COUNCIL OF THE CITY OF PHILADELPHIA2 COMMITTEE OF THE WHOLE3 Room 400, City Hall6 Philadelphia, Pennsylvania Tuesday, November 30, 20107 10:35 a.m. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA10 COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DARRELL CLARKE11 COUNCILMAN FRANK DiCICCO COUNCILMAN W. WILSON GOODE, JR.12 COUNCILMAN BILL GREEN COUNCILMAN WILLIAM K. GREENLEE13 COUNCILMAN CURTIS JONES, JR. COUNCILMAN JACK KELLY14 COUNCILMAN JAMES KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI15 COUNCILWOMAN DONNA REED MILLER COUNCILWOMAN MARIA D. QUINONES-SANCHEZ16 COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILWOMAN MARIAN B. TASCO17 BILL 100635 - An ordinance amending Chapter 19-2600 of The Philadelphia Code, relating to19 tax rates, credits and alternative tax computation for the business privilege tax, by20 providing certain exclusions; revising certain tax rates; and creating certain fresh food tax21 credits; all under certain terms and conditions.22 - - -24 2
Good2 morning. This is a public hearing of the3 Committee on the Whole regarding Bill No.4 100635. I would ask Mr. McPherson to5 please read the title of the bill.6 MR. McPHERSON: Bill No.7 100635, an ordinance amending Section8 19-2600 of The Philadelphia Code,9 relating to tax rates, credits and10 alternative tax computation for the11 business privilege tax, by providing12 certain exclusions; revising certain tax13 rates; and creating certain fresh food14 tax credits; all under certain terms and15 conditions.16
Thank17 you.18 Councilman Goode, your light is19 on. Did you want to be recognized?20
After the25 11/30/10 - WHOLE - BILL 1006351 first witness.2
Thank6 you, Madam President. 8 We've met with many manufacturers, who9 have welcomed us into their plants and10 showed us their creativity and how they11 are leading the global economy. " This campaign crystalized the12 main point in our proposal today. Of13 every dollar spent locally, 68 cents gets14 recycled into our local economy. 18 Today, we will have a debate,19 not about the numbers, because we have20 always maintained that this proposal21 would be revenue neutral for the City for22 now. 11 Every tax commission has stated we need12 to shift our taxes from things that are13 mobile to immobile. What they fail to14 say directly is that in order to15 eliminate our reliance on business tax,16 we have to shift the burden to property17 tax, and we would have to increase our18 property taxes by over 100 percent. 25 7 11/30/10 - WHOLE - BILL 1006351 Single-sales factor being2 piloted this year, while an option, will3 take years to implement and needs much4 study and review. 15 People are going to use the16 traditional scare tactics about the17 potential job losses and put out huge18 numbers. Here again, every national19 study shows small businesses are job20 creators, particularly in urban centers21 like Philadelphia. Therefore, a tax22 reform that helps small business, helps23 create small businesses, cannot lose24 jobs. 25 8 11/30/10 - WHOLE - BILL 1006351 What we are proposing is not2 complicated; it's very simple,3 eliminating the payment on the first4 100,000 of gross receipts for every5 business, which will immediately take6 5,000 Philadelphia business filers off7 our books. That's right, we are going to8 give a tax break to 50,000 small9 businesses in Philadelphia. 20 We are simplifying the21 calculation and collection, leading to22 more predictability for businesses and23 for the City. 4 Winners: Manufacturing. The5 recently released PIDC report further6 supports the need for us to make this7 change as soon as possible. The report8 states that there are over 104,000 jobs9 in manufacturing and in the industrial10 sector, one of every five jobs in11 Philadelphia. These jobs pay nearly12 $50,000 and there's a growth potential of13 over 22,000 jobs. 18 The recent study of the19 Inquirer speaks to Philadelphia's poverty20 rate. 24 Today's discussion is as25 10 11/30/10 - WHOLE - BILL 1006351 complicated and as simple as the current2 national debate on taxes. If we give the3 richest one percent of the country a tax4 break, they will reinvest it into our5 economy. That's our current course. 9 We have met over the last 1810 months with the Administration, just this11 weekend, trying to address the concerns12 to mitigate any unintended consequences13 to this, but ultimately at the end of the14 day, my colleagues have to choose will15 they support Philadelphia businesses. 3
Thank4 you.5 At this time, does anyone else6 want to be recognized?7 (No response.)8 COUNCIL PRESIDENT VERNA:9 Seeing no one, we will call upon our10 first witness.11 MR. McPHERSON: City Controller12 Alan Butkovitz.13 (Witness approached witness14 table.)15
Good16 morning. Welcome. Kindly identify17 yourself for the record.18
I'm Alan19 Butkovitz. I'm the Philadelphia City20 Controller, and I want to thank you and21 the Council for this opportunity to22 testify today. 9 I think the main reason that10 the proposal is a damaging one is set11 forth pretty succinctly in the12 Philadelphia Inquirer op-ed piece that13 was written today by Professor Robert14 Inman, who is a nationally recognized15 economist from the Wharton School and has16 been an authority behind the work of the17 Tax Reform Commission. 3 Now, when the Philadelphia Navy Yard4 closed, I think we lost about 2,900 jobs,5 and then you had the multiplier effect of6 that. 21 Now, an economy such as22 Philadelphia's is made up of a diversity23 of types of companies, but the fact that24 a company is low profit margin is not in25 14 11/30/10 - WHOLE - BILL 1006351 itself a bad thing. In fact, there is a2 high correlation between being low profit3 margin and being somebody that employs a4 lot of workers. 7 The industries that are being8 targeted by the quadrupling of the gross9 receipts tax are industries that employ a10 lot of people. Not only do they employ a11 lot of people, they employ a lot of12 people at the bottom of the economic13 spectrum. They employ a lot of poor14 people. 15 The general philosophy16 encapsulated in this bill is basically17 trickle-down economics. It is18 Reaganomics in another name. It is the19 same debate that is going on in20 Washington now regarding the renewal of21 the Bush tax cuts for the top two22 percent. The theory, simply stated, is23 that if the people at the top of the24 economic chain don't pay any taxes,25 15 11/30/10 - WHOLE - BILL 1006351 eventually everybody else is going to2 benefit. 9 Thirdly, it is not revenue10 neutral. The Revenue Department has11 analyzed the data. Only the Revenue12 Department could analyze the data because13 of IRS confidentiality rules. So they14 looked at the top 100 business taxpayers15 in the City, which constitute 72 percent16 of all the taxpayers, and they reached17 certain conclusions, an important one of18 which is that this pokes a $23 million19 hole in the budget in 2015. 25 16 11/30/10 - WHOLE - BILL 1006351 We have the uncertainty of whether this2 economy is recovering or whether we are3 headed into a double dip. We have --4 Philadelphia has suffered a major loss in5 the fact that Governor Ed Rendell's term6 has come to an end and that there is7 going to be a change in the lineup in8 Harrisburg that is going to be very9 adverse and hostile to Philadelphia's10 interests, and as Councilman Sanchez11 mentioned just a moment ago, the default12 position given the record of tax policy13 in Philadelphia is, as you eliminate14 business taxes and as you cannot15 effectively touch the wage tax,16 everything flows downhill, and when you17 build a hole in the budget, the people18 who get hit in the neck are the people19 who pay the real estate taxes in20 Philadelphia. 25 17 11/30/10 - WHOLE - BILL 1006351 There are problems on the2 horizon in the School District's3 financing, which will produce further4 pressure on real estate taxpayers. 10 Fourthly, it is -- it's a basic11 premise about business climate that12 whatever the rules are, the one thing13 that you have to do with business is be14 consistent and be predictable. We had a15 process in Philadelphia. Over the last16 15 years, there has been significant17 progress towards tax reduction of18 business taxes, tax reduction of wage19 tax. 20 The damage from that kind of21 action is more than the fact of what you22 just hit them with. 6 Next, you have this whole7 concept of winners and losers. 10 Even Professor -- by the way, I'm asking11 to introduce Professor Inman's op-ed into12 the record in lieu of reading it. 20
We all have to21 pay taxes as the cost of maintaining a22 civilized society, and generally we've23 done it by kind of a consensus in24 Philadelphia. There's been a consensus25 20 11/30/10 - WHOLE - BILL 1006351 that business taxes generally should go2 down. 5 This proposal breaks new ground6 in another way. It intentionally tries7 to pick winners and losers, which is8 something that has been abhorrent at the9 national level since the 1980's debate10 about industrial policy. Government11 should not be in the business of12 targeting and destroying particular13 industries and businesses. That's14 something to take place in the15 marketplace. And it's one of the intents16 of this bill to benefit certain17 industries and on the back of the hand,18 the other side of that is that other19 industries are going to have to bear the20 brunt of that. The industries that are21 going to have to bear the brunt of it are22 the ones that already have a low profit23 margin. So it takes very little tipping24 point to turn them from profit into25 21 11/30/10 - WHOLE - BILL 1006351 non-profit. 5 Now, there's also a lot of this6 discussion about the question of small7 business and small business being the8 generator of the vast majority of jobs,9 but it's also true -- you know, I had a10 small business when I started out in law11 practice. All small businesses -- I12 don't know of any small business that13 starts out with a profit in the14 beginning. Everybody goes through a15 gestation period. Everybody goes through16 a period where they're losing money. The17 rationale of this is that you don't make18 it to profitability unless you are saved19 by that $100,000 exemption, which is the20 panacea. 2 And I think the final point is3 one of process. This Council has been in4 the forefront of a reform era in5 Philadelphia government, in open,6 transparent government. 12 Well, we have the spectacle here. Look13 what we have. We have a process that has14 really not penetrated the public very15 much, as evidenced by the fact that when16 Finance canvassed 30 industry association17 groups, 20 of them didn't even know that18 there was a current discussion about19 whether the basic rules of taxation that20 govern them was under discussion. Then21 we have a five-page bill which draws fire22 from particular powerful industry groups,23 starting with the supermarkets, and the24 approach to that is that anybody that is25 23 11/30/10 - WHOLE - BILL 1006351 powerful enough to make a lot of noise2 gets an amendment or an exemption that3 they're off the hook and the shortage is4 then rolled over and dumped on the other5 poor taxpayers who don't have that kind6 of voice. So the latest word is that7 there's some kind of amendment being8 cooked up on behalf of the construction9 industry, although when we asked10 yesterday, it was not available for11 inspection or examination. I understand12 it may have been circulated to13 Councilmembers today. 21 So you cannot have both a22 rushed process and a process with all23 sorts of surprises at the end that don't24 have an opportunity to be vetted. If25 24 11/30/10 - WHOLE - BILL 1006351 there's going to be major amendments at2 the end, then the prudent course is to3 pull the bill out of Committee and come4 back in another two or three months after5 all the significant amendments have been6 vetted and examined and then take a look7 at it, after you're sure what the numbers8 are on that piece of paper. But beyond9 that, what is wrong with doing all of10 this in the light of day? Why in the11 world are we talking about major public12 policy, major tax policy in secret,13 back-room secretive kinds -- where nobody14 could get a hold of a witness list until15 this morning, nobody could see the16 amendment. 19 So that essentially sums up my20 feelings on this bill. 24
Thank25 25 11/30/10 - WHOLE - BILL 1006351 you. One moment, please.2 The Chair recognizes Councilman3 Goode.4
Thank you,5 Madam President.6 Good morning, Mr. Controller.7
Thank you9 for your testimony. I'm glad you10 actually started out this debate. It11 will be a long and lively discussion.12 There will be people as proponents who13 will try to spin their opinions. There14 are people who will be opponents who will15 try to spin their opinions. There are16 some things that are not debatable, so17 I'd like to actually simplify some things18 right now by posing a few questions.19 The first question is, does20 this bill raise taxes on any small21 businesses?22
Does this25 26 11/30/10 - WHOLE - BILL 1006351 bill raise taxes on Philadelphia-based2 businesses?3
Is this bill5 really about business size and geography?6 We know that in terms of business size,7 there are small businesses that will pay8 more; there are small businesses that9 will pay less. There are large10 businesses that will pay more; there are11 large businesses that will pay less.12 There are Philadelphia businesses that13 will pay more; there are Philadelphia14 businesses that will pay less.15
There are17 out-of-town businesses who will pay more.18 So this is not really about19 business size or geography; this is about20 industry type?21
Does this23 bill raise taxes on labor-intensive24 businesses?25 27 11/30/10 - WHOLE - BILL 1006351
Absolutely. I2 think that's one of the worst things3 about this bill.4
And the last5 question is and for the record, your6 estimation of job loss is what?7
That's why I10 can't support this bill. The portion of11 the bill I do support is the $100,00012 exemption on gross receipts, which is why13 I co-sponsored the bill. My question to14 you is, do you still support the15 elimination of the gross receipts portion16 of the BPT?17
Sure, depending21 on where you're going to make up the22 revenue.23
Okay. And24 in this bill now, is the $100,00025 28 11/30/10 - WHOLE - BILL 1006351 exemption revenue neutral?2
Well, the3 answer would be, it's revenue neutral if4 you do everything else that the bill5 does. If you just did the 100,0006 exemption, it wouldn't work, because it7 wouldn't be revenue neutral.8
So how much9 does the $100,000 exemption on gross10 receipts save a business?11
Again,12 Professor Inman's estimate is that it13 saves them $530.14
It saves15 them $530 at the end. In the first year16 it saves them $141?17
After five19 years it eventually saves them $530.20 So how much are we spending on21 this bill, in your estimation?22
Yeah. How25 29 11/30/10 - WHOLE - BILL 1006351 much does the bill cost?2
Well, I mean,3 we're punching a revenue shortfall of $234 million and we're --5
So we're6 spending $23 million to save businesses7 $141 now and eventually $530?8
Thank you.10 Thank you, Madam President.11 COUNCIL PRESIDENT VERNA:12 You're welcome.13 The Chair recognizes Councilman14 Green.15
Thank you,16 Madam Chair.17 Mr. Controller, I want to thank18 you for coming in and testifying today.19 Although we don't agree on the policy, I20 do appreciate that you have a21 perspective, and I just want to say that22 Steve Mullin from Econsult will be23 testifying with respect to the issues you24 raise, Mr. Inman's testimony. But you25 30 11/30/10 - WHOLE - BILL 1006351 made a number of conclusory statements2 about the impact of this bill and I just3 wondered what internal analysis has been4 done by the Controller's Office with5 respect to any of the conclusory6 statements that you made.7
Well, first of8 all, we read the bill, and then we talked9 to a number of industry groups to try to10 get a consensus of the impact within11 their industries. We reviewed the12 correspondence from the Chamber of13 Commerce with you and Councilman Sanchez14 and we've kind of done an analysis of the15 19 questions that were asked and the 1316 that were not responded to and the six17 that were responded to. And we've18 reviewed things like Inman's testimony.19
So Professor20 Inman, you may be shocked to hear this,21 but I don't disagree in substance with22 what he said today, because what he did23 in his analysis was hold the net income24 rate constant at 6.45 percent and25 31 11/30/10 - WHOLE - BILL 1006351 increase the gross receipts rate. So the2 assumptions underlying his conclusions3 are not what we are doing in this bill.4 He did that because his model only takes5 into account shifting of one factor, and6 that is gross receipts. And based on my7 many discussions with Professor Inman8 over the last two years on this topic, I9 understand that those are the limits of10 his model.11 I appreciate that it has a12 meaningful impact on you, but I just13 wanted to make sure that you understood14 the limits of Professor Inman's model and15 that he basically said he was unable to16 model what we're doing.17 My question --18
Is there a19 question at the end there? Because I'd20 like to respond to that.21
Yes. If you22 drive along City Line Avenue and you look23 at the Bala Cynwyd side, would you24 describe the financial services firms,25 32 11/30/10 - WHOLE - BILL 1006351 insurance firms and law firms that have2 moved to that side of City Line Avenue as3 highly profitable or marginally4 profitable businesses?5
Well, as you6 look out your car at the buildings on7 City Line Avenue, I don't think we would8 have any way of knowing the answer to9 that. I guess you'd have to look at10 their tax returns.11
The answer12 is that they're all highly profitable13 businesses. In fact, I was the 40th14 employee of one of them, Susquehanna15 Investment Group, which now has 1,50016 employees on the other side of City Line17 Avenue, in large part driven by the18 City's tax policy of punishing19 profitability. It is only profitable20 firms that can create jobs and grow jobs.21 I don't expect us to resolve22 this debate today, Mr. Controller, but23 what I do hope is that you'll listen to24 the rest of the testimony today, because25 33 11/30/10 - WHOLE - BILL 1006351 this is a very important issue for the2 City, and hopefully after you hear3 everything, we can persuade you in4 another direction.5
Well, if I can9 respond to your comment about Professor10 Inman, what he said was that it is11 prudent when you are in the business of12 analysis to look at things that have a13 track record, and that the gross receipts14 tax has been adjusted enough over the15 history of Philadelphia that he can make16 calculations about how many jobs will be17 lost by this. He said that the proposal18 for the elimination of the net income tax19 was completely experimental, that there20 was no data added and, therefore, the21 choice that he had was one between the22 probable loss of 75,000 jobs versus the23 lack of evidence that this course would24 produce a single job. That's actually25 34 11/30/10 - WHOLE - BILL 1006351 what he said.2
Thank you,6 Madam Chair.7 To reach the estimate that you8 keep reciting, he left the net income9 rate constant, which this bill does not10 do. So bad assumption in, bad result out11 in the model. And, once again,12 Mr. Mullin will be testifying on this in13 more specificity and I hope you can stay14 around and listen to it.15
Thank you22 also for your testimony and for the23 clarity with regards to who the winners24 and/or losers are, because that's one of25 35 11/30/10 - WHOLE - BILL 1006351 my principal concerns.2 In your analysis, as you3 answered Councilman Green, have you had a4 chance to look at other municipalities5 that may have been down this road with6 this type of tax policy and the outcome7 or yield of the implementation of this8 type of policy?9
Well, I mean,10 the problem is that there's nobody that11 has exactly done this. That's one of12 the -- this is basically a theoretical13 idea, an experiment. But there is no14 place that has had this precise set of15 taxes or this tax change.16
Any17 municipalities that tested a similar idea18 but the yield was --19
No.20 Philadelphia is actually in a pretty21 small category of cities that actually22 has both of these taxes. So, no.23
In the24 short time I've been here, my experience25 36 11/30/10 - WHOLE - BILL 1006351 has been to have this type of debate, a2 tax debate, as a part of the overall3 budget review process. What's the value4 or downside of not having this debate5 during the actual review of our city's6 budget?7
Well, I mean,8 the biggest problem is that you might9 blow a hole in a budget that a couple10 months from now you're going to have11 created your own deficit in the middle of12 the budget year. That's the major13 concern. I mean, you're paying for14 everything. You're paying for payroll15 for police and you are paying for tax16 cuts. It's all part of the budget17 discussions. You want to make sure it18 comes out balanced.19 But when you enact the budget,20 you've got good revenue estimates and you21 can make a decision -- you can make22 choices between certain spending levels23 and certain tax cuts or tax giveaways,24 but to do it in the middle of the budget25 37 11/30/10 - WHOLE - BILL 1006351 year -- I think the effective date of2 this wouldn't be until after the fiscal3 year anyway, so I'm not sure that it's4 that big of a difference. This wouldn't5 take effect until next fiscal year6 anyway.7
Thank you,8 Madam Chair.9 Thank you, Mr. Controller.10
Thank you,14 Madam Chair.15 Mr. Controller, do you know how16 many cities in the country have a net17 income tax?18
Four - New20 York, which is its own special exception;21 Washington, DC, which is essentially a22 city state and has its equivalent of23 their state income tax; Detroit; and24 Philadelphia. If we continue this path,25 38 11/30/10 - WHOLE - BILL 1006351 we're headed towards Detroit.2 Thank you.3
Well, my only4 response to that would be, how many5 cities have quadrupled their gross6 receipts tax or tripled?7
I'm going to10 allow the testimony on this to evolve11 during the day rather than respond to12 that. Thank you, Madam Chair.13
Thank you14 very much.15 Are there any other questions16 for this witness?17 (No response.)18
Thank you19 very much.20 MR. McPHERSON: Our next panel21 consists of Brett Mandel, Carmen Adames,22 John Kostenbauder and Randall Scott.23 (Witnesses approached witness24 table.)25 39 11/30/10 - WHOLE - BILL 1006351
Good2 morning. Would you please state your3 name for the record and begin your4 testimony. We will have all testimony5 and then questions at the end of the6 panel presentation.7
My name is Brett8 Mandel. 10 Good morning, Madam President,11 members of City Council. 18 This is certainly not my first19 time to appear before this Council to20 talk about Philadelphia tax policy. I21 believe I sang to you once. 9 Employers and residents in Philadelphia10 are burdened with high taxes when11 compared to surrounding suburbs and other12 cities. The taxes we impose are unique13 to Philadelphia, which sets us apart in a14 bad way and hurts our ability to attract15 and retain jobs and residents. 21 Fundamentally, most cities and22 localities do not tax business23 activities, so it is rare indeed to even24 talk about local business taxes. Where25 41 11/30/10 - WHOLE - BILL 1006351 firms are taxed locally, it is much more2 common to tax receipts than it is to tax3 profits, which makes some intuitive sense4 as receipts are much more easily tracked5 and audited for local enforcement. 10 But as economic evidence of the11 negative effects of Philadelphia's tax12 structure mounted and political pressure13 grew to reduce tax rates and reform the14 tax structure, we made serious strides15 toward improvement. 25 43 11/30/10 - WHOLE - BILL 1006351 employment growth dropped substantially2 after the City began its program of3 incremental tax reductions in 1996. 7 The question as to whether to8 continue or restart the current path of9 tax reductions or alter our course to10 adopt additional changes are ones that11 we've examined many times over the course12 of the last decade. 22 The Tax Structure Analysis Report23 promoted additional reductions to the24 wage tax and the gross receipts portion25 44 11/30/10 - WHOLE - BILL 1006351 of the BPT, but its primary2 recommendation was a substantial3 reduction to the net income portion of4 the BPT. 10 In looking at the two portions11 of the BPT, there is a striking12 difference between how the two levies13 affect firms. The gross receipts portion14 is levied primarily on receipts generated15 by local sales, a customer walks into a16 business and makes a purchase. 25 45 11/30/10 - WHOLE - BILL 1006351 By contrast, the burden of the2 net income portion of the tax is based3 not only on local sales activity but also4 on a firm's physical presence in5 Philadelphia. 14 Over and over in my research, I15 encountered employers and investors in16 firms who spoke of the fact that the tax17 on net income, in effect, made the City18 an unwelcome silent partner for many19 businesses. 2 The tax Reform Commission3 concluded economic theory and economic4 research strongly suggests that5 Philadelphia's peculiar combination of6 taxes is far more damaging to the economy7 than an alternative revenue structure8 would be. 14
My name is Randall21 Scott. I'm Executive Vice-President with22 Thomas Properties Group, and I have23 testimony to put into the record to the24 Council.25 48 11/30/10 - WHOLE - BILL 1006351 COUNCIL PRESIDENT VERNA:2 Mr. Scott, do you have written testimony3 to be circulated?4
As background, our9 firm, Thomas Properties Group, is a Los10 Angeles-based real estate operating11 company publicly traded on the NASDAQ12 since 2004. We're a developer and13 owner/operator of 15.8 million square14 feet of commercial property nationally.15 We operate in California, Texas and here16 in the Midatlantic. We're predominantly17 an owner of office buildings, but have18 some retail and residential product here19 in Philadelphia. That includes 212120 Market Street, which people know as the21 Trader Joe's Building, and the Murano22 Condominium at 21st and Market. Our23 other Philadelphia assets include24 Commerce Square and 1835 Market Street,25 49 11/30/10 - WHOLE - BILL 1006351 which together total 2.6 million square2 feet of prime West Market Street office3 space.4 Our firm is the direct5 successor to the developer of One6 Commerce Square, which opened in 1987 and7 was built in joint venture with IBM8 Corporation, and Two Commerce Square,9 which was a build-to-suit for10 Consolidated Rail Corporation. In each11 instance, the major tenant for those12 towers no longer has a presence in13 Philadelphia. IBM was 500,000 square14 feet, almost 1,000 jobs when we opened15 One Commerce Square in 1987. They were16 gone by 1992 and 3.17 Conrail was even bigger,18 750,000 square feet, almost 2,000 jobs.19 They exited the City in '98, '99.20 Conrail was acquired by CSX and Norfolk21 Southern. It was really bad luck for the22 City and certainly bad luck for us, as we23 had to backfill three-quarters of that24 Two Commerce Square tower. On the other25 50 11/30/10 - WHOLE - BILL 1006351 hand, IBM was driven out by the City's2 high business privilege tax and wage tax3 policies.4 In general, the demand for5 office space in Philadelphia has been6 flat for over 20 years. There's really7 very little growth. Evidence includes8 the fact that office rents are virtually9 at the same levels as they were in 1987,10 in some cases less. Building values are11 stuck at levels way below replacement12 cost, and evidence of that is the fact13 that we've only had two buildings built14 here, the Cira Centre and Comcast Center,15 since the 1992 delivery of Two Commerce16 Square and the Bell Atlantic Tower, and,17 finally, the fact that the City is not on18 the radar of most institutional19 investors.20 I can tell you that our firm is21 roundly criticized by analysts in New22 York for the capital that we have23 invested in Philadelphia because of the24 low growth and high tax situation here.25 51 11/30/10 - WHOLE - BILL 1006351 Overall, the Philadelphia2 region since 1990 has seen significant3 growth. The total stock of suburban4 office space now well exceeds that within5 the City limits. It was not the case6 until the mid 1990s. So, in other words,7 Philadelphia has exported jobs and8 economic growth to its suburbs.9 So I'm here today in support of10 this proposal, which we believe is an11 effort to adjust public policy to enhance12 economic growth. And although the13 Green/Sanchez proposal is unlikely to14 benefit our firm's individual tax15 position, our company supports the bill16 because we believe it will help lessen17 the disincentive to locate a business in18 the City, will help drive economic growth19 and will, therefore, boost demand for20 office space.21 We believe that people and22 businesses respond to incentives and that23 taxes that are broad based at low rates24 incentivize economic growth.25 52 11/30/10 - WHOLE - BILL 1006351 In closing, I would say that we2 do not view this bill as the perfect3 end-all. It's our hope and expectation4 that if enacted, over time the gross5 receipts portion can be cut further and6 continuously toward Mr. Mandel's7 objective of zero.8 Thank you, Madam Chairman.9
Good13 morning. 14 I'm the Tax Director of the Pennsylvania15 Philadelphia Office of Weiser Mazars, a16 five-office accounting firm that actually17 is headquartered in New York. Prior to18 this year, I was the Tax Director of19 Fishbein and Company until we merged with20 Weiser Mazars, Fishbein and Company. 7 First, I'll first start out by8 saying that we are not based in9 Philadelphia. 12 Even though his largest client that he13 immediately obtained was a14 Philadelphia-based client, he declined to15 move the firm into the City, and the firm16 has always operated outside the City. We17 recently moved from Elkins Park to18 Horsham. Moving into the City was not a19 consideration. 7 We have found that the8 preparation of the business privilege tax9 return net income portion -- I'll step10 back a second. 12 As we have talked about a13 little bit, there's a net income portion14 and a gross receipts tax portion to the15 preparation of the business privilege tax16 return. 2 There are effects after the preparation3 of the return. We provide the client4 with a return. They file the return with5 the City. Upon occasion, there will be6 notices, delinquent tax notices and7 whatnot that come from the City. 17 It doesn't always stop with the18 preparation. It's the notices we have to19 deal with. 21 It's hard to quantify exactly22 the effect on a typical client, because23 there's no such thing as a typical24 client. We have clients that are 10025 56 11/30/10 - WHOLE - BILL 1006351 percent based in the City. We have2 clients that are based in the City, but3 they reach out to the suburbs and maybe4 other states. We have clients that are5 in other states or other municipalities6 that do business in the City. We have7 clients that do not touch the City8 whatsoever. As a result, depending on9 the client, we have a different amount of10 attention we have to put towards the11 preparation of a return. 19 I've heard a lot of talk about20 winners and losers. There are definitely21 winners and losers. That's what makes22 this potential change such a difficult23 challenge to actually enact. We have24 seen, and I agree, low margin taxpayers25 57 11/30/10 - WHOLE - BILL 1006351 are hurt a little bit. I've done some analyses on some4 of our clients. One of our law firm clients will clearly7 save tax dollars. However, they will --8 it will not necessarily be a windfall, at9 least based on the analysis with respect10 to this one client. 15 This is a client that has been in the16 City for probably 30, 40 years. I have17 told them that from a tax point of view,18 they could clearly save substantial19 dollars by moving, I guess, six or seven20 miles across City Ave. 24 Now, I will suggest that that25 58 11/30/10 - WHOLE - BILL 1006351 type of taxpayer is the exception and not2 the rule. 4 We've seen many service-based5 businesses, the analyses that I've done,6 I've seen a savings of 11 percent to a7 savings of 80 percent with service-based8 businesses. They are the winners. I've9 seen many losers. 13 We have a restaurant client. I14 see their tax double. Another restaurant15 client, I see their tax going up 3016 percent. 19 One of the clients will be paying three20 times what they were. Another company,21 which -- that first company is a22 distributor. 25 59 11/30/10 - WHOLE - BILL 1006351 Also, we have a construction --2 we have several construction firms. 10 I also want to comment briefly11 on the fact that -- on the statement that12 50,000 less tax returns would be filed13 under the proposal. I cannot tell you14 how much less of a burden that would be15 on the City in terms of responding to16 notices, in terms of their personnel17 being able to address larger taxpayers,18 the taxpayers that are truly paying the19 dollars. 6 When you eliminate -- if you7 eliminate the net income portion, you8 streamline filing of tax returns. You9 streamline the City's response.
14 I think it allows the auditors15 who come out and do audits to focus on16 bigger issues, and it will reduce -- it17 may not eliminate, it will reduce tax18 controversy that come up during audits,19 and depending on whether you're a20 corporation, which is not subject to the21 net profits tax, or if you're an22 unincorporated entity that is subject to23 net profits tax, it will substantially24 reduce the time, both the burden on the25 61 11/30/10 - WHOLE - BILL 1006351 tax preparer but also on the client in2 putting together information. 6 Bottom line, I believe that7 because of the trend in other states,8 Ohio eliminated their corporate net9 income tax and went to a commercial10 activity tax. Texas moved away from11 their income tax and moved more towards a12 gross receipts tax. 16
Thank17 you.18 Gentlemen, please remain where19 you are. I understand there is another20 witness on your panel that arrived late.21 MR. McPHERSON: Carmen Adames.22 (Witness approached witness23 table.)24
Good25 62 11/30/10 - WHOLE - BILL 1006351 morning. Kindly identify yourself for2 the record and proceed with your3 testimony.4
Good morning. My5 name is Carmen Adames and I am the CEO of6 Adames Professional Services, which is a7 certified minority and women-owned8 business located here in Philadelphia.9 My company provides accounting10 services for roughly 300 to 500 clients,11 the vast majority of which are small12 businesses located in Philadelphia.13 Based on my years of experience in14 accounting of small business tax returns15 I have filed, it is clear that Bill16 100635 will benefit my clients and17 Philadelphia's business community at18 large. By eliminating the net income19 portion of the BPT, a major competitive20 disadvantage for Philadelphia businesses,21 will be removed. Businesses that sell22 goods and provide services in23 Philadelphia will lose an incentive to24 move their operations across City Line25 63 11/30/10 - WHOLE - BILL 1006351 Avenue. Goods and services that2 originate in Philadelphia and are sold3 abroad will no longer face steep and4 uncompetitive local taxes.5 With the help of the $100,0006 exemption and the alternative rates7 available for retailers and wholesalers,8 Philadelphia's small business community9 should see a dramatic decrease in10 business privilege tax burden.11 One of the other things I've12 noticed is, whenever a potential client13 comes to visit me, wishes to open a14 business in Philadelphia and I do explain15 the tax situation that they will have to16 deal with in Philadelphia, they do tend17 to change their mind and move their18 business a little bit to the suburbs or19 outside of Philadelphia.20 Just in conclusion, I believe21 this proposal is sound and in the best22 interest of Philadelphia businesses. I23 urge you to pass the bill out of24 Committee.25 64 11/30/10 - WHOLE - BILL 1006351 Thank you.2
Thank you,5 Madam Chair.6 I'd like to thank all of you7 for taking time out of your business8 schedules to come in and talk to us9 today.10 I just -- Mr. Scott, I know you11 have to leave in a few minutes, so I'll12 start with you. You mentioned that your13 business is actually going to end up14 paying more, you think, in the short run15 to the City of Philadelphia as a16 consequence of this change. Yet you are17 in favor of it. Could you just sort of18 in one simple declarative sentence repeat19 why you think that this is important for20 the growth of the commercial real estate21 sector in Philadelphia?22
Sure. We're of the23 view that incentivizing businesses to24 locate in Philadelphia will drive demand25 65 11/30/10 - WHOLE - BILL 1006351 for office space and cause rents and2 property values to increase, and as an3 investor, that's your objective, your4 primary objective.5
Thank you.6 Mr. Mandel, if you could also7 just in one simple declarative sentence8 summarize your testimony, why is it9 better to eliminate the net income tax10 even if that means paying for it with an11 increase in gross receipts?12
Well, I think13 that's the big question, is it worth14 paying for it with the increase in the15 gross receipts, but clearly the net16 income tax is the more important of the17 taxes in terms of what draws companies18 out of Philadelphia, what encourages19 companies to leave Philadelphia. It is20 very, very attractive if you have a21 dollar of tax relief to provide, to22 provide it in the net income tax first.23
Thank you.24 Mr. -- I apologize. I'm going25 66 11/30/10 - WHOLE - BILL 1006351 to -- would you please repeat your name2 for us.3
I'm used to4 this, Councilman. John Kostenbauder.5 COUNCILMAN GREEN:6 Mr. Kostenbauder, could you please7 describe how easily a firm who was either8 located in the City of Philadelphia or9 located outside of the City of10 Philadelphia and doing business here can11 avoid the net income tax compared to12 avoiding the gross receipts tax, legally13 avoid the net income tax?14
As we spoke15 about, the net income portion of the16 business privilege tax is -- a starting17 point is federal income tax, and then we18 carve up, determine how much of it might19 be allocated to the City. The City's20 current net income rate is 6.45 percent.21 One of the ways we can reduce that tax22 burden is to bonus out any profits in23 salary. The wage tax as imposed -- I'm24 rounding -- four percent on residents,25 67 11/30/10 - WHOLE - BILL 1006351 three and a half percent on2 non-residents. So I can achieve an3 immediate reduction from 6.45 to maybe4 3.5 percent just by bonusing out profits5 in terms of salary.6 Well, I spoke about7 apportionment. There are -- the way you8 carve up the pie is by looking at your9 property in the City versus property10 everywhere, payroll in the City versus11 payroll everywhere, and sales in the City12 versus sales everywhere. There's three13 factors. You take an average of these14 three factors. I'm simplifying a little15 bit.16 In any event, sometimes the17 taxpayer may only have one factor, sales.18 While you might be able to legally, with19 substance, set up an office outside the20 City, all the sudden you've created a21 second factor. Now, instead of 10022 percent being to the City, you're down to23 maybe two-thirds to the City.24 I understand that it is not25 68 11/30/10 - WHOLE - BILL 1006351 uncommon for service-based businesses to2 set up satellite offices outside the3 City, to which they source a significant4 amount of receipts.5 A third way that companies --6 again, I think the bigger the company is,7 the more they can take advantage of these8 types of opportunities. If a company has9 ownership in two or three or four10 different entities, there are times that11 you, within reason, can take a fee, an12 intercompany fee, charge the City-based13 enterprise an intercompany fee and have14 the profits actually be taxed outside the15 City.16 And another way that is17 available really only to the large18 publicly traded companies is something19 called "Delaware Holding Companies,"20 where they set up a tax-sheltered entity21 in the State of Delaware to which they22 pay royalties, reducing their net income.23 Philadelphia as well as Pennsylvania24 remain the few jurisdictions left that25 69 11/30/10 - WHOLE - BILL 1006351 have not closed what I'll call the2 Delaware Loophole.3 So those are four different4 ways that you can manipulate net income5 tax. But when it comes to the gross6 receipts tax, it's where the product is7 delivered or it's where the service is8 rendered, and basically it's as simple as9 that.10
Thank you.15 Thank you all for your16 testimony. I appreciate it.17
Thank18 you.19 The Chair recognizes Councilman20 Goode.21
Thank you,22 Madam President.23 Good morning. The questions24 are first for Mr. Mandel, then for the25 70 11/30/10 - WHOLE - BILL 1006351 other three accountants.2 Mr. Mandel, in your testimony3 you talk about the strategy the City4 pursued since the mid '90s, the wage tax5 cuts and gross receipts tax cuts. How6 has that worked? Has it been successful?7
Certainly if you8 look at the gap between nationwide9 employment and Philadelphia employment10 before we began our tax cuts of the wage11 tax and the gross receipts tax, it was a12 pretty large gap. That gap has been all13 but eliminated by the reductions in the14 taxes.15 Now, that gap hasn't gone16 totally away, and what's happened over17 the last few years with the recession has18 thrown everything into, I guess, a reset19 mode, but clearly the employment growth,20 the difference between when the nation is21 growing and when we're growing, has been22 dramatically cut since we've been23 reducing our taxes.24
But cutting25 71 11/30/10 - WHOLE - BILL 1006351 the gross receipts portion has worked?2
Clearly, the cuts3 to the gross receipts and the wage tax4 have had a positive effect in the5 economy.6
Had we in7 the mid '90s targeted the net income8 portion rather than gross receipts9 portion, what would be different?10
Certainly the11 economic theory suggests that the same12 thing would have happened, that we would13 have had that employment growth, but we14 know that the gross receipts tax has made15 a change because there are facts on the16 ground. We can see the change.17
Well, before we20 started cutting the gross receipts tax,21 that was economic theory as well.22
Yeah. It is clear25 72 11/30/10 - WHOLE - BILL 1006351 that the reductions of taxes makes sense.2
But the same3 reduction in net income since the mid4 '90s is not proven.5
Well, we haven't6 been cutting the net income tax since the7 mid '90s.8
Okay. So15 we're still talking about eliminating net16 income portion, and the sense for why17 we're doing it is because out-of-town18 businesses don't necessarily pay gross19 receipts tax, and that so we're removing20 a disincentive for people to locate here.21 That's good, it makes sense, it sounds22 sound and logical to remove a23 disincentive, but through this24 legislation, are we actually creating an25 73 11/30/10 - WHOLE - BILL 1006351 incentive to locate here?2
Well, as I think3 as Professor Inman pointed out in his4 essay this morning, raising one tax will5 have a negative impact on the economy.6
The question7 is simply, is removing a disincentive the8 same as creating an incentive? And are9 we actually creating an incentive for10 anyone to locate here? And the answer is11 no, but you can answer for yourself.12
I'm still trying13 to get the double negative in my head.14 If you remove the disincentive, do you15 create an incentive?16
The17 businesses who left, are they coming back18 because of this legislation?19
I certainly would20 defer to the accountants, but I don't21 know that they would.22
They would23 not necessarily come back because of this24 legislation. There's nothing that this25 74 11/30/10 - WHOLE - BILL 1006351 legislation does to create incentive for2 people to move back.3 Now, my problem with how this4 thing is spun is, we're talking about5 businesses who are located here, but let6 me ask a very simple question. Does the7 BPT actually apply to anyone who doesn't8 do business here?9
My question12 is, do you have to pay business privilege13 tax if you don't do business here?14
I'm not20 talking about physical presence.21 Obviously everyone who pays the BPT does22 business here, whether they are23 headquartered here or not, but they're24 doing business here. And the thought25 75 11/30/10 - WHOLE - BILL 1006351 behind that and where I'm going with this2 is simply that the large retailers that3 provide thousands of jobs, as a result of4 this legislation are they going to5 headquarter here?6
Okay. So9 this legislation does nothing to actually10 increase business here.11
Well, you see, I12 think there's a question of whether the13 net would end up being positive or14 negative, but I think it's very clear15 that if you remove the net income tax,16 you would have growth or you would have17 fewer losses.18
Let me go19 back to the large retailers that provide20 thousands of jobs. They quite possibly21 are already located somewhere else for22 another reason, for whatever reason. It23 could have been the wage tax, it could be24 the school system, it could be any number25 76 11/30/10 - WHOLE - BILL 1006351 of reasons. They're not going to locate2 here because of this legislation, if it3 becomes law. Is it possible that they do4 less business here and create less jobs5 here because we make the tax shift?6
Sure. That's the7 problem with a tax shift. This is --8 fundamentally, when the Tax Reform9 Commission looked at this, we took any10 number of different play with the tax,11 change the tax. Fundamentally, if you12 increase the tax on one side, you'll have13 a negative impact. If you decrease the14 tax on a different side, you'll have a15 positive impact. The question to you is,16 net net is that going to be a better tax17 structure?18
So part of19 the hit on this has been that we're20 letting large retailers who are not based21 here get away with not paying enough22 taxes. So we're going to tax them more23 and what's going to be the effect?24
Some of them could25 77 11/30/10 - WHOLE - BILL 1006351 move.2
Remember, the5 focus of my testimony is that net income6 tax reduction makes a great deal of7 sense. I continue to believe that the8 Tax Reform Commission was correct that9 this is a tax that is perverse, we should10 get rid of it.11
I won't12 prolong this. I made my point.13 To the three accountants,14 simple question --15 COUNCILMAN DiCICCO: Can I get16 a point of order on that one question?17
The18 Chair recognizes Councilman DiCicco for a19 point of order.20 COUNCILMAN DiCICCO:21 Mr. Mandel, I've read it maybe twice. I22 don't understand. Do you support this23 legislation or not?24
I think I still25 78 11/30/10 - WHOLE - BILL 1006351 have --2 COUNCILMAN DiCICCO: I'm not3 being critical. I appreciate your --4
I still have some5 of the same questions that are being6 asked here. I know that in any kind of7 shift, there will be winners, there will8 be losers. I'm considering that myself.9 I don't think this is a bad thing to talk10 about, but --11 COUNCILMAN DiCICCO: You12 haven't come to any decision or13 conclusion yet?14
If you are15 starting a tax structure and you said16 should we have no net income and only17 gross receipts, that would make a lot18 more sense than what we have now, but19 clearly there's going to be losers and20 winners. I'm with you, still21 considering.22 COUNCILMAN DiCICCO: Thank you.23 Thank you.24 Thank you, Councilman.25 79 11/30/10 - WHOLE - BILL 1006351 COUNCIL PRESIDENT VERNA:2 Councilman Goode.3
To the three4 accountants, I'll ask the same question I5 asked the City Controller, but it's even6 more appropriate to ask you. I assume7 that you provide services to small8 businesses, and so there are small9 businesses that will pay more and there10 are small businesses that will pay less.11 Is that true?12
For the record,13 Councilman, I'm not an accountant. I'm a14 real estate guy. So our view is that no15 tax here would be the best.16
-- we'll get rid of23 the net profits tax first, and we believe24 removing that disincentive will cause25 80 11/30/10 - WHOLE - BILL 1006351 more businesses to stay in the City and2 fill our buildings.3
Let me ask4 the question that I asked to Mr. Mandel.5 Has the gross receipts cuts and wage tax6 cuts caused more businesses to stay here?7 The answer is yes.8
Okay. To14 the two accountants, you represent15 providing services to small businesses.16 There are small businesses that will have17 their taxes raised and there are small18 businesses that will have their taxes19 decreased; is that correct?20
Could you22 define what you mean by "small business"23 from a receipts level?24
Annual gross25 81 11/30/10 - WHOLE - BILL 1006351 receipts of less than $1 million.2
With the3 analyses I did, there were more savings4 than there were --5
That's not6 the question I asked. The question I7 asked was, there are winners and losers8 among small businesses; is that true?9
And there11 are winners and losers among12 Philadelphia-based businesses; is that13 true?14
So this is16 not about business size or business17 geography, this is about industry type;18 is that correct?19
Different20 industries are impacted differently, I21 agree.22
But this is23 not about business size or business24 geography, it's about industry type; is25 82 11/30/10 - WHOLE - BILL 1006351 that correct?2
When you say3 "this is about," just so we can clarify.4
The spin on5 this is that this is for small6 businesses, it's against large7 businesses; it's for Philadelphia-based8 businesses, it's against out-of-town9 businesses. That's not true. The truth10 is that this is not just about size and11 geography, it's more about industry type.12
I think it's13 about everything. It's about inside as14 well as outside.15
But small16 businesses, some small businesses, will17 pay more?18
Low margin19 small businesses are more likely to pay20 more, yes.21
And some22 Philadelphia-based businesses will pay23 more?24
It depends25 83 11/30/10 - WHOLE - BILL 1006351 on the level of receipts and their --2
Thank you,14 Madam Chair.15 Mr. Mandel, the Bob Inman16 studies that I've seen over time17 basically say that the lowering of the18 gross receipts and wage tax hasn't really19 caused job creation, it's retained jobs20 in the City of Philadelphia.21
I guess I would22 say that the way I've always understood23 the studies, we're looking at the24 difference between how the nation is25 84 11/30/10 - WHOLE - BILL 1006351 growing and the difference between the2 way the City is growing.3
We would have been5 growing more or growing less depending on6 how the taxes are changed. Clearly, over7 time the City of Philadelphia has lost8 jobs.9
Right. So10 with respect to the net income tax, if11 that tax is lowered, are we likely to12 create and retain more jobs than we13 otherwise would?14
Well, certainly,15 again, using the conception of changing16 with respect to the nationwide economy,17 certainly the theory would suggest that18 if we eliminate this tax, we would move a19 lot closer to the national growth, so20 that when the nation grows, we grow.21 When the nation is shrinking, we shrink22 at the national rate instead of what has23 been the case previously, where when the24 nation is growing, we don't grow as much.25 85 11/30/10 - WHOLE - BILL 1006351 When the nation is shrinking, we shrink2 more.3
Does anybody4 on the panel know how many taxes are paid5 to the City of Philadelphia from people6 who pay gross receipts only and who have7 zip codes outside of the City of8 Philadelphia, what the dollar amount of9 taxes we collect from that is, which10 would sort of -- so if you knew that, you11 could then tell us whether or not we're12 going to collect more taxes from people13 outside the City and less taxes from14 people inside the City. But you're not15 experts on that, so you're not here to16 testify about that. I'm sure we'll be17 able to ask Rob Dubow and Steve Mullin18 those questions later, because I think it19 will demonstrate that there's an impact20 on the type of business -- geography and21 on locality.22 So thank you.23
Thank24 you.25 86 11/30/10 - WHOLE - BILL 1006351 Councilman Goode, are you2 finished with your questioning?3
Thank5 you.6 The Chair recognizes Councilman7 Greenlee.8
Thank9 you, Madam President.10 Very quickly, because11 Councilman DiCicco got my question in.12 Because, Mr. Mandel, I wasn't clear. The13 other three witnesses said that they14 support the bill, but at this point,15 you're not ready to say yay or nay16 exactly? You gave us a good history, but17 you didn't really -- I'm just trying to18 figure out what your position is right19 now.20
I certainly21 believe that there is an ideal position22 out there that the City should continue23 to aspire to. If what this Council is24 going to say is that we are never going25 87 11/30/10 - WHOLE - BILL 1006351 to return to the notion of reducing our2 tax rates and reducing the tax burden,3 then I think it makes a great deal of4 sense to consider shifts. If what you're5 saying is that at some point in the6 future when the nationwide economy comes7 back and when we consider again the8 reducing of tax burden, then the idea of9 cutting makes a lot more sense than10 shifting.11
Thank you,16 Madam President.17 Mr. Mandel, you're saying that18 you believe this is better than what's19 currently on the books, but we shouldn't20 do this either?21
We should do24 something else. We should do something25 88 11/30/10 - WHOLE - BILL 1006351 other than what's on the books and we2 should do something other than this as3 well.4
Clearly, what we5 have on the books is not good. We need6 to fix it. Obviously --7
So this is8 better than what's on the books, but this9 is not what we should really do?10