COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Monday, February 27, 2006 10:35 a.m. - - - PRESENT: COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DARRELL L. CLARKE COUNCILMAN FRANK DiCICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JACK KELLY COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN KRAJEWSKI COUNCILMAN MICHAEL A. NUTTER COUNCILMAN JUAN RAMOS COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO BILLS 060004, 060006, 060007, 060008, 060014, 060089 and 060090 - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
Good morning, everyone. This is the Committee of the Whole's public hearings on tax bills. I would ask Mr. McPherson to please read the title of each of the bills before us, please. MR. McPHERSON: Bill No. 10 060004, an ordinance amending Section 11 19-1801 of The Philadelphia Code, entitled "Authorization of Tax," to further authorize the Board of Education of the School District of Philadelphia to impose a tax on real estate within the City of Philadelphia; all under certain terms and conditions. Bill No. 060006, an ordinance 19 amending Section 19-2604 of The Philadelphia Code, relating to tax rates, credits and alternative tax computation for the business privilege tax, by reducing certain tax rates, under certain terms and conditions. Bill No. 060007, an ordinance 3 2/27/06 - WHOLE - BILL 060006, ETC. amending Chapter 19-1500 of The Philadelphia Code, entitled "Wage and Net Profits Tax," by deleting certain special tax provisions and related definitions and rates, all under certain terms and conditions. Bill No. 060008 an ordinance 9 amending Chapter 19-1800 of The Philadelphia Code, entitled "School Tax Authorization," by amending Section 12 19-1806, entitled "Authorization of Realty Use and Occupancy Tax," to further authorize the Board of Education of the School District of Philadelphia to impose a tax on the use or occupancy of real estate within the School District of Philadelphia. Bill No. 060014, an ordinance 20 amending Chapter 19-2600 of The Philadelphia Code, entitled "Business Privilege Taxes," by adding a new exception from the definition of "Receipts," under certain terms and conditions. 4 2/27/06 - WHOLE - BILL 060006, ETC. Bill No. 060089, an ordinance 3 amending Section 19-2604 of The Philadelphia Code, relating to tax rates, credits and alternative tax computation for the business privilege tax, by reducing certain tax rates, under certain terms and conditions. Bill No. 060090, an ordinance 10 amending Section 19-2604 of The Philadelphia Code, relating to tax rates, credits and alternative tax computation for the business privilege tax, by reducing certain tax rates, under certain terms and conditions.
Thank you. I would like the record to reflect that Bill Nos. 060004 and 060008 will be heard on Tuesday, April the 4th at 10:00 a.m. I would ask Mr. McPherson to please call our first witness. MR. McPHERSON: It's a panel from Philadelphia Forward. 5 2/27/06 - WHOLE - BILL 060006, ETC.
Good morning. Please identity yourself for the record and proceed with your testimony.
Good morning. My name is Brett Mandel and I'm the Executive Director of Philadelphia Forward. Madam President and members of City Council, thank you for providing this forum to discuss tax bills, specifically legislation to address the job-killing business privilege tax, and thank you to this City Council and to Mayor Street for continuing to engage in a debate about taxes and the City's future. The further removed we are from November 2003, when the Tax Reform Commission released its ground-breaking final report, it becomes more important to remember how we got here. As you know, 80 percent of the electorate voted to establish the Tax Reform Commission in 6 2/27/06 - WHOLE - BILL 060006, ETC. 2002, and the Commission spent nearly a year and about a half a million dollars in public funds to draft a plan to make our tax structure more fair and less burdensome so we can attract and retain jobs and residents. That plan was embraced by civic groups, business organizations and neighborhood associations. That plan was endorsed by the Mayor's hand-picked 21st Century Review Transition Team and that endorsement was echoed by the Mayor's invitation-only economic summit. Yet, we continue to debate these issues. We debated whether our high and unfair taxes chased firms and families from the City. We now understand that they do. We debated whether we could afford to reduce our oppressive tax burden without threatening vital City services. We now know that we can. We now are determining how soon, how certain and how structured tax reform should be. There is much tweaking that we 7 2/27/06 - WHOLE - BILL 060006, ETC. could do with the business privilege tax and the way it exempts certain firms or forces others to pay higher tax burdens, but the true problem is that the tax exists at all. Simply put, other cities and other locales around Philadelphia do not impose a tax like this, and the very fact that we do puts us at a competitive disadvantage. So while this Council is right to consider Councilwoman Reynold Brown's and Councilman O'Neill's legislation to create an exemption for bookbinders in Philadelphia and while the Council is encouraged to lengthen the net operating look carryforward, adopt single-factor apportionment and eliminate the situation that forces sole proprietors and partnerships to actually pay an effective tax rate that is higher than their corporate competitors, the Tax Reform fundamentally concluded that we must, and that we can, fundamentally phase out this job-killing tax and end all of its 8 2/27/06 - WHOLE - BILL 060006, ETC. problems. We firmly believe that if we reduce the burden of this tax, we will grow jobs and we will increase the value of commercial real estate in Philadelphia, which will increase overall tax revenues in the City in the future. In fact, our experience in the last decade of tax reductions has demonstrated that we have cut taxes, but increased tax revenues in each year of our tax reduction program. But you have certainly heard this before from me. Therefore, Philadelphia is pleased to present two panels of informed witnesses for your consideration who will make brief statements and then make themselves and their expertise available for your interrogation. Panel will include employers who have located jobs and businesses outside Philadelphia because of the job-killing business privilege tax. Panel 2 will include employers and 9 2/27/06 - WHOLE - BILL 060006, ETC. members of the Tax Reform Commission who can attest to the idea that we must end it, not mend it. We don't need half measures; we need true tax reform. Today taxes hold Philadelphia back. Tomorrow tax reform can move Philadelphia forward. With that, I will introduce Lou Katz, who will begin our testimony.
My name is Lou Katz. I employ over 300 individuals, and my business is located on the Montgomery County side of Township Line Road. When my current lease was about to expire, I began looking for locations within the City limits where I could better take advantage of what the City could offer to me and to my employees. I found a building that had stood empty for almost a year and was ready to purchase and renovate it. In 10 2/27/06 - WHOLE - BILL 060006, ETC. addition, I was prepared to increase key employee salaries to offset Philadelphia wage taxes. In other words, I was ready to fully commit to the City by bringing in new employees, renovating non-income-producing property and becoming a new contributor to Philadelphia real estate taxes. However, when I shared my new vision with my accountants, they attempted to explain the Philadelphia business privilege tax. They pointed out that I would be paying taxes on revenue whether I made a profit or not. They said that given my rising expenses, including the ever-increasing medical malpractice, the likelihood of an increase in minimum wage which would spiral salaries upward, even though my salaries are well above the current minimum wage, in my low-margin industry, the addition of a business privilege tax is an expense I could simply not afford. It made no sense for me to pay such a tax 11 2/27/06 - WHOLE - BILL 060006, ETC. when I could avoid it by staying a mere 200 yards out of the City. I renewed my lease in Montgomery County. I stayed out of the City because of the BPT. On the flipside, I have an option to terminate my lease if I purchase a building, even if it's in Philadelphia. But for the BPT, I would move into the City. I would add new employees to the Philadelphia tax roles. My business would be growing in Philadelphia. I would be purchasing and renovating a building somewhere within the City limits. I hope this City Council will reduce both the gross receipts and net income portions of the BPT and provide a fixed schedule of at least five years of legislated cuts and provide a schedule to phase out this job-killing tax. I need some certainty to plan for the future growth of my business. Thank you.
12 2/27/06 - WHOLE - BILL 060006, ETC. You're welcome.
Just a moment, please. Councilman Kenney, you have a point of order?
We have around 30 office workers and the rest are in the field.
Do we have another witness? Please identity 13 2/27/06 - WHOLE - BILL 060006, ETC. yourself for the record.
Good morning. My name is Lisa Salley, S-A-L-L-E-Y, and I'm the owner of a mortgage brokerage by the name of Heritage Capital Services. Actually, just to give you a little bit of history, I'm a native of Philadelphia. I went to the public school system here in the Philadelphia area, left after high school, did collegiate studies and did the first 13 years of my corporate career before 14 coming back to Philadelphia full time in 15 2004, but beginning to plan for it in 16 2003. 17 I decided to come back to 18 Philadelphia, that I would open the 19 mortgage brokerage, and as I began to 20 evaluate where to put the business, where 21 to have the core operations, how and 22 where to recruit, I looked at the City of 23 Philadelphia because I am a native 24 Philadelphian. I live in Philadelphia 25 currently, my family, grandparents, 14 2/27/06 - WHOLE - BILL 060006, ETC. aunts, uncles, cousins and so forth. And I'm actually still very active in Philadelphia. But the long story short, I ended up locating my business in Montgomery County because of the business privilege tax, when I looked at just strictly the numbers associated with starting a small business and where the tax monies could be used to do other things in the start-up operations. So I made the initial decision in 2003 to physically locate outside of the City, and I did that. It's now 2006, and two major things have happened from a growth point of view from the business. We spun off one other financial business. That business also employs people now outside of Philadelphia, but in the metropolitan area, in Montgomery County. So we've got one spin-off in that area. The second thing is, because of the growth and the size of the business, with the amount of volume that we're 15 2/27/06 - WHOLE - BILL 060006, ETC. doing, I'm now considering purchasing space. I've been actively looking for space to purchase since November. I did look initially in the City of Philadelphia, but, again, as I do the numbers and because of the business privilege tax, I am leaning towards Montgomery County right now. And I would ask that the City Council would consider reducing and even potentially eliminating the business privilege tax so that people like myself who are native Philadelphians, who make a commitment as we return or even stay in Philadelphia, would like to have businesses in the City itself, but the business privilege tax in itself is an uncompetitive edge that we have to figure out how to work against. So I would just implore the Council as you consider these discussions and the evaluations this morning to eliminate the tax itself, to consider that strongly, to give small businesses an opportunity. 16 2/27/06 - WHOLE - BILL 060006, ETC.
I'm rather curious. If in fact Council were to reduce the BPT tax, would you be inclined to move back into the City?
I would be inclined to move the current operations in the county back into the City, number one. The second thing that I would be inclined to do would to not purchase, because I'm looking to make my first purchase commercially for the operation itself. I'd purchase physically in the City instead of in the county.
Thank you very much. Councilman Goode, did you want to be recognized at this point?
Okay. Good morning, sir. Please identify yourself for the record.
Good morning. My name is George Brenner, and my current 17 2/27/06 - WHOLE - BILL 060006, ETC. occupation is to provide small- and medium-sized businesses with financial, operational and business development consulting services in the pharmaceutical contract research field. My background also includes years of experience as 8 Vice-President at a contract research 9 organization, as well as experience in 10 healthcare, public accounting and 11 insurance. 12 I'd like to address City 13 Council regarding a company called 14 Philadelphia Association for Clinical 15 Trials, also known as PACT, P-A-C-T, and 16 a decision that this company had to make 17 which was impacted by the City of 18 Philadelphia taxes on businesses 19 specifically. 20 The company was founded in 1980, and PACT was formed by a consortium of Philadelphia area hospitals with the mission of taking advantage of the wealth of healthcare talent in the Philadelphia region and to attract pharmaceutical 18 2/27/06 - WHOLE - BILL 060006, ETC. research and development funds into the local economy. By 1989, PACT, which was located at University City Science Center, had grown to approximately 50 employees. The company was faced with a decision to relocate its office space in order to accommodate additional staff. A number of variables, including location of current employees, access to public transportation, cost of new office space, moving costs, personal taxes and business taxes, were considered in determining where to relocate. In 1989, around that time, the Goode Administration had recognized that the City-imposed business taxes were a major contributing factor to the exodus of many businesses from Philadelphia. The Goode Administration announced a five-year plan to begin the reduction of Philadelphia business taxes. Now, based on this news, PACT contacted the City and worked side by 19 2/27/06 - WHOLE - BILL 060006, ETC. side with City representatives to look for office space within the City of Philadelphia, as well as get a better understanding of the planned tax reductions. Now, while looking at the factors of the suburban locations and the Philadelphia locations, most factors were very comparable. Office buildings close to public transportation in the suburbs meant that there would be little impact on the existing employees, and the rental rates were competitive. However, comparing the business tax structure in the suburbs to the Philadelphia business taxes became a deciding factor. Even with the Goode Administration's five-year plan, which was not approved at the time, the suburban business taxes were dramatically lower and, thus, much more favorable to PACT. As a result, a decision was made to take the 50 employees and move out to the suburbs. Now, since 1989, PACT and its 20 2/27/06 - WHOLE - BILL 060006, ETC. successor companies have had to relocate to additional space in the suburbs, as well as acquire additional office space three additional times. The company continues to grow and reached an employment of approximately 450 employees. Now, the question for City Council to consider is, does the collection of business taxes from a company such as PACT outweigh the economic impact of 450 additional City-based jobs? Now, since PACT moved out of Philadelphia years ago, obviously the 17 City has not collected any additional business tax revenues from PACT. Consider, however, if the City waived its business taxes and not collected any business taxes from PACT and kept the 450 administrative jobs, the scientific jobs, the medical jobs, the technological jobs, what would the value be to the City of Philadelphia? Not only has the City of 21 2/27/06 - WHOLE - BILL 060006, ETC. Philadelphia lost tax revenues from a business that moved out, it has also lost the economic impact of City-based jobs. Thank you.
Thank you. Good morning. Please identify yourself for the record.
Scott Ziskind, Z-I-S-K-I-N-D. I'm a former Philadelphia business owner. I am the Philadelphian. I was born here. I went to public schools here. I started a business here. I own a house here, and I'm raising my family here. My company does work all over the United States, but even with the high rate of business taxes that my company has paid, I've remained here. Ninety-nine percent of my business is outside of the City. Seventy-five percent of that is outside the state. And, yes, I do pay taxes in the states that we do business in. California and New York are a few of many that I have 22 2/27/06 - WHOLE - BILL 060006, ETC. returns in. But I remain here, until a routine audit of my Philadelphia sales tax a few years ago, where we also own and operate another company in Camden, New Jersey, which because of the nature of the business is not allowed to operate in the state of Pennsylvania. It's wine storage. And going through this audit, the auditor picked up that one company, the company based in Philadelphia, is the management company for the company in New Jersey, and he asked me why I kept my business in Philadelphia if I already had another company out of state. When I asked the man to repeat himself, he realized what he had said and would not repeat himself. By the end of that year, we had formed another corporation in New Jersey and had moved. I still maintain a Philadelphia business license, because one percent of my business is still in Philadelphia. I cannot calculate how much money I've 23 2/27/06 - WHOLE - BILL 060006, ETC. saved in the last few years, but I know that it's helped pay for the offset of my health insurance increases and things like that. We also have purchased a commercial building in Camden since we've moved. But I'm still true to Philadelphia, still live here. You guys have to do something about the business privilege tax. There are a lot of very small businesses like myself. We don't employ nearly the numbers that I've heard here this morning, but my little company feeds five families, and those five families are five individual businesses that every year get clobbered by this business privilege tax. And it's the small guys. It's not like Comcast that you guys are giving a free ride on a lot of the taxes that we have to pay, but it's the little guys that are supporting the City, and pretty soon there won't be any little guys left.
I 24 2/27/06 - WHOLE - BILL 060006, ETC. really want to thank you for taking the time to come in to testify. At this time, the Chair recognizes Councilman Goode.
Thank you, Madam President, and I thank all of you for your testimony. I want to deal a little bit with the who, what and where of job creation, starting with the who. Who can create jobs? How does Philadelphia Forward and the panelists intend to address the issue of racial and gender discrimination in small business lending?
I employ the best contractors I can find. I was raised in a color-blind family.
That's not the question I asked. The question is, how does the panel expect to address the issue of racial and gender discrimination in small business lending, the issue of who can create jobs in Philadelphia? If you don't have access to capital and 25 2/27/06 - WHOLE - BILL 060006, ETC. credit or equitable access to capital and credit, you can't create businesses and create jobs at the same rate. And that is part of the problem, the fact that the City is majority female, majority people of color, but there is still discrimination in small business lending.
I'll let each of the panelists speak for themselves, but I think you're absolutely right, Councilman. There's no question about that. This panel was assembled to talk about the effects of the business privilege tax. Absolutely the work that you've done in documenting the problems with small business lending and calling attention to it, we need to focus on that, but today at this point --
The simple message is that business tax reforms equals new jobs. I'm asking a question about that job creation. The first question is, who can create jobs and how do we address the issue if there's not 2/27/06 - WHOLE - BILL 060006, ETC. equitable access to business development because there's not equitable access to capital and credit?
Let me address that. The type of business that I represented here actually is not a capital-intensive business, and I can tell you that when this business was originally formed, it was thinly capitalized, and it had been a constant struggle to maintain its profitability. The issue that this business faced from an employee perspective was not so much looking for minority employees, but looking for qualified employees.
That's not the question I asked. I asked about small business lending and racial and gender discrimination in small business lending.
And I guess I'm not sure. I'm in a business that actually does lending, and we do lending 27 2/27/06 - WHOLE - BILL 060006, ETC. irrespective of gender or race. There are certain, if you will, underwriting criteria that has to be met. I'll use my business as an example. When we were about to start, I made a decision to do it essentially from a cash-driven funding process as opposed from a debt-based scenario to get started. As I now look at the growth -- I've proven the business model and the structure of the business itself -- I now consider myself in Phase 2 of the growth of the business and I'm now considering a different growth strategy. I am considering a debt mechanism to help get me there. I am going through very formal processes with the bank and so forth. So if you could help us understand your question a little better relative to job creation, I'd answer to the job creation piece that the --
The issue is very simple. As we talk about business tax reform, we're talking about the issue 28 2/27/06 - WHOLE - BILL 060006, ETC. of economic growth and we're talking about the issue of job creation. The issue is whether we are also at the same time addressing the issue of economic equity and whether there's equitable access to capital and credit and there was equitable access to business development and the ability to create businesses and create jobs. I'll move on to my second question, which is the what and what type of job quality. I'd like to ask each of the panelists, what is your position on the state minimum wage?
Excuse me, sir. You're going to have to use the microphone.
I have a 29 2/27/06 - WHOLE - BILL 060006, ETC. non-union company --
Excuse me, sir. You're going to have to identify yourself for the record.
I'm sorry. Scott Ziskind again. I have a non-union company. We pay better than prevailing union wages. Even my laborers make more than a union laborer would make in a given week.
My question is, what is your position on the state minimum wage? What should the state minimum wage be?
I'm not aware of what it is now because I don't pay anything near it. I pay a lot more than what it is.
Does another panelist want to answer the question? What should the state minimum wage be?
My third 30 2/27/06 - WHOLE - BILL 060006, ETC. question is the where. Other than business tax reform, what's your organization doing to help neighborhood businesses? Can you name specific initiatives to deal with neighborhood commercial corridors?
Other than business tax reform, what is your organization doing to help neighborhood businesses? Can you name any specific initiatives to help neighborhood commercial corridors?
Philadelphia Forward has been working to promote the recommendations of the Tax Reform Commission. We've also been outspoken on the need to improve the ethical framework with which we make decisions in Philadelphia. We've talked a lot recently about the budget system itself and improving the public knowledge about what the budget is. That is what we are 31 2/27/06 - WHOLE - BILL 060006, ETC. doing. Lisa, if you have initiatives that you're working on.
I happen to live in Mount Airy. Mount Airy USA is very active in that particular area. One of the things I've done as an interim strategy is to put a processing office there to try to create jobs specifically there, and I also serve on the Design Review Board for Mount Airy USA to help encourage jobs into the City, in particular in the downtown Mount Airy area. So I try to put not only voice but hands with the things that I believe in as well.
You're welcome. Mr. Mandel, do you believe that we should be reducing the net income portion of the BPT tax or should we just continue with the gross receipts 32 2/27/06 - WHOLE - BILL 060006, ETC. reductions?
To understand the answer to that question would just take a step back and look at what those two different taxes tax. The gross receipts portion taxes City receipts. So if you sell something, a dollar comes over the cash register in the City, you're paying a tax on City receipts, and as you know, it's whether you make a profit or not. The net income tax is about whether you're making money. You can have lots and lots of sales and make no 16 money. So that is a very compelling reason why we should be focusing on the gross receipts tax. But you can also have a business in Philadelphia that exports its goods and services all around the world and pay little or no gross receipts tax. These companies that -- yes, little or no gross receipts tax. So they feel it only on the net income tax. These are companies that 33 2/27/06 - WHOLE - BILL 060006, ETC. compete nationally, compete globally. If they don't have a business reason for being in Philadelphia, well, it's very compelling for them to say, I'll move my firm a few steps over City line and not pay any business privilege tax. So you certainly need to concentrate on both sides of the equation. The gross receipts side disproportionately hurts small and growing neighborhood businesses that are selling to Philadelphians. The net income side hurts firms that compete nationally and compete globally. We need both in a thriving economy in the City of Philadelphia. That's why the Tax Reform Commission fundamentally said we have to attack both sides of this problem.
Thank you. For the record, I would ask you another question. The Administration has taken the position that we should only legislatively reduce taxes one year at a 34 2/27/06 - WHOLE - BILL 060006, ETC. time instead of multiple years to coincide with the Five-Year Plan. As a business person, what are your thoughts on this issue?
I'll let the business people answer, but I will just make a few comments about that in general. Philadelphia has a legislated schedule to reduce the wage tax over the next ten years that was passed by this City Council, signed by our Mayor. The tax schedule that we are debating changing today was, again, approved by this Council, signed by our Mayor, a legislated schedule of taxes. There is a misnomer, a falsehood that by legislating a schedule of tax cuts in the future, that would tie the City's hands. We would not be able to change this. As you know, as I said, right now you are debating legislation to change a schedule. The state has announced a schedule to phase out the 35 2/27/06 - WHOLE - BILL 060006, ETC. capital stock and franchise tax twice, I believe, during the phase-out. We have reconsidered and said, Let's change the schedule, let's pause it for a year. The City locks future taxpayers into expenditures when it sells bonds, when it adopts multi-year contracts. It is almost the easiest thing that this City Council does to change tax rates, because within literally a few weeks, you can legislate and unlegislate tax rates. There is no reason why not to legislate tax rates. And as I'll ask the business owners to respond, there's a very compelling reason why you should legislate a multi-year schedule. Businesses are making decisions for years in advance. Mr. Katz is looking to sign a multi-year lease. Ms. Salley is looking to buy a building. I'll ask them to respond, but we need certainty, to the extent that we can provide it, and to the extent that we can say this is what we're going to do in 36 2/27/06 - WHOLE - BILL 060006, ETC. the next year and the year after and the year after and the year after, it's very compelling.
George Brenner. Let me just elaborate on that. When businesses decide to relocate, typically it's at the end of a lease and you're looking for new office space. The decision really comes down to a financial modeling approach. You're putting in the cost of renting the new space. You're putting in other costs, present value, doing all the mathematical gyrations that require you to come to a sound decision. If you think about it, businesses don't sign one-year leases typically. It's a five, seven, perhaps ten-year lease. So the decision that you're making is a longer term than a one-year term that you're looking at. So that argument goes for putting together a five-year plan, at a minimum. Just like we saw back when my company was considering leaving, Mayor Goode at the 37 2/27/06 - WHOLE - BILL 060006, ETC. time put together a five-year plan, which helped. Unfortunately, the plan never got legs.
So what you're saying, it's the question of predictability.
Okay. The Chair at this time recognizes Councilman Kenney.
Madam President, with all due respect, and I apologize, I really don't understand what we're doing here. I just want to understand so I understand the framework in which we're having this discussion today. We're basically dealing with five bills.
Two of them are Administration bills with one-year reductions. Two of them have been sponsored by Councilman Nutter and 38 2/27/06 - WHOLE - BILL 060006, ETC. others, which are multi-year reductions. And one is a kind of a niche tax issue, which the Administration supports, which is a multiple-year tax reduction, not a one-year tax reduction. Is that correct within the framework?
Why are we having this discussion now? Because it seems that what everyone is testifying to we've heard for years now. I mean, this is nothing new. With the exception of the niche tax issue, there's really nothing new we're discussing. Shouldn't we be having this discussion when we're ready to consider the passage of the budget? Certainly it's our job to listen to testimony, and I don't mind staying here and listening to it, but --
Well, I think today starts that process of the budget. 39 2/27/06 - WHOLE - BILL 060006, ETC.
I'm always willing to be enlightened. I just think we've been going through this process for years now.
As I said, I think you're taking for granted that Councilmembers who felt one way last year are going to feel the same way this year.
I have not taken a poll, but I think that sometimes people are inclined to change 40 2/27/06 - WHOLE - BILL 060006, ETC. their position.
And I also think being around here as long as I've been around here, and it's not as long as some others, but part of the problem we run into with this process is that I can see a scenario where everybody votes for all of them and it gets so confusing, that the Administration then decides which ones they're going to choose. I think we've been through this with item pricing and some other issues in the past. So that now there's so many of these bills in consideration, you could argue that I voted for 060006 and 07 and I've done tax reform, but it's not what the Commission has recommended and it's, in some people's opinion, not something that's going to be effective over a long-term period. I mean, I just think it's in ways confusing the issue with all these bills. Certainly the process is what it is and we're going to proceed through it, 41 2/27/06 - WHOLE - BILL 060006, ETC. but I just want the record to be clear that I've heard all this testimony before. And I appreciate people taking time out of their busy workday because they have to pay such high taxes in Philly to come in here and testify and leave their businesses, but none of this information is new.
Well, are you suggesting that we not have any hearings on the tax bills --
-- and we simply come in and cast our vote and leave?
No. No. 19 I'm confused. I think the issue is getting confused or wanting to be more confusing because of the number of bills we have here now and the ability to kind of legislatively hide in the guise of tax reform, because I voted for one, I didn't vote for the other. We've had this 42 2/27/06 - WHOLE - BILL 060006, ETC. scenario before. I just want the record to be clear --
-- a bill that we have already passed some time ago.
07. And 04 and 06, as I said at the very beginning of the hearing -- I'm sorry; 04 and 08 are going to be continued until April the 4th at 10 o'clock, because they deal with the School District and they were inadvertently added. The others, as I said, one pertains to the business privilege for one year. The other is the multi-year. So I don't know what --
I just want the record to be clear that this is information that we've heard forever and 43 2/27/06 - WHOLE - BILL 060006, ETC. I don't see anything new, unless you know something I don't, which hopefully you're correct, something has changed, but I just wanted to make the record clear. Thank you.
Councilman, I couldn't agree with you more. I would be thrilled if we had settled this issue any number of times before we come back, and I would urge this Council to adopt a comprehensive consensus tax reform legislation that would follow at least on the spirit, if not the letter, of what the Tax Reform Commission reported to you everything you asked us to do.
Thank you. The Chair recognizes Councilman Goode.
Thank you, Madam President. Just for clarification of the 44 2/27/06 - WHOLE - BILL 060006, ETC. record, the bills before us all have multi-year schedules. One is a three-year schedule; one is a five-year schedule; and beyond that, the Five-Year Plan contains a five-year schedule, not to mention the fact that even if we were to pass a bill as a five-year schedule, we can come back the next year and change it. So what beyond the five-year financial plan and the schedule contained within the five-year financial plan do you really require? If one bill is three years and one bill is five years --
The recommendation of the Tax Reform Commission, which I think makes sense in terms of a framework, is a complete phase-out schedule that in the Tax Reform Commission's legislation was a ten-year complete phase-out of the business privilege tax.
And that's not considering any of these bills today? 45 2/27/06 - WHOLE - BILL 060006, ETC.
No, it's not. Neither is, I think, anything that we have presented as the Tax Reform Commission's recommendation. None of the bills cuts the gross receipts side, cuts the income side, with an ultimate phase-out of the tax. We hold that out as what is desirable. That's what the Tax Reform Commission concluded. That's what we think makes sense. We asked these people to join us and help echo that.
To go a little bit further with it then, it's clear that by passage of any of these bills, at the end of any of these schedules, we're not in a competitive position. What puts us in a competitive position is if the Mayor and the City Council in the future decides to continue these cuts beyond the schedules within these bills.
That is why our second panel, which I have titled "End 46 2/27/06 - WHOLE - BILL 060006, ETC. It, Don't Mend It," will speak to the idea that playing around with the edges, small cuts, small exemptions, are not what we have to be talking about. We have to be talking about fundamentally getting rid of this tax over time. We'll present other employers who have looked at could we do tweaks, could we do some things to help, and we'll also have members of the Tax Reform Commission up here to talk about why we fundamentally concluded it's not about making a tweak over here, making a change over here. Fundamentally over time this tax has to go for Philadelphia to be as competitive as we should be.
You're welcome. Are there any other members who have questions for this panel? (No response.)
47 2/27/06 - WHOLE - BILL 060006, ETC. Seeing none, thank you.
Thank you. With that, I would like to bring up the "End It, Not Mend It" panel of Robert Cheatham, David Rech, Bill Mifflin, Patrick Diogenia, and I'll ask any members of the Tax Reform Commission who have joined us to provide moral support for us as well.
Good morning. Please identify yourself for the record and proceed with your testimony.
Good morning. My name is Robert Cheatham. Madam President, members of Council, thank you for allowing us to talk to you this morning. My name is Robert Cheatham. My business develops web-based software to perform geographic analysis. I'm here to talk about geographic analysis. You all thought I was here to talk about taxes. I employ 14 people, seven full 48 2/27/06 - WHOLE - BILL 060006, ETC. time and seven part time. My wife and I live in the Fourth District. We pay a lot of taxes: Wage, school tax, real estate, real estate transfer tax, net profits, gross receipts, use and occupancy. It's a pretty long list. I'm here today to express how damaging this tax environment is to both Philadelphia and my business. The business privilege tax is killing jobs at both my business and many others. My company is an S corporation. This is a special kind of corporation that is designed for small businesses. Because Philadelphia does not recognize this status, I actually pay triple taxes. I'm forced to pay both on my business profits tax, my gross receipts and then again on the school tax at a personal level on the same profits. We've gone after every opportunity we can to minimize this burden on our business. We applied for the job creation tax credit. We 49 2/27/06 - WHOLE - BILL 060006, ETC. qualified for it. It's a great idea, but it's largely ineffective. The tax credit is complicated and relatively inflexible to take advantage of. I wasn't born here in Philadelphia. I grew up in Michigan. I lived overseas for several years. I came here for graduate school, stayed here to work and started a business here. I've worked hard to build that business. My wife and I enjoy this City and we care about its future. We want Philadelphia to succeed, and we want to be part of that success. I don't want to live and work in the suburbs, with all due respect to the people that preceded me. I'm not really interested in that. I want to live in the City. For me, it's not about Montgomery County. It's about moving to Boston, Paris, Istanbul, Seattle, Montreal. I and my staff are being pushed to those places. So where was my latest hire? 50 2/27/06 - WHOLE - BILL 060006, ETC. Seattle. And the one before that? Burlington, Vermont. My business is growing, and I'm really happy about that, but I'm learning that if I want to continue to be successful, I don't want to grow it here in Philadelphia. I'm not against paying my fair share. I pay wage tax, and while it's high, I think it's not unfair. If Philadelphia is successful, I know my real estate taxes are going to go up. I think that's fair. But the triple tax that I'm paying is unfair, and it targets small businesses. I'm really tired of seeing Comcast and Dechert and other large corporations getting tax breaks, while my business is left subsidizing them. I don't think they need subsidies. I'd like to see it fair. If you're worried about Philadelphia's future, cut business privilege tax across the board. Be bold. It doesn't need to result in service 51 2/27/06 - WHOLE - BILL 060006, ETC. cuts, and in the long run, it will give the City more money, particularly if it's paired with real estate tax restructuring. Without serious business tax reform, the City's economic development spending, all of the investment that's been made in the last several years in economic development in neighborhoods is going to be futile. I urge you to do something about it for the sake of one of America's finest cities. I'd like to -- I didn't prepare this, but I'd like to respond to Councilman Goode's question earlier with a story that I recently went through. We grew the business, started the business with a small amount of cash, relatively thinly capitalized, but we recently made a decision to apply for a line of credit to help manage our cash flow. The way this works is, the bank examines your books. They look at your P&L statement. They look at your balance sheet. The 52 2/27/06 - WHOLE - BILL 060006, ETC.
BPT, in particular the net profit tax, severely impacts our cash flow and our net profit, damaging our ability to qualify for credit, and I would argue that it does so disproportionately to small businesses, and I believe that cutting something like this would actually make qualifying for credit an easier thing.
Councilman, you're going to have to put your microphone on because I don't know if the stenographer could hear you.
Thank you, Madam President. I agree with everything you said. It has nothing to do with the question that I asked. And there is an issue of credit gaps that exist in terms of offering access to capital and credit to women and people of color. That's the question I asked. In terms of long-term strategy for economic growth, isn't that an equally important issue? The fact 53 2/27/06 - WHOLE - BILL 060006, ETC. that the City is majority female, majority people of color, but there is an issue of bank redlining and unfair lending practices that keeps any number of people from starting businesses and creating jobs because they were born female or born a person of color, what does this panel suggest in terms of addressing that long-term issue? And the second question I asked, which you did not choose to answer is, what should the state minimum wage be?
I'm not an expert on the subject, but I think it should be raised. I think it's a very good point. 54 2/27/06 - WHOLE - BILL 060006, ETC.
Good morning. Please identify yourself for the record.
Good morning. David Rech, R-E-C-H. Scribe is the company's name. Good morning, Councilperson President Verna and other Councilpeople. I was concerned about the time, because Brett told me I only had two minutes, but Robert basically said everything that I wanted to say. I will make a couple other points, however. First of all, in response to Councilman Kenney's question, I too am confused. I don't quite understand what issues are up right now, and I try to stay informed, but basically from my business perspective, if we had a fair, predictable, comprehensive tax and it was obviously reformed and dropped for the BPT, we would be in better shape. 55 2/27/06 - WHOLE - BILL 060006, ETC. Now, moving on, there's a couple of things. Last year I testified to the Council when we were considering the BPT and I made several points, many of which were elaborated in an article in the Philadelphia Inquirer and also the Philadelphia Business Journal. I also am not a native Philadelphian. I'm a native Floridian who moved here for graduate school, stayed and started a business in 1999. I'm not going to recount everything, but when I testified here before, I basically explained to you that we're a technology-based company that has imported a number of people here. Since starting in 1999, we've had an average growth of 36 percent. And when I reported to you last, I was explaining to you that we would probably hire our 30th employee sometime in the first quarter of '06, which is now, and that we were considering moving our business out of Philadelphia to possibly Birmingham, 56 2/27/06 - WHOLE - BILL 060006, ETC. Alabama or Nashville, Tennessee or other places. And then, lastly, I was explaining to you that the difference between staying here in Philadelphia and moving out. We are a globally competitive company. It was only a small percentage. So we're not talking about large percentages of distinction between here and other locales. As of today, we are contracted out to equal 50 percent growth for 2006 as of today, and we're still growing. So we've done quite better. We just hired our 35th full-time employee, also employ six part-time employees, have nine current openings in our company. Unfortunately, for the City of Philadelphia, we've set up a separate corporation in Broward County, Florida, and all of those hires are going to take place out of the City limits here. Our lease ends at the end of this year and we're considering downsizing. We will 57 2/27/06 - WHOLE - BILL 060006, ETC. remain in the City of Philadelphia because the Northeast corridor is a very strategically important corridor for publishing, but we do not need to do our work out of Philadelphia. I love Philadelphia. I moved here. I have been active here, and I would love to continue to grow here, but it's going to be impossible. I urge you to, A, develop a complete and comprehensive decision about the BPT now, please, so that we can gain predictability in my business, we can plan for the future. The second thing I would say is, when you're considering these, make sure that you consider the companies' in general contribution to the City and who the tax burden falls most greatly on, and you will see that it is businesses that are similar to mine. And then obviously not only give consideration to the gross receipts part of it, but also to the net income 58 2/27/06 - WHOLE - BILL 060006, ETC. part of it. It's exceedingly important that the net income part be considered. As Robert was saying before, it really affects our ability to get credit, valuation of our company, the ability to grow, et cetera. And then if you don't mind, just one quick thing or two quick things. Councilman Goode asked about the racial and gender discrimination in small business loans. I can't speak to that. I'm a cash-funded business. We never borrowed any money. But I can tell you this: In addition to having funding to provide jobs, you also have to have the skills and knowledge to start a business.
Ninety percent of businesses fail. Our company when it hit recently its fifth year anniversary, we were a statistical anomaly. And if you look at the environment in which my business operates, you will see that we are predominantly minority and predominately woman, people who are employed by my 59 2/27/06 - WHOLE - BILL 060006, ETC. company, though I am the owner and I'm a white male. The people who will grow, develop skills under our tutelage, who will go out and start their own businesses, who will go out and get better jobs from my company all have that opportunity here in the City of Philadelphia, and they're no longer going to be able to have that. That's it.
Thank you very much. The Chair recognizes Councilman Goode.
I'm not sure you fully addressed my question of who can create jobs and whether there is discrimination in terms of who can create jobs.
Well, I would say that is not an issue that I can deal with in a sort of global philosophical sense. I can only deal with that issue --
It's not a 60 2/27/06 - WHOLE - BILL 060006, ETC. philosophical issue.
I can only deal with that on an ad hoc basis, and what I can tell you is that when we make hiring decisions in our company, these are the future people who will be holding positions of importance and also starting their own businesses, going on to graduate careers and everything else. And in our company, it happens to be that we give preference to people who are not white men.
You should be fully concerned that as you train those employees, as they grow to learn your business, are ready for entrepreneurial opportunities, if they are female or person of color, they will face lending discrimination. You should care about that.
I do, but like I said, they also have to have the knowledge and skills to be able to perform the jobs. 61 2/27/06 - WHOLE - BILL 060006, ETC.
No, I'm not. What I'm saying is that if you asked me 6 years ago whether I was going to be able 7 to run my company, my answer would be 8 sure, I think I can, but in reality, I 9 did not have the knowledge and skills to 10 perform the job that I do to run my 11 business, to examine budgets, to 12 understand all of the -- 13
So you're 14 assuming that racial and gender 15 discrimination that exists in terms of 16 small business lending is due to a skills 17 gap as opposed to -- 18
Like I said, I'm not 19 addressing that issue. I'm addressing 20 the issue of preparedness.
You chose to address it. You raised the issue. You chose to address it. Thank you.
Thank you, Madam President. I have only two questions. My first for the panel is, if the BPT were eliminated, corporations would pay no 9 taxes on income, while sole proprietors and partnerships would continue to pay this net profits tax. Please expound on that and explain what happens then. What happens to those businesses and individuals?
I can give the perspective from the Tax Reform Commission. I don't know that anybody else on the panel wants to --
In the ideal world, if you were looking at restructuring the City of Philadelphia's tax structure from a blank slate, you would probably not have a tax on wages at 63 2/27/06 - WHOLE - BILL 060006, ETC. all in Philadelphia. You probably would not have a tax on business income at all in Philadelphia. The model for local tax structures across this country is, by and large, dependence on a levy on the value of place, the value of property, a little bit coming from sales as well. When we looked at the wage tax, which is also the net profits tax that partners have to pay, our fundamental conclusion was, it's impossible to get rid of it totally because it represents such a huge percentage of the City budget. That said, we should dramatically reduce it, and as you know, this Council has approved a plan and this Mayor has signed a plan to phase that down over the next ten years, which would be a big help. So in terms of the fairness, anyone making a wage in Philadelphia, and that includes owners of business, have to pay a tax on wages. One of the striking features of the business privilege tax is 64 2/27/06 - WHOLE - BILL 060006, ETC. that, well, you know some businesses don't have to pay taxes at all. If you are a utility, if you are a bank, if you are a port-related company, you don't have to pay the business privilege tax at all. In looking at how to make the business tax more fair, some of the ideas that we considered on the Tax Reform Commission were, should we broaden the base? Should we make everybody pay? Would that make sense? Should we ask people to pay one side of the tax, whichever is higher, whether it's gross receipts or net income tax? Does that help us maybe on the fairness? That doesn't necessarily help us on the competitiveness. So fundamentally, in terms of what was fair for the business tax, if we reduce, eliminate the business privilege tax, certainly you're left over with partners still having to pay this net profits tax, but that is the -- fairness is a terrible word to use for this 65 2/27/06 - WHOLE - BILL 060006, ETC. subject, but that is the fairness of the wage tax, that anybody who earns a wage in Philadelphia has to pay that tax. If you could start from scratch, if we were going to say, Let's eliminate every single tax and build a new tax structure in Philadelphia, we might look a lot like Boston. We might look a lot like Lower Merion. We might look a lot like almost every other jurisdiction in the United States that does not tax wages, that does not tax business income.
I'm very glad to hear you give me your whole convoluted philosophy of taxes in Philadelphia. That was the most convoluted response I've ever heard. I asked you a question on one kind of tax. So you respond to another. But we're living in times where, unfortunately, a lot of our problems are due --
Think of how long it would have taken you to read all 500 66 2/27/06 - WHOLE - BILL 060006, ETC. pages of the Tax Reform Commission's report.
-- to people who have their own self-interest in mind and do not look at the greater good for the greater number of people, including sole proprietors and others. They haven't dealt with them, but only their own interests.
I'll open the question then to the panel. You are sole proprietors. Do you feel that getting rid of the business privilege tax and paying your tax on net profits makes sense?
Excuse me. You chose to answer. Let us run our hearing. You just respond, if you don't mind, Mr. Mandel. What about the position taken by the Tax Reform Commission that higher real estate taxes, including full valuation, should be used to pay for business tax reductions? Let's hear your 67 2/27/06 - WHOLE - BILL 060006, ETC. response to that. I'm sure it would be just as convoluted.
As long as you don't sing, though, we can handle it.
Right now in Philadelphia the value of property, specifically the value of commercial property, is low. The notion that we are looking to convert Two Liberty Place into condominiums, that it makes more sense for the owners of office towers to get rent from residents as opposed to rent from offices is not a good thing for the City of Philadelphia. So when we are not able to attract jobs, when we're not able to retain jobs, when the jobs that we're able to attract and retain are going to buildings that are paying no taxes, no 24 business taxes, like the Cira tower or the new Comcast tower with its deals, 68 2/27/06 - WHOLE - BILL 060006, ETC. when we're doing that, we are reducing the value of commercial property in Philadelphia. By not allowing us to capitalize on the increase in the value of commercial property means we give up revenue for the City and for the School District. I'm sure you remember when Paul Levy came before this City Council and testified that for a while, our commercial property values in terms of the entire property value for the City were creeping up. In the late '90s, we were starting to get more money from commercial properties, and that was a good thing, but then the bottom fell out of the market. As you know, many of Center City's trophy buildings have come forward to the City and have been reassessed. Because they can't charge enough for office rent, they have to reduce the value of their building. People from the Building Owners and Managers Association are here to testify 69 2/27/06 - WHOLE - BILL 060006, ETC. to that fact today. If we were able to rent square footage in the City of Philadelphia for $30 a square foot, $40 a square foot, which is not unheard of in other cities, the value of our commercial buildings, our trophy buildings, Liberty Place, Two Liberty, would be so much higher, we would be generating so much more revenue to the City. Because some of our trophy buildings are only renting for $20, less than $20 a square foot, the value of commercial property is not returning enough to the City of Philadelphia. If you would phase out the business privilege tax, the tax that is on business would get capitalized into the value of commercial structures. That's the research that the Tax Reform Commission showed, that if we reduce the business privilege tax, we generate more money from the real estate tax, specifically more money from the commercial real estate tax. So when you 70 2/27/06 - WHOLE - BILL 060006, ETC. say businesses would not be paying tax, no, businesses would not be paying this tax; they would be paying increased money in real estate tax. Again, I'll ask you to pay attention when the Building Owners and Managers Association testify to this, because they could speak much more knowledgeably to that.
I will say, Madam President, to my colleague, Councilman Goode, he asked about jobs. The panelist even responded to jobs somehow, whatever that meant. They didn't answer the question before, but they did now. But thank you very much, Madam President.
You're welcome. I think we have a couple other members that would like to testify.
Councilman DiCicco, do you want to hear 71 2/27/06 - WHOLE - BILL 060006, ETC. from the other witnesses or do you want to be recognized now? COUNCILMAN DiCICCO: I'd like to be recognized now, Madam President. Just one quick question.
Thank you. COUNCILMAN DiCICCO: Maybe Mr. Mandel can answer this. Do you happen to know how many Chapter S corporations there are currently in the City of Philadelphia? And if you can give me some background and give it to the Chair, the number of people they employ, what the cumulative taxes that they're generating for the City of Philadelphia, that might be helpful, because I suspect there's a significant number of those types of corporations.
I don't know off the top of my head. COUNCILMAN DiCICCO: One of the other witnesses talked with the triple 72 2/27/06 - WHOLE - BILL 060006, ETC. tax on Chapter S, so it's something I'd like to --
Right. As you know, the Tax Reform Commission, one of the other recommendations was to eliminate that disparity where sole proprietors and partnerships have to pay not only the BPT, but also the net profit tax. We allow them to offset one against the other, but not enough so that the total offset. One of the recommendations in the Tax Reform Commissions's report was that as we are phasing out the business privilege tax, that we eliminate that disparity. I do not have that information in front of me. I'm confident that the Revenue Department has that information. I see Ms. Kammerdeiner is here. I would urge you to -- COUNCILMAN DiCICCO: I'll wait for Ms. Kammerdeiner to come up as well. Thank you. Thank you, Madam President. 73 2/27/06 - WHOLE - BILL 060006, ETC.
Thank you. Councilman Ramos, do you want to be recognized now or do you want the panel to complete its testimony?
If you can permit me, it's a very quick question for Mr. Mandel.
Mr. Mandel, are you in support of repealing the wage and net profits tax that is No. 060007?
Yes, I am. I don't think that was the most effective way to target tax relief to low-income residents in the City. When the Tax 74 2/27/06 - WHOLE - BILL 060006, ETC. Reform Commission looked at this recommendation, we struggled, because in providing this, it's sometimes referred to as low-income tax cut. It's not a low-income tax cut. It's a low-income tax credit. And what we found when we did the research was that there is a state credit, there is a federal credit, and this would add a local credit. But one of the problems with the state and the federal credit is that not everyone who is able to take advantage of that credit has taken advantage of it. So the Tax Reform Commission's recommendation was to dramatically expand the efforts to make sure that people take advantage of the state and federal taxes. So we would be -- state and federal tax credits, the Earned Income Tax Credit and the state equivalent, so that we could actually reach the people who are not being affected, as opposed to create a new program that would help some of the people who are already being helped by 75 2/27/06 - WHOLE - BILL 060006, ETC. these other programs.
Thank you. Mr. Mandel, who is next to testify? Please identify yourself for the record and proceed with your testimony.
Yes. My name is Patrick Diogenia. In 2003 and 2004, I was on the payroll of the Philadelphia Industrial Development Corporation, working in student retention. At that time, I was also living in the City and enjoying its many sublime amenities. When I wanted to get somewhere, I used SEPTA, but when I decided to start a marketing consulting business, I knew getting somewhere in business would require me to move out of the City I had come to consider my 76 2/27/06 - WHOLE - BILL 060006, ETC. adopted home. Given the Philadelphia taxes revenue without regard to profit or loss, the burden is significant for a professional services firm, which may begin with a few clients, but like your neighbor down the street, Red Tettemer, may eventually grow to employ 100 people in highly compensated, professional positions. These people would live in Philadelphia, shop in Philadelphia and possibly raise children in Philadelphia. As I expand my consultancy into a full-service ad agency, I cannot tell you exactly how many people we will employ or what our market cap will be, but I can tell you that whatever potential is here has been lost to New Jersey. And for a City whom I personally toiled to retain the creative class, it is sad indeed that I must contradict my own work and avoid Philadelphia as I expand my business.
Thank 77 2/27/06 - WHOLE - BILL 060006, ETC. you very much. Mr. Mifflin, so nice seeing you again.
Thank you very much, Council President. It's very nice to be here.
My name is William E. Mifflin. I'm representing a custom contract furniture manufacturer this morning. Tracey/Soltrace is a custom contract furniture manufacturer in North Philadelphia. We have a factory size of about 30,000 square feet, and we're relatively a small contractor employing people. Twenty-four of those happen 20 to be Philadelphia residents. 21 As with most companies, and 22 especially with manufacturing, we are 23 constantly striving for a competitive 24 edge to ensure that our product will be 25 produced in the most economical and 78 2/27/06 - WHOLE - BILL 060006, ETC. efficient manner. We not only compete with companies from the southern part of the United States, but we're now competing with international firms as well. We are a third-generation furniture manufacturer, all in the state of Pennsylvania, and our company was moved to the North Philadelphia location in the mid 1990s, with the support of Councilman Clarke, along with others. Essentially, I'm here today to ask members of City Council to encourage the economic vitality and growth of the City by supporting legislation that would systematically and equitably reduce the present business privilege tax. Specifically, we're asking City Council and the City Administration to work expeditiously and cooperatively to reduce both the gross receipts and net income portions of the BPT, provide a fixed schedule of at least five years of legislated cuts, and ultimately provide a 79 2/27/06 - WHOLE - BILL 060006, ETC. schedule to phase out this job-killing tax. I realize, perhaps more than many other people or taxpayers or businessmen, the difficulty and complex challenges facing City Council as you consider a City budget which must maintain adequate and appropriate City services for all our citizens. At the same time, the business community is requesting that you act boldly and proactively to an existing problem that will only get worse in the future unless we take the necessary steps now to ensure that our City continues to provide jobs and attract new businesses. A reduction and ultimately the elimination of the BPT would enable our company to hire additional employees from our community to provide them and their families with the opportunity to live, work and contribute to our City in a meaningful and productive manner. Given the present tax structure of the City of 80 2/27/06 - WHOLE - BILL 060006, ETC. Philadelphia, it's very difficult for businesses to consider expanding their workforce, given the high cost of doing business. We are encouraged by the Mayor's recent willingness to consider short-term reduction to the BPT, but from a planning perspective, businesses need to know what we can anticipate in future years regarding our tax burden. Our company made a commitment to move to Philadelphia in the mid 1990s. We continue to invest in the City in many ways, including street cleaning, graffiti removal, weed removal on public property, at our own expense. We wish to remain in Philadelphia for the foreseeable future. We are native Philadelphians who care passionately about our great City and want Philadelphia to succeed. However, those responsible for economic development in New Jersey are frequently making inviting overtures to relocate. This would obviously not be 81 2/27/06 - WHOLE - BILL 060006, ETC. our desire, but we must consider all opportunities. We ask that you support our efforts to remain a productive partner as we contribute fiscally to the improvement of our City. Thank you for the consideration of this important legislation and an opportunity to appear before you today. That concludes my formal remarks. Thank you.
Thank you very much. Are there further questions from Councilmembers?
I would be pleased to talk to the Tax Reform Commission's report, but I'm also joined by other members of the Tax Reform Commission. Al Taubenberger is here, Tom Forkin is here, Drew VandenBrul is here and Stu Weintraub 82 2/27/06 - WHOLE - BILL 060006, ETC. is here. I would certainly encourage if any of them have any different answers or additional answers to any of the questions that I tried to respond to about our report, with your permission, I'd be thrilled to ask any of them to echo or add comments.
Councilwoman Blackwell, members of Council, my name is Stewart Weintraub, and as Mr. Mandel has stated, I was a member of the Tax Reform Commission. I would like to respond to the two questions that Councilwoman Blackwell raised --
-- to Mr. Mandel. I will try to make my answers a little bit more brief. With respect to the corporations not having to pay the business privilege tax if it is repealed, 83 2/27/06 - WHOLE - BILL 060006, ETC. and we hope it is repealed, the corporate officers, the owners of the corporations are salaried employees of the corporations. They pay wage tax. The net profits tax is the self-employed persons corollary to the wage tax. So while the corporation itself under a phase-out would not be paying the tax, the individuals who work for the corporation, including the owners of the corporation, would still be paying the wage tax and paying taxes to the City. As far as the other question concerning the real estate tax increase, while it has been commonly said that the Commission recommended raising the real estate tax to fund tax reform, that is not what the Commission report said. Let me say that very clearly. We did not recommend that. We were asked in our charge to make tax reform recommendations that were socially and fiscally responsible. So that when we made our recommendations to reform the tax 84 2/27/06 - WHOLE - BILL 060006, ETC. structure, we also laid out a roadmap of various options that City Council could consider to fund the tax reform. In our report, what we basically said was, if everything else failed, Council could look to the real estate tax, but there were many, many other sources of funding for tax reform that was in the recommendations of the Tax Reform Commission that would have precluded the necessity of looking at the real estate tax. Also, unrelated to responding to the questions, I would like to just bring one other --
Excuse me, Mr. Weintraub. We have a point of order before you continue. Councilman Nutter.
Thank you, Madam Chair. I made the point at this moment. I think Mr. Weintraub is about to go into Bill 14? 85 2/27/06 - WHOLE - BILL 060006, ETC.
He was responding to questions I had asked. I had one follow-up as well.
I understand. Mr. Weintraub, I thought you in your explanation -- and I know you're trying to respond quickly, but I think it bears repeating and a bit of a slowing down. Let's talk about the net income portion of the business privilege tax as it relates to sole proprietors and partners.
That's exactly my line as well, because you responded to the wage tax issue, but we asked you about the business privilege aspect of them, not the wage tax part. And Councilman Nutter -- 86 2/27/06 - WHOLE - BILL 060006, ETC.
Councilwoman, would you like me to wait for Councilman Nutter's question or to respond?
Let me try to restate what I said, because I believe I was responding to your question, Councilwoman. The corporations, if they are not paying business privilege tax as an entity, the corporate officers, who are the owners of those corporations, are still paying wage tax, and that wage tax is the profits of the corporation that is being paid to the corporate officers. The profits of the corporation being paid to the corporate officers are paying wage tax. 87 2/27/06 - WHOLE - BILL 060006, ETC. Most of your corporations in Philadelphia today, what they should be doing if they're not doing is paying out the profit of the corporation as salary to their owners. That way, they pay no 7 net income tax on the business privilege tax and they're paying wage tax. But many of them don't do that, and they wind up paying the higher business privilege tax instead of the wage tax. And that's what I was trying -- the point I was trying to make.
Thank you, Madam Chair. I think part of this discussion in its explanation revolves around the intermingling of terms. Mr. Weintraub, when you talk about corporate entities and their officers, some may pay the regular commonly known, for instance, resident wage tax rate, which we know to be four 88 2/27/06 - WHOLE - BILL 060006, ETC. point something. The net income portion of the business privilege tax, which I want to make sure that we're narrowly focused on that, is a higher rate --
So who actually pays the net income portion of the business privilege tax?
Any corporation that has a profit where the profit is not paid out to the owners of the corporation as salaries.
Well, many of your publicly traded companies, they would not be necessarily paying out all their profits to the officers because they have a responsibility to their 89 2/27/06 - WHOLE - BILL 060006, ETC. shareholders, but where the shareholders of the corporation are the officers of the corporation and are the owners of the corporation, are operating the corporation, many of these small corporations that Councilman DiCicco asked about a moment ago, these S corporations, they should not be paying the net income portion of the business privilege tax if they are paying out the profit in the form of salaries to the officers. Unfortunately, many of them don't do that, because for federal purposes, there is no distinction between the wages and the corporate profit. For an S corporation, they're taxed the same.
Sole proprietors and partners, well, they pay the net profits tax and they pay the business privilege tax, and they get a credit --