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
Thank you,13 Madam President.14 COUNCIL PRESIDENT VERNA:15 You're welcome.16 Councilman Greenlee.17
Just one18 last question along those same lines.19 What is your opinion about what the bill20 does as far as the gross receipts tax?21 Obviously increases it. What is your22 opinion on that?23
That's where --24 I'm as curious as you are to hear some of25 89 11/30/10 - WHOLE - BILL 1006351 the testimony later to hear more opinions2 on that. Again, we know that cutting the3 net income tax makes a great deal of4 sense. We know that increasing the gross5 receipts tax will have a negative impact6 for some businesses. I'm very interested7 in the testimony of Mr. Dubow and8 Mr. Mullin.9
Okay.10 Thank you.11 Thank you, Madam President.12 COUNCIL PRESIDENT VERNA:13 You're welcome.14 The Chair recognizes Councilman15 Jones.16
18 First of all, thank everyone19 that has given testimony. It has been20 insightful. 25 90 11/30/10 - WHOLE - BILL 1006351 I'm also thankful that people2 are using on the analogy an example of3 the Fourth District, which is City4 Avenue. 6 So when people make these7 strong assertions that one way or another8 somebody is going to go based on a9 percentage point or two one way or the10 other, I don't think -- I think it's a11 little more elastic than inelastic in12 location. 13 My second point is, as people14 start talking about these winners and15 losers, I want it codified in three16 categories for me. One, the winners when17 it comes to businesses, what individual18 businesses and industries are impacted,19 winners, losers. And I also want to know20 what the job impact, winners and losers,21 are. Because if a winner in one sense is22 going to, in so doing, hire somebody,23 that's important to me. 8 I look at the broad picture, like all of9 us, what is the impact on our treasury,10 but at the end of the day, I'm concerned11 about the person on the construction12 site, I'm concerned about the person who13 works in Target, I'm concerned about what14 those impacts are. 5 And the third food group and6 final food group is potential investors,7 people that are making a decision whether8 to move, someone said, seven miles up9 Lancaster Avenue or Bala Cynwyd Avenue10 and whether or not that's enough to miss11 out on a market that might be at12 Philadelphia's -- in Philadelphia or on13 its border, is it enough to move them out14 of that. 20 Also, a lot of assertions have21 been made about the potential 75,000 job22 loss. I mean, I know enough about23 economics to know that a lot of this is24 the WAG theory, which is a wild-ass25 94 11/30/10 - WHOLE - BILL 1006351 guess, and we don't know. I mean, for2 real. I mean, we can put up all the3 charts in the world, but we don't know4 what people are going to do. So if you5 say we're going to lose 75,000 jobs,6 based on what? 10
Thank11 you.12 The Chair recognizes Councilman13 Clarke.14
Thank you,15 Madam Chair.16 Good word, Councilman Jones.17 Good morning. Actually, before18 I ask a couple of questions, I just want19 to be consistent with the conversations20 that I have personally had with a number21 of people that have come at this witness22 table in this whole debate about tax23 issues, and I actually heard a reference.24 I can't remember who said it, but this25 95 11/30/10 - WHOLE - BILL 1006351 whole notion of jobs moving into the2 City, jobs leaving the City, headquarters3 moving in, moving out, people's decisions4 as it relates to whether or not this is a5 city that's a good place to do business6 is not just related to this whole tax7 issue, because there are other8 considerations, such as schools. There9 are other considerations, such as crime,10 environment.11 So there are a whole lot of12 things that factor into this whole -- and13 I'm just being consistent, because I14 always say this every time people -- and15 I know, Mr. Mandel, we've had lengthy16 debates about this in your earlier years.17 And I think that as we take this holistic18 approach about the tax policy, we should19 also understand what implications they20 may have on those other very important21 issues, such as our ability to fund our22 schools, such as our ability to have23 enough police to be on the streets, such24 as our ability to make sure that we have25 96 11/30/10 - WHOLE - BILL 1006351 decent places to live and the quality of2 life is sustained. So that's also a part3 of it.4 But getting back to this tax5 issue, and I want to ask -- I'm like6 Councilman Green, the accountant, Mr.?7 MR. KOSTENBAUDER:8 Kostenbauder.9 COUNCILMAN CLARKE:10 Kostenbauder. Actually, your testimony11 was quite intriguing, in that you talked12 about various aspects and the impacts on13 various businesses, winners, losers,14 inside, outside. The first question I15 have, do you have the analysis that16 you've done in writing?17
I took18 actual net income for 2009 and actual19 gross receipts for several different20 clients, and that's where I'm coming up21 with my numbers.22
Is that23 proprietary? The reason I ask that,24 because it was very detailed and, from my25 97 11/30/10 - WHOLE - BILL 1006351 perspective, not to suggest that you all2 are not balanced, but to date so far,3 your testimony seemed like the most4 balanced testimony, the most objective,5 and I wanted to know if --6
Well, I7 consider it proprietary. If there is a8 way -- remember, this is an extremely9 small population --10
-- of the13 entire tax base of the City of14 Philadelphia.15
If there's a18 way that I can summarize it for you, I19 will attempt to do that.20
That will21 be very helpful.22 The second thing, I think I23 heard you reference the fact that --24 there's this sense that all of the,25 98 11/30/10 - WHOLE - BILL 1006351 quote/unquote, companies that may be2 headquartered outside of the City or the3 larger companies are high profit margin4 companies, which I believe a lot of them5 are not. There are a significant number6 of low margin profit, high volume7 companies that would not benefit8 significantly from the $100,0009 exemption, because they are larger10 companies.11 Can you talk to me about those12 companies and the impact that can13 potentially be on those types of14 companies, either in or outside the City15 of Philadelphia?16
A company17 that can apportion is only, if you take18 away the business privilege tax, is only19 going to pay the gross receipts tax,20 which, as we know, will go up21 significantly. And every taxpayer is22 different. You have to run the numbers23 on every taxpayer. So there are those24 that will find themselves -- in one case25 99 11/30/10 - WHOLE - BILL 1006351 I found it almost tripling. In another2 case, it doubled. It really depends.3
It's very6 specific to the margin. It's very7 specific to their base. If you're8 outside the City property, outside the9 City payroll, at zero-zero allocated the10 City, the gross receipts, there might be11 different impact than if you are in the12 City. There is -- you have to do the13 modeling.14
Okay. In15 your client base, do you have any of the16 companies that are construction related?17
What impact19 do you anticipate, if you've done an20 analysis on that, as it relates to a21 construction company?22
I did23 analysis on one. It was not based in the24 City, and it doubled. It virtually25 100 11/30/10 - WHOLE - BILL 1006351 doubled. It paralleled everything being2 said about the construction industry3 impact.4
As it12 relates to that? Okay. All right.13 Thank you very much.14 Thank you, Madam President.15
Thank16 you.17 The Chair recognizes18 Councilwoman Brown.19
Thank you,20 Madam President.21 Good morning, everyone.22 Brett Mandel, my follow-up23 questions are for you. Have you done an24 analysis of the bill?25 101 11/30/10 - WHOLE - BILL 1006351
Across the4 board, recognizing and accepting the fact5 that you're an expert on this type of6 issue.7
I always rely on8 the experts who do the actual number9 crunching. So I took a look at what10 Inman did, I took a look at what Econsult11 has done, and I took a look at what the12 City has done. As I said, looking at who13 wins, who loses is the most important14 thing in this and what you think is going15 to happen based on those winners and16 losers, and I guess I would say I'm still17 looking at that as well.18
Okay. So19 you have done an assessment of who the20 winners and losers are?21
I certainly22 haven't done an independent analysis, but23 I've looked at the analysis that was done24 for the bill.25 102 11/30/10 - WHOLE - BILL 1006351
Do you2 agree with the tentative list of who the3 winners and losers are?4
Yeah. Certainly5 isn't surprising. As the accountants6 have said, it makes sense. If you're7 going to eliminate the net income tax,8 you're going to help certain firms. If9 you're going to increase the gross10 receipts tax, you are going to hurt11 certain firms or at least make them pay12 more. I don't think that's a shock.13
In the14 third paragraph, first sentence of your15 testimony, you say, and I quote,16 "Philadelphia's tax problems remain17 threefold - we tax too much, we tax the18 wrong stuff, and we tax unfairly."19 Do you believe this tax20 proposal is fair?21
I think it creates22 different unfairnesses. I think that the23 current tax structure is unfair in one24 way. Certainly if you favor some firms25 103 11/30/10 - WHOLE - BILL 1006351 and disfavor, if that's a word, other2 firms, you'll hear other complaints of3 unfairness. Again, why it's fundamental,4 the first line of the next paragraph,5 which you didn't even snicker on, "take6 the business taxes, please," that's7 fundamentally what the City needs to do.8
Do you9 believe that this proposal is revenue10 neutral?11
I believe that the12 revenue neutral number is always going to13 be shifting based on the City's budget14 assumptions. When the City gives you new15 budget assumptions, you'll have to change16 the rates to make it revenue neutral.17
With that18 said, do you believe that we should be19 having this conversation, discussion,20 friendly debate as a part of the budget21 review process?22
I think whenever23 you have it, it's good, because this24 problem is here, it's now, whether you25 104 11/30/10 - WHOLE - BILL 1006351 have it during the budget debate. I will2 say that as a veteran of tax reform3 discussions, when the Administration4 wants to have the debate, they're5 thrilled to have the debate. When they6 don't want to have the debate, there's7 always a better time to have the debate.8 When you're in the budget session, We9 should have this debate after we settle10 the budget. When you're out of the11 budget session, they say, Let's have this12 debate during the budget session.13 So you are the legislative body14 of the City. You should make legislation15 when you want to make legislation.16
Thank you17 for your testimony.18 Thank you, Madam Chair.19 COUNCIL PRESIDENT VERNA:20 You're welcome.21 The Chair recognizes Councilman22 DiCicco.23 COUNCILMAN DiCICCO: Thank you,24 Madam Chair.25 105 11/30/10 - WHOLE - BILL 1006351
Just a6 follow-up to Councilwoman Brown's7 question where she asked about whether it8 was revenue neutral, and your response9 was that it's based upon each budget10 year. So in order for this to remain11 revenue neutral, I believe you just12 answered that the rates would have to13 constantly change.14
I guess what I'm15 saying is that the Administration sets16 the revenue estimates. They're the ones17 who are going to determine what the rates18 would have to be to make it revenue19 neutral. If you --20
So either at21 some point it's no longer revenue neutral22 or the rates change?23
Sure. Revenue24 neutrality will only be at one point in25 106 11/30/10 - WHOLE - BILL 1006351 time and then the marketplace will react2 and there will no longer be revenue3 neutrality.4
So either5 way, it's bad. It's bad because it's not6 revenue neutral or it's bad because the7 rates keeps shifting.8
I guess I'm saying9 that revenue neutrality only exists at10 one specific point in time when the11 numbers are calculated. Once the numbers12 are calculated --13
So14 technically we shouldn't be using the15 word "revenue neutral," period. Is that16 a better way of putting it?17
Thank you,20 Madam President.21 COUNCIL PRESIDENT VERNA:22 You're welcome.23 Councilman DiCicco.24 COUNCILMAN DiCICCO: Thank you,25 107 11/30/10 - WHOLE - BILL 1006351 Madam Chair, and good afternoon. Winners2 and losers. I wish there was a way of3 saying we would all be winners and there4 would be no losers, because I think that,5 in and of itself, makes me very6 uncomfortable about doing any7 legislation, but I live in the real world8 and I know that sometimes that's the way9 things are. But I think with all the10 brain trusts that we have and all the11 people who have been working on this for12 the last couple of years and having seen13 where the City has come in the 15 years14 or actually a little bit longer than I've15 been here during Rendell's first16 administration in reducing taxes, but for17 the national economy, I think the City of18 Philadelphia was doing quite well, and I19 think it has to do with the fact that we20 were beginning to do tax reductions.21 To the gentleman, the22 builder -- I forget your last name,23 because I was --24
Scott.25 108 11/30/10 - WHOLE - BILL 1006351 COUNCILMAN DiCICCO: -- I was2 practicing Mr. Kostenbauder's last name,3 so I lost your last name.4
I have an easy one,5 Scott.6 COUNCILMAN DiCICCO: Scott.7 Okay. Thank you. You talk about some8 investments that your company has made in9 the City of Philadelphia and probably go10 back late '80s maybe?11
Mid '80s, yes, sir.12 COUNCILMAN DiCICCO: Probably13 our tax structure was probably at its14 worst at that time, but you made a15 decision, a business decision, to come16 here because maybe supply and demand or17 that the Philadelphia market had some18 appeal to you. Is that a fair19 assumption?20
Actually, IBM21 brought us to Philadelphia.22 COUNCILMAN DiCICCO: Pardon me?23
IBM brought us to24 Philadelphia to build their building.25 109 11/30/10 - WHOLE - BILL 1006351 COUNCILMAN DiCICCO: And then2 you did Commerce Two?3
We did One Commerce4 Square for IBM and Two Commerce Square5 for Conrail.6 COUNCILMAN DiCICCO: Conrail.7 And then you did the Murano?8
Yes, sir.11 COUNCILMAN DiCICCO: In the12 last five, six years?13
It opened in 2008.14 COUNCILMAN DiCICCO: My point15 being that as bad as things are, there16 was still some positive reason to want to17 develop in the City of Philadelphia. If18 it was as bad as some people are19 suggesting, that no one wants to do20 business in Philadelphia -- and I don't21 mean this to be flip or sarcastic -- I22 don't think your company would have made23 that decision to develop in the City of24 Philadelphia in recent years. I mean,25 110 11/30/10 - WHOLE - BILL 1006351 not even going back as far as the '80s,2 because IBM brought you here, I3 understand that.4
We owned the Murano5 site. We acquired it when we acquired6 the 20th and Market site. We owned it7 and tried to develop it for over a decade8 as an office site, but because of low9 demand and the inability to make the10 numbers work because of that low demand,11 we, in defense, turned to residential12 development.13 COUNCILMAN DiCICCO: And then14 the real estate market nationally took a15 dive and you guys took a hit as a result16 of that.17
Indeed.18 COUNCILMAN DiCICCO: But for19 that, I think you would agree that your20 project would have been a successful21 project.22
We hope that it23 will still be a success.24 COUNCILMAN DiCICCO: Well, and25 111 11/30/10 - WHOLE - BILL 1006351 I hope so, too.2
Thank you.3 COUNCILMAN DiCICCO: Because4 we'd like to see another project get5 built after you guys, and a few of the6 other folks who have developed have done7 some recent auctions to try to sell some8 of the units.9
Yes.10 COUNCILMAN DiCICCO: To11 Mr. Kostenbauder, you mention -- and kind12 of along the same line of questioning13 that Councilman Goode and Councilman14 Clarke were going. You mention marginal15 businesses that would be negatively16 impacted being restaurants and17 construction. Are there any other18 industries that would be, in your19 opinion, negatively impacted by way of20 this legislation?21
Well, you're22 going to hear me say "it depends" a lot.23 COUNCILMAN DiCICCO: And I24 understand that, but generally.25 112 11/30/10 - WHOLE - BILL 1006351
You can have2 a real estate enterprise that is hurt for3 ten years, I mean, that is kind of hurt a4 little bit for ten years, but then they5 sell. Well, I don't know if that's been6 factored into this. So it all depends on7 the unique aspects of each particular8 enterprise.9 COUNCILMAN DiCICCO: Does the10 service industry, as an example, would11 they be more negatively impacted?12
I believe13 they're more positively impacted. From14 my sample, they're more positively15 impacted.16 COUNCILMAN DiCICCO: But17 restaurants?18
Restaurants,19 based on what I went through and what I20 understand, is that they would initially21 be negatively impacted. Although it's my22 hope that if you increase the pie, that23 they're going to have more revenues that24 will compensate for the hit that they25 113 11/30/10 - WHOLE - BILL 1006351 take. I'm not sure how much analysis has2 been done there either, but...3 COUNCILMAN DiCICCO: I was in4 the restaurant business and I went5 bankrupt, so I know about marginal6 restaurant business.7
As 808 percent of businesses do.9 COUNCILMAN DiCICCO: Eighty10 percent of restaurant businesses do,11 right. Then I became a Councilman and12 got even poorer, but that's besides the13 point.14 I guess my point is, when you15 look at construction and you look at16 restaurants and I don't know what other17 industries would be negatively impacted,18 we're talking about industries that19 employ Philadelphians primarily. I'm not20 taking any exception to the big law21 firms. They employ Philadelphians as22 well, but I'm trying to get a numbers23 thing here.24 Construction are blue-collar25 114 11/30/10 - WHOLE - BILL 1006351 jobs. Restaurants, service industry are2 blue-collar jobs. Those are the people3 who live in our communities. Hoteliers,4 as an example, I'm not sure what your5 analysis says about that. They employ,6 someone said, 80 percent. I think it's7 closer to 85 percent of the people who8 work in hotels are Philadelphia9 residents, many of whom had not been10 employed until those hotels were built.11 So I'm just trying to look at12 it in a numbers -- using a numbers game,13 if you will, to see how many Philadelphia14 residents would be impacted either15 positively or negatively by way of this16 legislation.17
I'm not18 really in a position, having not done an19 analysis like that, having, for example,20 no hotel clients. And I'll reflect on21 what I said previously. This is an22 extremely small sample that I'm using,23 but it does parallel everything that's24 being said about service and low margin25 115 11/30/10 - WHOLE - BILL 1006351 versus the impact on each.2 COUNCILMAN DiCICCO: Higher3 margin.4
Higher5 margin.6 COUNCILMAN DiCICCO: I think7 that's all, Madam President.8 Thank you. Thank you very9 much.10
Thank11 you.12 The Chair recognizes Councilman13 Green.14
Thank you,15 Madam Chair.16 Mr. Scott, I know you have to17 leave and so I really want to thank you18 for staying as long as you did. I just19 want to ask this one question. Would you20 have come to Philadelphia in 1987 without21 an anchor tenant in a building that they22 wanted to be built here?23
Okay. And I25 116 11/30/10 - WHOLE - BILL 1006351 know you said this during your testimony,2 but for how many years did IBM decide to3 stay in Philadelphia in your building and4 why did they leave?5
What they told us10 was because they couldn't justify paying11 the taxes in the City.12
They told us BPT24 and wage tax.25 117 11/30/10 - WHOLE - BILL 1006351
1983.11 Thank you, Madam President.12 COUNCIL PRESIDENT VERNA:13 You're welcome.14 Councilman.15
And I think16 they came here in 1987.17 Mr. Kostenbauder, during your18 testimony, you said that in your small19 sampling of the businesses that you20 looked at, the non-Philadelphia-based21 firms ended up paying more to the City22 than they otherwise were paying on23 average among your client base; is that24 correct?25 118 11/30/10 - WHOLE - BILL 1006351
Thank you,8 Madam President.9 Good afternoon, and thank you10 for your testimony. I just want to touch11 on something that Councilwoman Brown12 touched upon and our City Controller13 Butkovitz also mentioned in his testimony14 about the timing of this legislation.15 Now, we've heard about the winners, the16 losers and everyone else, and Councilman17 Jones just mentioned something about,18 well, there may be people losing their19 jobs over this, there may be people20 gaining employment, and I just want to21 ask Mr. Mandel and the other panelists if22 they have any opinion as to the timing of23 this legislation, because it seems to me24 that this is a very complex issue and25 119 11/30/10 - WHOLE - BILL 1006351 this is going to be -- it's going to have2 to put more study in it as far as the3 effects. How is this going to affect4 Philadelphians in general? And that's5 what we have to look at.6 I just want to know if -- it7 won't be long before we're sitting in8 this Chamber discussing a budget for next9 year, and this is going to be one of the10 questions. Of course, it's going to11 affect our budget for next year, and I12 don't know if it's going to be negative13 or positive. I just wanted to know if14 you had any advice on or opinion on15 whether this is the time to be doing that16 or should be done, as Councilwoman Brown17 mentioned, that maybe it would be better18 to be doing this in the budget when we're19 discussing the budget for next year.20 Does anyone want to give their21 opinion on that?22
I'll take a crack23 at deferring to my colleagues here,24 because, as you know, I've come to this25 120 11/30/10 - WHOLE - BILL 1006351 Council many, many times saying that you2 should have done many things a lot sooner3 than this. So if you didn't listen to my4 timing advice then, I'll defer to them5 today.6
A decision8 to locate in the City in a good economy9 is difficult. A decision to locate in10 the City in a bad economy is even worse.11 The term "disincentive" was used. If you12 remove a disincentive, it makes it easier13 for me to recommend to a client who --14 and if they're a C corporation, they're15 paying 35 percent -- 34, 35 percent to16 the federal government. They're paying17 9.99 percent to the State of18 Pennsylvania. They're then going to pay19 another 6 percent to the City. It makes20 it easier if I say, You don't have to.21 It makes it easier for them to make a22 decision if they have access to the same23 basic population, workforce, a lot of24 other things held equal, to not locate in25 121 11/30/10 - WHOLE - BILL 1006351 the City.2
Well, you3 mention that you have a -- I guess in4 your client base, how many would you5 say -- what would be the percentage of6 your clients come out winners versus7 losers?8
You know, I9 wish I had been able to do an10 across-the-board analysis. Some of our11 clients reached out to us, mainly in the12 construction or real estate arena. Many13 of them didn't, because they didn't14 believe this was going to ever come to15 fruition.16 So I'm not in a good position17 to give you an across-the-board answer.18
Okay. Well,19 it would be interesting to see where the20 Chambers come into this field. I'd be21 very, very anxious to know what their22 opinion is. But thank you very much.23 Thank you, Madam President.24 COUNCIL PRESIDENT VERNA:25 122 11/30/10 - WHOLE - BILL 1006351 You're welcome.2 The Chair recognizes Councilman3 Jones. Is he in the room?4 I don't believe he's in the5 room, so we'll continue on.6 Does anyone else want to be7 recognized?8 (No response.)9 COUNCIL PRESIDENT VERNA:10 Seeing no one, thank you all very much.11 We appreciate your coming in.12 MR. McPHERSON: Our next panel13 consists of Robert Rosania, Pete Windle,14 Ed Kicak.15 (Witnesses approached witness16 table.)17
Good18 afternoon, gentlemen.19 (Good afternoon.)20 COUNCIL PRESIDENT VERNA:21 Please identify yourself for the record22 and proceed with your testimony.23
25 123 11/30/10 - WHOLE - BILL 1006351 Thank you for the opportunity to present2 my testimony today. S. Armed Forces, the defense10 industry, commercial OEMs and a host of11 industrial applications. 14 I am a 50 percent owner of the15 business and, along with my other16 business partner, we took over the17 company in 2001. We focus on the more18 technically sophisticated items, which19 has helped our business to not only20 survive through the years but thrive over21 the past ten years. S. 6 Our company has been located in7 Philadelphia for many years, and we are8 committed to stay in the City. Both my9 business partner and myself born and10 raised in the City and went to school in11 the City. So we're committed to stay12 here. 16 We currently employ 12017 employees, most of whom are Philadelphia18 residents. 25 an hour. Our average salary2 employee, less the two owners, earn just3 under $59,000 a year. 6 We are a growing business. 2 million in 2009, an10 increase over 300 percent. After a small11 dip or a small decrease which we'll see12 this year, we are projecting continued13 growth in years to come. 2 Our net income portion of our3 business privilege tax currently is4 $24,000 a year. Under this proposed5 business privilege tax change, by the6 Year 2015 the vast majority of our BPT7 would be eliminated. 13 As an owner of Ehmke14 Manufacturing, we support the reform not15 only because it would result in tax16 savings for our company but also because17 it would make us more competitive with18 companies based outside the City. Most19 of our sales are to customers outside the20 City. 7
Good afternoon,11 Madam President and members of Council.12 My name is Pete Windle. I'm the13 President and CEO of Windle Mechanical14 Solutions Excel Machine Company. I15 purchased Excel Machine Company in the16 year 2006. It has been located in the17 Tacony section of Philadelphia since18 1969. We manufacture machine parts for19 the oil and gas, power, aerospace and20 BioPharma manufacturers. Nine people21 work in our shop, with an average salary22 of $46,000. I'm also proud to provide23 family-sustaining wages to our people.24 The past few years have been25 128 11/30/10 - WHOLE - BILL 1006351 challenging for us, but we did not lay2 anyone off during this recessionary time3 and used the downtime to train the crew4 to qualify us for an ISO 9001 20085 Quality Management System and6 Certification. This is a globally7 recognized certification, denotes8 high-quality manufacturing standards and9 a commitment to continuous improvement.10 We did this to position ourselves for11 when things turn and, as we pursue12 growth, to put us in a better situation13 to grow our business.14 As we come out of the15 recession, I am looking to grow the16 business by developing new product lines17 and services to our target market18 segments, which includes emerging19 industries and alternative industry20 sector. Our annual revenues average21 about $900,000 over the last five years22 and projected to grow to $2.5 to $323 million in the next five.24 We're proud to be a small25 129 11/30/10 - WHOLE - BILL 1006351 business manufacturing still in2 Philadelphia, but the cost of doing3 business here, and especially the BPT,4 the privilege tax, is a challenge for us5 and can put us at a disadvantage when we6 go after contracts with companies outside7 of the City.8 As we grow towards our targeted9 business levels, we know we'll be faced10 with decisions of relocating our facility11 to a place that supports new business12 levels. With that said, we will evaluate13 the costs associated with staying inside14 the City and weigh these costs against15 relocating outside the City where the16 cost may be less due, in part, to the BPT17 tax.18 An analysis of our BPT in 2007,19 '08 and '09 has shown that under the new20 proposal, our tax liability would in fact21 go down. If we looked at 2007; example,22 when we had a fairly good year, the tax23 difference with the new proposal would24 have dropped this year by about $300. It25 130 11/30/10 - WHOLE - BILL 1006351 doesn't sound like a whole lot, but for a2 small company, it is. If you look going3 out five years, it drops that tax $1,5004 to $1,800. That's part of a person's5 wage, that's a health insurance premium6 for the month, that's a rent payment and7 so forth. So it's significant to us.8 Under the growth assumptions9 that we have laid out, our tax -- of10 course, our tax savings would be11 significant as well. I see the savings12 as an avenue for me to pay and upgrade13 capital equipment and add additional14 staff and invest in ways to help us grow15 additionally.16 I support the BPT reform for17 two main reasons. First, it would mean a18 tax savings for my company, and,19 secondly, I think the reform would make20 my company and other manufacturers in21 Philadelphia more competitive with22 companies based outside of the City.23 Almost all of our sales, in24 excess of 90 percent, are to customers25 131 11/30/10 - WHOLE - BILL 1006351 outside the City. Under the current BPT2 structure, we have to pay net income tax3 on all these sales, which puts us, again,4 at a disadvantage to our competitors.5 The proposed reform would level the6 playing field for us in competing with7 those companies outside the City.8 As the head of a Philadelphia9 business firm, I urge you please vote for10 the BPT reform.11
22 First, let me thank City23 Council of Philadelphia for providing a24 forum for dialogue and discussion25 132 11/30/10 - WHOLE - BILL 1006351 regarding the impact and merits of the2 reform provisions of the Philadelphia3 business privilege tax. I would4 especially like to thank Councilman Green5 and Councilwoman Sanchez for being on the6 forefront of communication of this reform7 to the citizenry of Philadelphia. 13 To provide some background,14 Sandmeyer Steel Company is a15 third-generation, privately held16 manufacturer and processer of stainless17 steel and nickel alloy plate products18 serving a variety of what we generically19 call the process industries. We employ20 approximately 115 people. Our customers21 manufacture equipment for many different22 industries using stainless steel plate23 products. We service many industries,24 such as the oil and gas, chemical, pulp25 133 11/30/10 - WHOLE - BILL 1006351 and paper, water purification, food2 processing, semiconductor, solar3 equipment and, most recently, we are now4 involved in the nuclear industry. 14 With all that has been said,15 Sandmeyer Steel Company remains as a16 proud tax-paying corporate citizen in17 Philadelphia since its inception in 1952,18 and our company has provided jobs to many19 over almost 60 years of existence, thus20 supporting the City of Philadelphia21 through the City wage tax. 8 On more than one occasion, we have spoken9 about the possibility of moving outside10 of the City of Philadelphia due to its11 business privilege tax to a more12 attractive location for us to sell to our13 national and worldwide markets. Frankly,14 we're located right next to a golf course15 two-tenths of a mile and maybe a four16 iron away from Montgomery County. 19 I am here to render my support20 for Bill No. 2 As mentioned before, when you3 combine the six and a half City tax BPT,4 the 35 percent federal tax and then the5 ten percent, we're looking at over 506 percent of tax being paid to the various7 entities. 9 I have analyzed the impact to10 these proposed changes on our company by11 reviewing the five-year period ending12 December 31st, 2009. 2 million. This equates to about five17 jobs each year with benefits. It would18 result in additional investment in more19 efficient and effective equipment,20 growing our business and increasing21 employment. 25 137 11/30/10 - WHOLE - BILL 1006351 While the taxes of Sandmeyer2 Steel are reduced, properly administered,3 this tax will be replaced and enhanced by4 the taxing of many entities who are not5 based in Philadelphia but are6 economically involved and advantaged in7 the City and pay little or no tax to8 support the services for which they9 benefit. The elimination of the income10 tax portion and the application of a11 higher gross receipts tax rate is sound12 policy for not only the business13 community but also the City of14 Philadelphia. It provides a broader tax15 base taxed at albeit a higher rate. It16 will provide a more stable source of17 revenue during weaker economic times, as18 we've experienced these extraordinary19 times, when cities are challenged to20 provide services and corporations21 struggle to survive. 6 Although it was mentioned that not --7 there are not municipalities that do8 this, Ohio and Washington state are two9 states that have gone the board of --10 gone the way of an income tax based on11 gross receipt. And for the record,12 Sandmeyer Steel Company pays the13 commercial activity tax in Ohio and the14 business and occupation activity tax in15 Washington state. In each case, they16 involve very simple returns. It takes me17 five minutes. 3 I do have confidence in the4 members of this Chamber that you will5 thoughtfully consider anything that we've6 set up here. Your decision regarding the7 bill will be a key to the future progress8 of the City and whether or not it will9 regain its attractiveness for new10 business and expansion of existing11 businesses. 20
Thank21 you very much.22 The Chair recognizes Councilman23 Green.24
Thank you25 140 11/30/10 - WHOLE - BILL 1006351 all for your testimony.2 When you say it will level the3 playing field for you, this change, can4 you describe the taxes, say, that you and5 a national competitor would pay if6 selling to the same customer in Texas?7
We're paying six8 and a half percent income tax. In Texas9 there is no income tax.10
So if you11 had a competitor in Montgomery County who12 produced the same product that you13 produced and you both made a sale to14 Texas, what taxes would you pay that they15 don't pay?16
We're going to pay17 the gross receipts tax on the shipment18 and we're also going to pay a tax on the19 income as it relates to that shipment.20
You're not21 going to pay gross receipts, right,22 because it's a sale outside the City?23
That's correct, but24 the income tax portion we would pay.25 141 11/30/10 - WHOLE - BILL 1006351
So you'll2 pay the net income tax; they will not pay3 any net income tax?4
So you're at6 a 6.45 percent pricing disadvantage on7 that sale to begin with, which8 essentially means you're working with9 less cash flow as a consequence of our10 tax policy?11
Which means13 you have less to invest, and that's14 why --15
Well, when you're16 talking about $250,000 a year, that's a17 major piece of equipment or employees18 that can be hired.19
Now, if we20 change the tax policy to the one that's21 proposed, what taxes would you pay on the22 sale to Texas?23
We would just have24 income tax from Pennsylvania's25 142 11/30/10 - WHOLE - BILL 1006351 standpoint.2
Right. And6 what taxes would your competitor in7 Montgomery County pay?8
Right. So10 we've completely leveled the playing11 field for when you sell outside the City.12 Now, if you and a competitor13 were to sell inside the City before this14 change, right --15
Before this change16 we would pay the tax and they would not.17
Right. And25 143 11/30/10 - WHOLE - BILL 1006351 so when we change the law and you both2 make a sale in the City, what would3 happen?4
Because you7 would each pay the gross receipts tax at8 the same exact rate?9
So that when11 you're competing on price, you don't have12 to --13
Right.16 Okay. I just wanted to cover that. I17 appreciate your testimony.18 Mr. Rosania, I think the19 Councilwoman was there with me that day.20 The Councilwoman -- at any rate, we21 traveled out to your place of business22 and assembled was, I think, the UII and23 Manufacturing Alliance members and about24 30 manufacturers were there. We talked25 144 11/30/10 - WHOLE - BILL 1006351 about this proposal.2 Have you heard anyone say, any3 manufacturer, say that they would be hurt4 by this proposal of all the people that5 we've talked to over --6
No, I have not.7 And that was at the end of August,8 beginning of September where we sponsored9 a plant tour with the Manufacturers10 Alliance of Philadelphia. That is an11 association of just Philadelphia-based12 manufacturers, and you graciously spent13 your time explaining the nuances of the14 reform, and the response at that time was15 very positive.16
Okay. I17 have, Madam President, a letter from18 Cardone Industries, which is the City's19 largest manufacturer, where they come out20 and endorse the proposal. They have sent21 it to the Chamber of Commerce and said22 that we could submit it as their23 testimony for today. So I want to enter24 that letter on the record.25 145 11/30/10 - WHOLE - BILL 1006351 I will -- basically what they2 say is the proposal would help Cardone's3 bottom line and help the manufacturing4 sector generally, laying the foundation5 for additional job growth in6 Philadelphia. This is a company that7 currently puts their profitable lines8 outside of the City and runs their9 marginal lines here because they don't10 have to pay net income tax on marginally11 profitable lines.12 But perhaps as important as the13 dollar savings is the message that this14 BPT reform would send to companies15 already located in Philadelphia or16 considering moving here. By eliminating17 the profitability penalty of the net18 income tax and reducing the competitive19 disadvantage of Philadelphia-based firms,20 the proposal would make the City more21 competitive in attracting and retaining22 businesses and encouraging economic23 growth.24 So I think there's a copy up25 146 11/30/10 - WHOLE - BILL 1006351 there.2
Thank you.5 With respect to new6 manufacturing, attracting a manufacturer7 to the City today, is there any reason a8 manufacturer, whether they're putting in9 place a pharmaceutical line or any other10 kind of manufacturing, some of the green11 tech manufacturing, et cetera, is there12 any reason for them to come into the City13 of Philadelphia if they want to be in the14 region versus locating in Montgomery,15 Bucks, Chester or Delaware Counties?16
Well, the area17 has a lot to offer, but from the nature18 of this discussion, from a tax19 perspective, it would be very20 challenging.21
It would be22 challenging. And if we change the tax23 policy with respect to manufacturing24 along the lines we discussed, would there25 147 11/30/10 - WHOLE - BILL 1006351 be any tax analysis they would have to do2 between locating in Montgomery County or3 Philadelphia for City-level taxes?4
So they7 could make the decision based on where8 they want to be, ignoring tax9 consequences and focus on where the best10 workforce is and where the property value11 is least expensive and make their12 investment, just sort of based on normal13 business factors?14
Okay. Thank16 you. I don't have any additional17 questions. Thank you very much.18
Thank19 you.20 The Chair recognizes Councilman21 Goode.22
Thank you,23 Madam President.24 Good afternoon. Staying on the25 148 11/30/10 - WHOLE - BILL 1006351 theme of fairness, do you believe that we2 should be raising taxes on any3 businesses?4
Do you6 believe that we should be raising taxes7 on any businesses?8
If you can9 basically do away with it, no, I wouldn't10 want to increase taxes --11
It's a yes12 or no question. Do you believe that we13 should be raising taxes on any14 businesses?15
Do you17 believe we should be raising taxes on18 businesses so we can lower taxes on your19 business?20
It's a yes23 or no question. Do you believe that we24 should be raising taxes on some25 149 11/30/10 - WHOLE - BILL 1006351 businesses so we can lower taxes on2 yours?3
I would say, again,4 if you didn't have to raise taxes period.5
That's a yes6 or no question. Do you believe that we7 should be raising taxes on some8 businesses so that we can lower taxes on9 yours?10
Okay.12 Please describe the skill set of your13 employees.14
We have -- we15 basically have a major machine shop up in16 Northeast Philadelphia. There's about 7017 to 75 individuals who work in that18 machine shop. They vary. They can run19 CNC machines. They can basically run20 bollards, lays, et cetera. And then21 there's others that have more rudimentary22 skills that are basically helpers in that23 vein. Beyond that, there's the office24 staff. That can vary from high school25 150 11/30/10 - WHOLE - BILL 1006351 education up to MBAs.2
Do you3 believe that the skill set requirement4 for your industry is higher than the5 skill set requirement for national6 retailers?7
So we should10 raise taxes on national retailers so that11 we can lower your taxes while those12 national retailers provide thousands of13 low-skill jobs for Philadelphians?14
Councilman, I think15 also what we have to look at is what16 would be best for the City of17 Philadelphia.18
That's what19 the proposal is. The proposal is whether20 we should raise taxes on some to lower21 taxes on others.22
So should we25 151 11/30/10 - WHOLE - BILL 1006351 raise taxes on national retailers to2 lower your taxes?3
You know, we're4 looking at a benefit for Sandmeyer Steel5 Company as a manufacturer and being6 competitive in Philadelphia.7
The question8 is whether we should raise taxes on9 national retailers so that we can lower10 taxes on your business.11
Pardon me,12 Councilman. I think that's probably a13 question that you should answer.14
Okay. What I17 would propose as a manufacturer, we in18 the country have lost manufacturing jobs.19
I asked the20 question. Do you care to answer it?21 Should we raise taxes on national22 retailers so we can lower your taxes?23
My opinion, you24 should lower taxes on all businesses.25 152 11/30/10 - WHOLE - BILL 1006351
Thank4 you.5 The Chair recognizes Councilman6 Kenney.7
Thank you,8 Madam President.9 I want to take a look at this10 from the outside looking in instead of11 from the inside looking out. Actually,12 this chart has been helpful to me,13 because it just -- as you guys are14 speaking about your Philadelphia-based15 business and your outside business16 dealings outside the City, I'm looking at17 this chart.18 I was wondering if the sponsors19 of the bill or staff know how many20 suburban firms pay the lower rate of BPT21 for the business that they do in the22 City. Is there a number of firms -- do23 we have an aggregate number of firms that24 actually are located in the suburbs in25 153 11/30/10 - WHOLE - BILL 1006351 the four-county surrounding area that2 actually do business in the City of3 Philadelphia?4
There are7 two categories of taxpayers that are not8 in the City -- that are not headquartered9 here. There's a category of taxpayer10 that is -- basically pay only gross11 receipts to the City and who have zip12 codes outside of Philadelphia County.13
Well, stick14 to the chart for a second. The suburban15 manufacturer who is going to go from 14516 to 530, do we know generally how many17 companies that involves located in the18 suburbs?19
Well, a20 suburban manufacturer could be a United21 States manufacturer, because these people22 compete nationwide. There are 23,00023 businesses that pay taxes here with zip24 codes outside the City.25 154 11/30/10 - WHOLE - BILL 1006351
Do we know2 how many are in, for example, the four3 surrounding counties?4
I would be7 interested in knowing that number, and8 let me give you the hypothetical I'm9 thinking of.10 The three of you have your11 businesses located in the City, and we're12 thankful for that and we thank you for13 your continued existence there and14 investment. If, hypothetically, you were15 located in Montgomery County or in16 Delaware County and the business that you17 did in the City of Philadelphia -- now,18 recognize that Sandmeyer Steel may be a19 company or you guys may do more business20 in Washington state and Texas and other21 places, but if you were a company located22 in one of the four surrounding counties23 and your BPT rose from 145 to 530 under24 this proposal, you wouldn't be happy, I25 155 11/30/10 - WHOLE - BILL 1006351 assume. That's not something that would2 make a suburban-based manufacturer or3 business that does business in the City4 very happy, because we're basically5 raising your taxes. I mean, it's just a6 hypothetical.7 So basically a Philadelphia8 legislator -- Legislature is raising9 taxes for suburban businesses that do10 business in the City.11 What do you think would be the12 reaction of the suburban business13 community towards their Senators and14 Representatives who represent them in15 Harrisburg when we've actually -- it16 reminds me of the wage tax fight back, I17 guess, in the '70s, '80s where the18 animosity that was generated towards19 Philadelphia as a result of not having a20 differential wage tax was a really huge21 issue at the time.22 Based on the number -- and we23 don't know what that number is -- the24 number of companies in the four-county25 156 11/30/10 - WHOLE - BILL 1006351 region or further out into hinterlands,2 Berks County, Lancaster County, places3 where actually by motor truck or train4 you can actually do business in the City,5 what is the impact of the tax rates on6 those companies and what is the reaction7 of now a republican-dominated Legislature8 and Governor's Office towards9 Philadelphia raising the taxes of10 suburban manufacturing and other11 companies that do business in the City?12 I suspect there would be some reaction,13 and I don't suspect that it would be a14 positive reaction, and I can't tell the15 impact unless I know how many businesses16 are actually in that Pennsylvania17 suburban or ex-urban group.18 Now, if there's a company19 that's located in Oklahoma that does20 business in Philadelphia, I don't know21 what they're going to do. They probably22 have very little reaction they can take,23 but I can tell you that I would suspect24 the Chester County Chamber of Commerce,25 157 11/30/10 - WHOLE - BILL 1006351 the Delaware County Chamber of Commerce,2 the Montgomery County Chamber of Commerce3 are going to be knocking on Dominic4 Pileggi's door and Senator Erickson's5 door and some of these other folks6 saying, Yo, Philadelphia just raised my7 taxes, what are you going to do to8 counteract it?9 I mean, it's a hypothetical,10 but I don't know what the reaction of11 that republican -- and I'm not being12 partisan here, but the13 republican-dominated Legislature toward14 Philadelphia actually raising their15 businesspeople's taxes.16
I would agree. I17 got two letters, one from the State of18 Ohio, one from the State of Washington19 and I wasn't happy either. But the fact20 of the matter is, I guess for suburban --21 for the suburban companies, they are22 using City services. I mean, there is a23 rationale that people should pay their24 fair share and that the taxes that are25 158 11/30/10 - WHOLE - BILL 1006351 now borne by all Philadelphia companies2 are inordinate compared to what they3 receive.4
And I don't5 have an argument with that fact, with6 that issue. I think everyone should pay7 their fair share. That was the argument8 that was made back during the wage tax9 debate, and we wound up having to have a10 differential in the wage tax to keep the11 suburban legislatures and Harrisburg off12 our back. I think it was even maybe even13 a lawsuit that was brought up. I'm not14 sure of the details of how that happened.15 It was a while ago.16 But I just -- I mean, it is an17 unknown as to what reaction those Chamber18 of Commerces and those legislators and19 Senators would have towards Philadelphia20 towards what we get from them in state21 aid. I mean, I don't know whether they22 could exempt their companies out. I23 don't know what they're legally able to24 do to us or for their companies that25 159 11/30/10 - WHOLE - BILL 1006351 they're representing, but it is a dynamic2 that I would be interested in pursuing,3 just to get an idea as to what the4 reaction might be.5 So thanks.6
Thank10 you.11 I think my colleague's point is12 well taken. The fact of the matter is13 that the State Legislature, particularly14 in the suburban counties, are always15 happy when Philadelphia -- because they16 force us through their Uniformity Clause17 to raise taxes on our business. They're18 always happy.19 So the fact of the matter is20 that I would venture to guess that the21 State Legislature around the counties22 saying, Hey, they're finally catching up23 to the fact that we tie their hands about24 their ability to tax through this25 160 11/30/10 - WHOLE - BILL 1006351 Uniformity Clause; therefore, creating an2 incentive for our counties.3 So that's my reaction to that.4 I would hope that the one reaction that5 we would get from Harrisburg is that they6 need us to give us the authority so when7 we start talking about property taxes,8 when we start talking about fair taxes,9 we have the flexibility and the ability10 to really address this in a fair way to11 our citizenry, to the citizens of12 Philadelphia, which they have not given13 us.14 So I hope that one reaction is15 that, is to say, We can no longer tie16 Philadelphia's hands and continue to cut17 them, as the new Governor is currently18 saying, across the board, without giving19 Philadelphia the ability to create its20 own economy. So I encourage that.21
And then24 I just want to end on this note. It's25 161 11/30/10 - WHOLE - BILL 1006351 not a debate, because I think it's a2 great hypothetical and one that all of us3 who talked to our state colleagues should4 engage in, but I wanted for one point for5 Councilman Goode around retail.6 I think your question is7 important. I think it should be asked to8 Rob Dubow. I think the Administration's9 testimony will show that retail overall10 is a huge winner in this.11 So I just want to put that12 point out there, and that's the point13 that I welcome your debate with Rob Dubow14 on.15 Thank you, Madam President.16
Point of17 information on the last --18 COUNCIL PRESIDENT VERNA:19 Certainly. Councilman Kenney.20
And I21 recognize the issue of fairness and I22 recognize that our hands are often tied23 relative to Harrisburg and our ability to24 kind of self-determine our fate, but I25 162 11/30/10 - WHOLE - BILL 1006351 was up there in Harrisburg with the Mayor2 on the one percent increase in the sales3 tax, and let me tell you, it was like4 lifting granite. They don't -- we're5 asking for permission to tax ourselves6 and they made us stand on our head and7 walk down Second Street outside the8 Capitol to get that.9 All I know is that -- and I10 don't know what the number is because we11 don't know what the universe of people12 is, but when their businesses start13 screaming at them and they have full14 control and we don't have Dwight anymore15 and we don't have the capacity to direct16 our own future in Harrisburg, I'm17 concerned about what their reaction might18 be, and that's -- I just wanted to put19 that on the record. If I can get -- if20 your staff can give us the number of21 companies that may affect, it would be an22 interesting analysis.23
It's24 data analysis that we continue to ask the25 163 11/30/10 - WHOLE - BILL 1006351 Administration. Unfortunately, our2 returns limit and has the limitations of3 Nexus codes for us to get that down and4 dirty. Literally, they would have to go5 through every filing, because we don't6 have that capacity. But it's a question7 that you should ask Rob Dubow. It's a8 question we've asked the Administration9 to better gauge as we think of our10 ourselves as region versus just11 Philadelphia.12
But it13 might be also helpful if we engage the14 Chambers of Commerce in those counties to15 see just in general from, I guess, a poll16 of their members how they think that17 affects them, because I don't want to be18 in a situation where we go up there hat19 in hand to get help. I mean, the School20 District is going to be up against it21 next year and the year after. We're up22 against it now. I don't want to be23 angering people in Harrisburg that have24 our fate in their hands right now25 164 11/30/10 - WHOLE - BILL 1006351 totally. As I said before, we had Dwight2 Evans and now we don't have him. So, I3 mean, I don't know who is going to4 protect us up there if this turns out to5 be something that angers businesses6 within the counties.7 So thank you.8
I would9 only end that any time you're asking10 someone about, Are you okay with us11 increasing your taxes, the answer is12 going to be no. I think the fact of the13 matter is that 26 percent of the14 delegation in Harrisburg is from15 Philadelphia, and as has been said in16 this Chamber time and time again,17 particularly with the losing of Dwight18 Evans, people have to stand up and19 provide leadership. And I think if20 anything, this helps us generate that21 discussion about Pennsylvania tying our22 hands and then also saying take care of23 yourself, and I think that's the24 discussion we should have. We should not25 165 11/30/10 - WHOLE - BILL 1006351 let them frame it and we should not frame2 it from, Are you going to be okay if we3 raise your taxes so that we can give tax4 cuts to Philadelphians. That's not a5 debate. That's not a discussion.6
Some of our7 delegation did stand up and voted for a8 guy from Pittsburgh.9
Some of our12 delegation did stand up and voted for a13 guy from Pittsburgh. So I can't depend14 on our delegation necessarily to look out15 for what's in the best interest for16 Philadelphia.17
Thank20 you.21 The Chair recognizes Councilman22 Jones.23
Thank you,24 Madam President.25 166 11/30/10 - WHOLE - BILL 1006351 I agree with a gentleman by the2 name of Bruce Crawley, who said -- and I3 make this in context to the people who4 work in my district -- that they wouldn't5 care about paying higher wage taxes or6 paying higher BPT taxes if they could get7 some jobs in the neighborhoods and some8 contracts in the neighborhoods. Again, I9 want to refocus this on the employment10 impact of this and from this vantage11 point: This body voted for close to a12 ten percent tax increase on the citizens13 of Philadelphia, and here we are debating14 about the impact of suburban businesses15 and if they're going to get mad. I mean,16 we really need to look at this from an17 employment perspective and making sure18 that we look out for what the employment19 impact is going to be.20 And I keep hearing all this21 great analysis and it reminds of being an22 undergrad here in poly-economics 200, but23 the point of it is, at the end of the24 day, are we going to gain some jobs, some25 167 11/30/10 - WHOLE - BILL 1006351 job stability and in those retail2 businesses that we're talking about being3 impacted, and I want to hear more about4 that.5 I mean, I'm hearing about6 suburban legislators getting mad at us.7 Well, I think based on the vote a couple8 of weeks ago, they're pretty mad, and9 what we need to do is what's in the best10 interest of Philadelphians at this point,11 and I think this discussion should be12 more focused on that. And, again, I13 don't hear how that is happening.14 I don't think it's enough15 diversity here, quite frankly. I don't16 know where the African American Chamber17 of Commerce is in this debate, and I18 think that we need to hear from them and19 see all spectrums of the economy and how20 they're going to be impacted by this.21 Thank you, Madam President.22 COUNCIL PRESIDENT VERNA:23 You're welcome.24 The Chair recognizes Councilman25 168 11/30/10 - WHOLE - BILL 1006351 Green.2
Thank you,3 Madam Chair.4 A couple of key things I want5 to clear up here. First of all, we have6 spoken to all of the affinity chambers7 about this bill, and they can choose to8 testify or not testify.9 The second thing is that this10 tax proposal is what we are allowed to do11 under state-enabling legislation, and so12 we are authorized to make these changes13 under state law without needing to go to14 Harrisburg for anything.15 The third is that there are, as16 I was starting to say, there are two17 kinds of businesses that are not based18 here. There are the kind that pay gross19 receipts and no net income, about 23,00020 filers who have zip codes outside the21 City of Philadelphia. They pay about $1722 million in taxes to the City of23 Philadelphia right now, and their tax24 will go up to approximately $67, $6825 169 11/30/10 - WHOLE - BILL 1006351 million under this change. We know they2 are not -- that is lowering the taxes of3 Philadelphia-based companies.4 There's a second kind of5 non-Philadelphia-based company that is6 impacted. That is somebody who is not7 headquartered here but does pay some net8 income tax, and typically they pay net9 income tax that is less than or equal to10 what they pay in gross receipts, because11 they claim, quote/unquote, for all their12 business activity that they do with our13 1.5 million residents that they don't14 make much of a profit. Their taxes will15 go up also.16 There will be some Philadelphia17 businesses whose taxes go up and there18 will be some that will go down, but the19 people who are testifying right now are20 people who are invested in the City of21 Philadelphia, who create jobs, who have22 testified that they can invest in23 property, plant and equipment with these24 savings, which can create new jobs in the25 170 11/30/10 - WHOLE - BILL 1006351 City of Philadelphia. And we've heard2 them testify that no new manufacturer is3 going to come into a neighborhood in the4 Fourth District under our current tax5 structure and that a new manufacturer6 would be able to consider moving into7 every neighborhood in the City of8 Philadelphia without having to take into9 consideration business taxes, because10 they will be on a completely level11 playing field whether they locate here or12 outside the City. Mr. Dubow will not13 dispute that fact. It is indisputable.14 And there are 108,000 current15 manufacturing-related jobs in the City of16 Philadelphia, according to the PIDC,17 which is 18 percent of our workforce, and18 we are losing 10,000 to 15,000 of those19 jobs a decade. Some are going out of20 business, but some are moving to Texas,21 as Cardone expanded a line there, and22 other businesses as they are looking to23 start new businesses or -- not just add24 to their existing lines, they are putting25 171 11/30/10 - WHOLE - BILL 1006351 up plants elsewhere in the country.2 We met with a manufacturer in3 the City of Philadelphia who said that4 once a month someone comes up to him from5 the Arkansas Economic Development6 Authority, the Tennessee Economic7 Development Authority, this development8 authority, that development authority, et9 cetera. They know we are fertile ground10 for losing -- for competing for our11 manufacturers. It is because of our12 business privilege tax. It is because of13 our net income portion of our business14 privilege tax. And they show a chart15 that shows what their taxes would be in16 Arkansas and what their taxes are in17 Philadelphia, and we lose that battle18 every time. And we will continue to19 bleed manufacturing jobs, losing jobs,20 critical jobs in neighborhoods, until we21 correct this wrong.22 Thank you.23
Point of24 information.25 172 11/30/10 - WHOLE - BILL 1006351
The2 Chair recognizes Councilman Goode for a3 point of information.4
I'm glad5 Councilman Green is talking about6 neighborhood jobs. I'm glad that he7 cited the PIDC study. PIDC, for several8 years, had problems creating jobs in the9 Fourth District because they limited the10 development of industrial park to11 industrial development and manufacturing12 those type of things. As a former13 economic development administrator for14 the Commerce Department and as a former15 Vice-President of Philadelphia Commercial16 Development Corporation, I constantly17 pushed them to look at retail options for18 that industrial park. After there was a19 federal empowerment zone created there,20 what happened? We created huge retail21 development with national retailers. And22 for the record, I use to term "national23 retailers," not just retailers in24 general. We were able to attract a25 173 11/30/10 - WHOLE - BILL 1006351 number of national retailers to that2 industrial park, created a number of3 neighborhood jobs. Councilman Jones can4 testify to it. That development was done5 to empower people to create neighborhood6 jobs. No, it wasn't manufacturing, but,7 yes, a lot of neighborhood jobs were8 created right there.9 Thank you, Madam President.10
Madam13 President?14 COUNCIL PRESIDENT VERNA:15 Councilman Green.16
Thank you.17 Not to respond. I just want to18 reiterate the point that there is no19 evidence that we have seen provided by20 anybody, including the Administration,21 that the retail sector is hurt or that22 national retailers are hurt.23
Point of24 information.25 174 11/30/10 - WHOLE - BILL 1006351 COUNCIL PRESIDENT VERNA:2 Councilman Goode.3
I actually4 believe that it was the primary sponsor5 of the legislation that actually sold6 this bill as going after the Wal-Marts of7 the world who weren't paying their fair8 share.9 Thank you.10 COUNCIL PRESIDENT VERNA:11 You're welcome.12 The Chair recognizes13 Councilwoman Brown.14
Yes, Madam15 President. Councilman Jones raised the16 issue and I'd be deeply remiss not to17 further define the lack of diversity on18 the testifier list, and I too have a19 question and will broach this question20 with the Greater Philadelphia Chamber of21 Commerce, why we do not have the African22 American Chamber here, why we do not have23 the Hispanic Chamber here willing and24 ready to testify, why we do not have the25 175 11/30/10 - WHOLE - BILL 1006351 Asian American Chamber here willing and2 ready to testify. They too have a voice3 on a complex matter called business4 privilege tax debate.5 And so to Councilman Green, I6 will be curious to hear what their take,7 what their view, what their perspective8 is on this important tax debate.9 Thank you, Madam President.10 COUNCIL PRESIDENT VERNA:11 You're welcome.12 The Chair recognizes13 Councilwoman Sanchez.14
And I15 agree with Councilwoman Blondell Reynolds16 Brown that in terms of today's17 testimonial list, it may not reflect the18 full diversity of the City. It wouldn't19 be the first time we have a debate where20 voices are not heard.21 We did reach out to all of22 those affinity groups, and there will be23 more diversity as we move forward in the24 agenda with folks.25 176 11/30/10 - WHOLE - BILL 1006351 I think part of the reason --2 and I'll be very blunt and put it on the3 record -- many of these groups are4 dependent on City funding and, quite5 frankly, felt that while their members6 could benefit from this, they were not7 willing to come forth at this time. And8 that is a political reality that we face9 every single time we make a policy10 decision in this city.11 Thank you.12
Thank13 you.14 Thank you, gentlemen.15 Our next panel?16 MR. McPHERSON: The next panel17 consists of David Perlman; Walter Palmer,18 III; Emily Bittenbender; David Tarditi;19 and David Campoli.20 (Short recess for court21 stenographer.)22 (Witnesses approached witness23 table.)24
The25 177 11/30/10 - WHOLE - BILL 1006351 Committee is now back in session.2 Good afternoon.3
Good afternoon.4 COUNCIL PRESIDENT VERNA:5 Kindly identify yourself for the record6 and proceed with your testimony.7
Thank you. My8 name is Walter Palmer. I'm the President9 of the General Building Contractors10 Association. 13 Bittenbender Construction is a14 woman-owned business located in15 Philadelphia and has worked on several16 projects in Philadelphia as a prime17 contractor and as a subcontractor. 2 So here what I'd like to do is3 give some testimony, and if there are any4 questions from Council, there is a good5 representation of prime/subcontractors6 here able to answer any questions for7 you. 8 As I said, my name is Walter9 Palmer. 11 We are -- and I'm proud to say, we've12 been located in the City since 1724. The13 Philadelphia Builders' Chapter, as we are14 known, is a chapter of the Associated15 General Contractors of America. 22 I wish to thank Council23 President Verna for allowing me to24 testify today, and I also wish to thank25 179 11/30/10 - WHOLE - BILL 1006351 Councilmembers Green and2 Quinones-Sanchez, the sponsors of Bill3 No. 100635. 11 As we have previously12 communicated to City Council, our13 membership has determined that this bill14 will have a dramatic adverse effect to15 the entire construction industry. 25 180 11/30/10 - WHOLE - BILL 1006351 The most critical one is that, by2 definition, construction is a high volume3 and low margin industry, exactly the type4 of business that puts us in the "losers"5 column of this proposal. No amendment is6 going to change the fact that7 construction in this city is barely8 profitable in the best of years, so9 reducing a profits tax and increasing a10 receipts tax will always be harmful to11 the construction industry. 25 181 11/30/10 - WHOLE - BILL 1006351 We have shared this proposed2 amendment language with our members, and3 we have been trying to determine what4 effect it will have. While we appreciate5 the effort, preliminary research seems to6 indicate that this amendment is only7 marginally helpful and does not fully8 offset the large tax increase that this9 bill imposes on construction. This is10 because right now our construction11 projects in Philadelphia are just barely12 breaking even. 18 The multiple aggregate taxation19 for construction illustrates just one of20 the many reasons why Philadelphia ranks21 among the top five most expensive cities22 in the world in which to build. The23 construction and development industries24 already struggle with covering25 182 11/30/10 - WHOLE - BILL 1006351 Philadelphia's existing immense tax2 burden and regulatory hurdles. This3 tax-shifting proposal could make4 Philadelphia the most expensive in the5 country. 8 The construction industry in9 the Philadelphia region employs 62,00010 workers. We pay a fair wage rate to our11 union workforce, and our numbers will12 grow as the economy rebounds. 18 If you proceed with this19 proposed tax shift, what you'll be left20 with are out-of-state construction firms21 hiring out-of-state companies, workers,22 to come into the City to build. As many23 of you can attest to this, this only24 leads to loss of revenue as owners, labor25 183 11/30/10 - WHOLE - BILL 1006351 leaders and the City fight with these2 out-of-state firms to collect payment,3 taxes and health and welfare funds, as4 they often take the money and run. 6
Thank7 you, Mr. Palmer.8 Are the other witnesses going9 to also testify?10
Very13 well. Thank you.14 The Chair recognizes Councilman15 Green.16
My name is James20 Rogers and I am the Treasurer of the21 Building Industry Association of22 Philadelphia, which represents the23 region's residential homebuilders,24 residential contractors and suppliers. I25 185 11/30/10 - WHOLE - BILL 1006351 am writing on behalf of the BIA in2 support of the Bill 100635, with the3 proposed amendments, and we wish to thank4 the President and Councilmembers Green5 and Sanchez for the introduction of this6 legislation.7 Philadelphia is a very8 difficult city in which to be a9 homebuilder due to its high construction10 costs, difficult land acquisition,11 onerous regulations, an unpredictable12 zoning process and heavy tax burden,13 amongst other reasons. The Nutter14 Administration and City Council have15 taken important strides to reduce these16 hurdles, which is especially appreciated17 in this previously, never seen real18 estate market crash. However, much more19 remains to be done, and reform of our20 business tax structure is a critical21 component.22 The sponsors have proposed23 shifting the business privilege tax away24 from net income to focus solely on gross25 186 11/30/10 - WHOLE - BILL 1006351 receipts, and they have articulated a2 very persuasive case on how this tax3 shift will help attract more businesses4 and residents to the City. But the BIA5 had to first analyze the proposal as to6 how it would impact homebuilders.7 Initially, the original8 proposed legislation appeared to be a9 substantial tax increase. Building in10 Philadelphia has not been profitable in11 the last couple years, and, in fact, many12 of our members have been forced out of13 business or are selling off inventory at14 significant loss simply to pay off the15 bank. Our initial read was that the net16 income tax reduction would not help and,17 in fact, a gross receipts tax increase18 would be quite painful.19 However, based on the20 importance of the development industry,21 the sponsors listened to our concerns and22 proposed an amendment that will not23 further harm our decimated industry. In24 addition to acting as the developer25 187 11/30/10 - WHOLE - BILL 1006351 selling the project after completion,2 most of our members act as the general3 contractor, hiring subs to perform much4 of the work and, thus, we are subject to5 the subcontractor tax multiplier effect.6 The sponsors have proposed an amendment7 which will resolve this multiplier effect8 and dramatically change the bill's9 calculus for the BIA members, while still10 providing the appropriate tax revenue for11 the City in a more predictable manner.12 Finally, it is important for13 the BIA to analyze the Green/Sanchez14 proposal not based on our current15 projects but instead on future scenarios16 under an improved economy. None of us17 will be proposing to build new projects18 unless we project a profit, and19 consequently eliminating the net income20 tax will add substantially to our bottom21 line of the project. Our industry is a22 catalyst to economic expansion. By23 starting new projects, we create jobs,24 generate City revenues from transfer tax,25 188 11/30/10 - WHOLE - BILL 1006351 real estate tax and also increase the2 population in neighborhoods where it3 previously might not have been profitable4 to build in.5 Bill No. 100635 is a thoughtful6 economic development impetus which is one7 step in a hopefully broader-based8 strategy designed to jump-start our9 industry and result in more real estate10 development in the City. The BIA looks11 forward to continuing this discussion12 with members of City Council and the13 Nutter Administration. We wish again to14 thank the sponsors and all of the City15 Council and the Nutter Administration for16 their interest in improving the tax17 environment for operating a business in18 our city.19 The members of the Building20 Industry Association ask that the21 Committee approve Bill 100635, with its22 proposed amendment, and we thank you for23 your consideration and support.24
Thank25 189 11/30/10 - WHOLE - BILL 1006351 you, sir.2 The Chair recognizes Councilman3 Green.4
Thank you,5 Madam Chair.6 Thank you for your testimony,7 Mr. Rogers. When we were meeting in my8 office -- I think you're an accountant9 for many contractors. When we were10 meeting in our office, you mentioned sort11 of when you're beginning a project,12 looking for prospectively what you would13 pencil in as your expected profit margin14 for a contractor.15
Well, in terms of16 we're speaking for developers, and17 developers usually try to earn somewhere18 between six to eight percent.19
Six to eight20 percent, right. And you also represent21 some contractors, right?22
And when24 they're projecting forward, submitting25 190 11/30/10 - WHOLE - BILL 1006351 their bids, how much margin are they2 putting typically in to a --3
Okay. So9 basically this bill is -- I'm not asking10 you to respond to this, because you'd11 have no way of knowing. This bill is12 break-even for somebody at six percent,13 and then essentially removing the tax14 pyramiding is what enabled your15 developers to -- because they're also16 general contractors -- to realize a tax17 savings in this environment?18
Yes. Without the19 amendment, it would make no sense to our20 developer clients.21
Okay. But22 because of the amendment, your taxes,23 even when they're making no profit, went24 down?25 191 11/30/10 - WHOLE - BILL 1006351
In the short term,2 yes. In the short term, but not in the3 long -- in the long term, if they made no4 profit, it would not.5
Right. But6 you wouldn't build if you made no profit.7 Now you're stuck with existing inventory.8
Yeah. We have a9 very unique problem in this current10 environment, in that we are stuck with11 inventory, and under the current12 environment, it actually -- and this is13 where when talking to the developer14 clients is -- from our perspective, some15 of them in the short term, it's not a16 good proposal, but looking out to the17 future -- and most of them are looking18 out to starting new projects -- it will19 help them.20
Okay. So21 your analysis is, it might have a22 short-term cost, but in the long run,23 you're only in business to be profitable24 and when you're profitable, you're saving25 192 11/30/10 - WHOLE - BILL 1006351 a lot of money as a result of this2 change, it makes projects pencil sooner?3
Okay. Last5 year there were a total of $225 million6 of net income in the construction7 industry in the City of Philadelphia,8 which resulted in net income tax payments9 to the City of $14.9 million from the10 construction industry, and there were 911 million paid in gross receipts.12 After this amendment, we have13 estimated that the total tax burden of14 the industry will go from 24 million to15 about $16 and a half million. I say16 that -- I have a question for Mr. Palmer,17 or whoever he'd like to defer this to.18 We were provided with a very19 helpful chart by Mr. Palmer, which20 demonstrates that under the proposal with21 the amendment on a $30 million project,22 the contractor would have an increased23 cost -- and this is supposed to be an24 average of the industry, I think, not25 193 11/30/10 - WHOLE - BILL 1006351 dealing with any one business, but2 correct me if I'm wrong -- would have an3 increased cost of $14,000 or their taxes4 would -- out of that $30 million.5 When Mr. Ward and I were6 speaking prior to the beginning of7 testimony, I asked him what his profit8 margin was over the last five years, and9 he said it was one percent. At a one10 percent profit margin, this would be11 exactly revenue neutral to contractors in12 the commercial space. And I understand13 there's a difference between commercial14 and residential contractors.15 So I'm wondering given that and16 the fact that we will be decreasing the17 economic rent of doing business in Center18 City Philadelphia by 7 to 12 bucks a foot19 on the Market Street corridor, according20 to Paul Levy's research from the Center21 City District, why you don't think this22 will lead to more job creation and more23 construction as the economy improves.24
My name is David25 194 11/30/10 - WHOLE - BILL 1006351 Tarditi. I'm with TN Ward Company, just2 for your elaboration.3 The one percent is a goal to4 make. I don't think I said I made one5 percent every year, because we didn't.6 It's a very thinly margin industry, and7 one percent, if you ask any surety in the8 country who does bonded work, they will9 say the person making one percent of any10 size of a contractor, that's extremely11 good. It's a goal to get. Sometimes12 we're below it; sometimes we're above it.13 And I'd said that most contractors of our14 size would be very happy with one15 percent, very happy.16 The problem is, though, if you17 look in the chart itself and you go up18 above it, you'll see that that may be --19 that's with the amendment. Is that20 correct, sir?21
We intend to22 pass this only with the amendment. So,23 yes, we're dealing with an amendment24 world. In other words, only the far25 195 11/30/10 - WHOLE - BILL 1006351 right column and far left column are2 applicable.3
And that is5 a consequence of a request by the GBCA6 for us to look at tax pyramiding in tax7 cut.8
Okay. For the9 overall job cost, you're correct. It's10 basically a -- it's a ten percent11 increase over the existing law right now.12 It's $14,000. But this is all marginal13 numbers, because you're talking large14 amounts for the contract, and any slight15 problem could cause that to evaporate in16 a minute.17 But if you look up inside of18 it, you'll see the subcontractors, their19 tax rate will go up 50 percent. If you20 take the current law and then take it21 with the amendment, their taxes are going22 to go up 50 percent on that project, and23 the subcontractors to the subcontractors24 will go up 100 percent.25 196 11/30/10 - WHOLE - BILL 1006351
I'm sorry,2 sir. I can't recall your -- I know you3 work for Ward. I don't want to -- Mr.?4
Tarditi,8 okay. So you're here to talk about what9 the impact is on general contractors.10 You don't know the impact on subs,11 because what is in the far right-hand12 column is what they would pay in gross13 receipts tax. Every subcontractor I've14 talked to, including people who bargain15 with the various trades in the City who16 are subcontractors, basically say that17 the subcontractor doesn't pencil a job18 for less than eight or ten percent. So19 their net income taxes are going down20 more than their -- and their gross21 receipts are going up.22 So I didn't want to -- in other23 words, since you don't know that, I don't24 think there's a point in us debating that25 197 11/30/10 - WHOLE - BILL 1006351 point.2
Excuse me, sir.3 No. I take issue with that. I think4 you're talking the percent. It is their5 gross margin --6
There's a7 confusion here between where the fees lie8 and what's in the fees and what's out of9 the fees. I think between the BIA -- I'm10 sorry.11 COUNCILMAN DiCICCO: Identify12 yourself.13
Oh, I'm14 sorry. My name is Emily Bittenbender.15 I'm the owner of Bittenbender16 Construction.17 I think there is an uneven18 playing field when we're talking about19 percentage of fees. I think the20 gentleman from the BIA is talking about21 that their contractors are going in22 seeking fees of six percent, and I think23 what he's referring to are six percent24 between -- before the G&A and the taxes25 198 11/30/10 - WHOLE - BILL 1006351 are paid for. What Dave Tarditi is2 talking about is an average of one3 percent of profit on construction jobs4 after all of the G&A and taxes are paid5 for.6 So there's sort of a big gap7 here when we're talking about fees and8 the expectation of who is making what,9 and I think it's important, because when10 you're talking about a high volume, low11 margin industry such as construction, our12 margins are so low and there's a big13 difference when we're talking about the14 original proposal, which was a15 quadrupling of the gross receipts tax,16 which would have had an 104 percent17 increase on our taxation versus the18 amendments. So I just wanted to kind of19 clarify.20
I completely21 agree, but when you telescope back out22 and we look at the big picture and you23 say basically this is a basically revenue24 neutral proposal on the numbers that you25 199 11/30/10 - WHOLE - BILL 1006351 came in to provide us, it's a $14,0002 increase --3
It's in your10 own chart. The far right bottom column,11 three up from the bottom, assuming only a12 0.83 percent profit, it's a $14,00013 increased tax under the -- compared to14 the existing law. I mean, that is not --15 that is a marginal change. It is not a16 dramatic change.17 And let's just say we can18 disagree about how you characterize the19 one percent, but at one percent it's20 completely neutral.21 And so we're not -- we are not22 trying to hurt the construction industry.23 In fact, we feel like we've become24 educated as a result of your efforts to25 200 11/30/10 - WHOLE - BILL 1006351 come meet with us and are trying to be2 extraordinarily responsive, but I do want3 the record to reflect that in a $304 million project, your own chart shows a5 $14,000 increased cost.6
Overall, that's7 correct, but within that chart, as you'll8 see, as I said, if you take -- basically9 the subcontractors' tax is $100,000 in10 that chart, and under the present law, it11 is, subcontractors, id a total of 68 --12 $66,000 because of the income tax and13 receipts tax. So that's a 50 percent14 increase. Do you understand that?15
I understand16 that it's an increase in the gross17 receipts rate, assuming they pay no net18 income tax.19
But that is22 not the case among many subcontractors,23 especially the bottom tier. The bottom24 tier subcontractor ends up paying more25 201 11/30/10 - WHOLE - BILL 1006351 gross receipts because they're not paying2 it to somebody else. So the exemption3 and the tax pyramiding exemption we put4 in place doesn't apply, and that bottom5 tier subcontractor is relatively smaller6 than a large contractor such as yourself7 and has higher profit margins, because a8 family can't afford to eat that runs a9 small contracting firm, whether it's a10 mechanical trade or a plumbing contractor11 or et cetera.12 It's the bottom tier -- so the13 cost to the general contractor, which is14 who you represent, is $14,000.15
No. Excuse me.25 202 11/30/10 - WHOLE - BILL 1006351 It's not, sir. It was in a good market.2 It's an excellent market. Now we're in3 the bad market.4
It also6 takes into account the fact that there7 was absolutely no losses on this job, and8 I think this is one of the areas where9 people really misunderstand construction.10 Not only are we high volume, low margin;11 we're very, very, very high risk. So if12 one subcontractor, your client or13 anybody, goes bankrupt and you lose14 money, you're still paying on the gross15 receipts. So this is one of the areas16 why we are different from any of the17 other industries here, because we may bid18 on bid day a $30 million project and19 somebody might negotiate 50 cents on the20 dollar with us at the end of the day and21 we'll pay tax on 30 million and we may22 receive 18 million.23 So you're taking somebody who24 has very low margin to offset any kind of25 203 11/30/10 - WHOLE - BILL 1006351 liability and you're basically putting us2 more at risk, with no ability to be able3 to offset those dollars.4
So6 regardless of whether you're a7 subcontractor, because in a scenario like8 that, the general contractor is going to9 get it and then we're going to pass it10 down to the subcontractor. So every tier11 is going to be hit by this. And12 basically this is offset by the fact13 that -- you know, let's take an example14 of something I'm facing right now. I15 have a client right now who is going16 bankrupt. I developed a project for this17 client. They can't pay me. So if I were18 in the current scenario, regardless of19 the amendment or not, I would be20 responsible to pay the tax on that21 volume, regardless of whether I'm going22 to get that money or not, which23 essentially can put you down.24
Mr. Tarditi,25 204 11/30/10 - WHOLE - BILL 1006351 Line A on the chart that you have there,2 first column, under the existing law, how3 much did you calculate a general4 contractor would pay in taxes on gross5 receipts to the City of Philadelphia on a6 $30 million project?7
No, no; Line10 A, first column, existing Philadelphia11 business privilege tax, how much would a12 general contractor --13
So under the5 existing law, the general contractor6 would pay $58,000 in taxes to the City of7 Philadelphia?8
Now, if you13 go to Line A, far right column, Amendment14 to Proposed Law - Excludes, how much15 taxes would you pay a general contractor16 to the City of Philadelphia?17
I'd pay all the18 taxes. I have to pay the whole $159,00019 in taxes. That's part of my job cost.20
The far25 206 11/30/10 - WHOLE - BILL 1006351 right column, sir, can you tell me what2 number you have on Line A under the3 amendment?4
That component is5 fifteen nine. Then there's two other6 components, sir.7
You're the12 general contractor, and then the subs pay13 what they pay. I'm talking about general14 contractors.15
So you'll17 have a tax decrease as the general18 contractor to the City of Philadelphia on19 a $30 million project of $42,100 under20 your own analysis.21
No, because I22 have to pay for the whole project. It's23 part of my construction cost.24
You're not25 207 11/30/10 - WHOLE - BILL 1006351 obligated to pay taxes that your subs2 pay.3
It's part of the10 job cost. This is the total cost for the11 project.12
That's a13 great point. So what you're saying is,14 when you bid a project, you include your15 taxes?16
In some17 cases, there are cases such as the18 University of Pennsylvania who do not19 allow us to pass on the cost. So if we20 incur costs where we have to pay the City21 of Philadelphia for the business22 privilege tax, we have to offset that23 somewhere else.24 So, no, not in every case can25 208 11/30/10 - WHOLE - BILL 1006351 we pass it on to the City -- to the2 client.3 And then the other thing is, on4 bid day, again, I want to reiterate, we5 may include your cost for the business6 privilege tax in our bid as a lump sum.7 Again, if anything happens to that bid8 price and we don't make that money, we9 still have to offset the loss.10
Sure, but11 it's a one percent profitability on12 average, about.13
Right, which14 is so low that it really doesn't allow us15 any ability for any kind of mistake.16
And you17 break even at one percent under this18 analysis.19
Well, I20 don't believe we are breaking even. It's21 my understanding that still with the22 analysis, we're still paying an23 additional 11 percent --24
This is --9 Councilman, these are a couple samples.10 I've had projects half the $30 million11 and made $12,000 on it.12
I13 understand. And you do others where you14 make millions.15
But I still pay16 receipts tax despite that $13,000 profit17 on $50 million jobs.18 The point is is that what19 you've done here is, if this law is put20 into effect this way, you're presuming21 that the economy is going to go the way22 of this last year and the year before.23
I think the one6 thing that maybe you don't quite7 understand is, construction typically8 lags the economy. So many of the9 construction companies had good years in10 '08 and '09 and they're going to have bad11 years in '10, '11 and '12. See, the12 homebuilders are different. We had13 horrible years '08, '09. It's gotten a14 little better for us, and it will be much15 better for us in '12 and '13.16
I completely17 agree. That's why we have a five-year18 phase-in of this change, so that it's19 smoothed for every industry and they can20 relax. But your own numbers show that21 general contractors save $41,000 in taxes22 as a result of this change.23
That's in this24 sample, sir.25 211 11/30/10 - WHOLE - BILL 1006351
That's right. I4 had about a day to prepare for it and I5 did the best I could.6
Listen, in7 our defense also, I want to state that we8 got this amendment Wednesday, I think,9 evening. Thanksgiving was Thursday. So10 we basically had a day or two to look at11 it. So the analysis is really not that12 complete, sir, and I think we've actually13 spoken to you about the fact that we have14 had such little time to be able to do a15 full analysis to understand whether16 you're right, we're right, what the true17 number is. But I think given the fact18 that you've had two years to look at this19 tax policy, we've had about two days, I20 think it would be in the best interest to21 allow us to have a little additional time22 to take a look at it.23
And,24 Ms. Bittenbender, if we pass this out of25 212 11/30/10 - WHOLE - BILL 1006351 Committee, you'll have time, as I've2 committed this to you.3
Because6 basically -- I don't want to quibble7 about when you got it, but it was several8 weeks ago, according to Sophie Bryan, my9 Chief of Staff. But the point is, we are10 very close for it to being neutral to you11 under your own numbers.12
No. We13 really don't agree, because our members14 really represent general contractors,15 construction managers, subcontractors,16 vendors. So it's not revenue neutral.17 It really isn't. And, again, if you18 would give us another couple days to do19 more of an evaluation, I think we could20 come back and prove with a little bit21 more extensive data. That's really22 untrue.23
Sir, let's just25 213 11/30/10 - WHOLE - BILL 1006351 go to Line B.2
Look at Line B.4 Okay? Line B, if you take the present5 computations, $38,000 for a subcontractor6 and $28,000 for their tax, that is7 $64,000, $64,000 to -- under the proposed8 amendment, $100,000. That's not tax9 neutral.10
Yeah. I11 understand. You're here representing the12 GBCA. Those are general contractors.13 Your numbers show a $41,000 benefit.14
The total17 project -- I understand. The total18 project cost --19
-- is $3021 million. The impact is $14,000 for the22 total project cost sort of based on your23 own analysis, and at a one percent profit24 margin, it's neutral.25 214 11/30/10 - WHOLE - BILL 1006351 We can agree to disagree all2 day about this, but the point is, it has3 basically eliminated -- it is basically4 revenue neutral for you in a $30 million5 project, and that's the point that I6 think we should be able to agree on.7 Fourteen thousand out of 30 million --8
We don't agree.13 Respectfully, we don't agree. It's not14 revenue neutral for the subcontractors15 that contribute into this. We have16 polled, we have called all of our17 members. We have heard from all of our18 members. I can't find one contractor,19 prime contractor, subcontractor, material20 supplier, that works in the City that is21 a member of the GBCA that is willing to22 say that this is good for construction.23 There just aren't any. And you may think24 that it's revenue neutral for a prime25 215 11/30/10 - WHOLE - BILL 1006351 contractor, but at the same turn, you're2 raising the tax on a subcontractor from3 $38,000 with your amendment to $100,000.4 Without the amendment, you've raised it5 from 38,000 to 143,000.6 So there's no -- it's not7 revenue neutral. You're using words that8 it's unfair. This is bad for business,9 bad for construction, bad for small10 businesses that are located in the City11 that do work here. This is not good12 policy.13 COUNCILMAN GREEN:14 Ms. Bittenbender, when we were speaking15 on the phone the other day, we talked16 about how as a general contractor who17 builds in the City of Philadelphia, when18 it is built in the City of Philadelphia,19 it is a union-built project, and when it20 is built -- and you are union21 contractors?22
And when it24 is built outside the City of25 216 11/30/10 - WHOLE - BILL 1006351 Philadelphia, oftentimes it is not a2 union-built project.3
Well, yeah.4 It can either be open shop, it can be5 prevailing wage, but primarily the City6 of Philadelphia, for the most part, is a7 union base with a higher rate of8 construction.9
Right. And10 so if we have a policy that is going to11 promote development, economic development12 in the City of Philadelphia, and slow the13 expansion of the suburbs because we're14 changing our tax policy, isn't that good15 for your industry, if you believe that to16 be true?17
I'm not sure18 I quite understand, because the cost of19 doing construction union versus non-union20 isn't really comparable. So could you21 rephrase it?22
It's where23 people will be building within the24 region, in the City or outside of the25 217 11/30/10 - WHOLE - BILL 1006351 City. That's what this debate is about2 for us.3
Well,4 according to your argument -- and it's5 one that I think every one of our members6 would embrace and hope to become true --7 is that if your tax policy does what you8 say and it creates a building boom, I9 think all would be forgiven. But I think10 that there's no proof that we can see11 where you're going to offset these12 winners to such a degree that they're13 going to have a building boom. I mean,14 I've read testimony of somebody else15 that's coming before you soon that says16 the losers in this tax policy shift,17 we're going to pay 42 more million18 dollars per year, and the winners are19 going to have a windfall of 50 million.20 Well, of the 50 million that the winners21 are not going to have to pay, 20 million22 of that windfall is going to be for 1723 law firms. Well, those 17 law firms,24 because they're going to save $2025 218 11/30/10 - WHOLE - BILL 1006351 million, aren't going to hire that many2 more people, because we're their client3 base, and they're not going to build. So4 I don't see where the building boom is.5 So all along we've respectfully6 had a great dialogue with you and we've7 enjoyed our dialogue and we hope you're8 right, but we just don't see the proof.9 So there's a standstill really between10 our organization and you, because you11 don't understand the risk and the12 potential to us in the loss and even our13 numbers, and we don't understand how you14 see that this is such an awesome thing15 for our industry. We'd like to, but we16 don't see it.17
I18 understand, and we have had a respectful19 dialogue and I really do appreciate that,20 and through the process I've learned a21 lot about -- more than I ever thought I22 knew about general contractors and23 subcontractors and residential24 homebuilders and others in the City, and25 219 11/30/10 - WHOLE - BILL 1006351 I'm really glad that we've identified the2 tax pyramiding issue that is unfair to3 the construction industry. Many other4 low margin businesses have the5 alternative rate structure that's6 available for retailers and7 manufacturers, et cetera. And, you know,8 all I can say is the proof will be in the9 pudding and you'll be building more stuff10 in the City of Philadelphia instead of11 building office space that you may not12 win the award for on the Route 20213 corridor for the next law firm that14 leaves the City of Philadelphia because15 of our tax structure.16
Thank20 you.21 The Chair recognizes22 Councilwoman Brown.23
Good24 afternoon. I listened with interest in25 220 11/30/10 - WHOLE - BILL 1006351 your testimony where you stated that you2 believe that the amendment that's been3 introduced will in no way make you whole4 as it relates to this bill.5
It helps us.9 I'll kick it off and then Dave, who does10 all the numbers -- it definitely helps11 us. It's the best part of the amendment12 for us, and it is -- the Councilpeople13 have gone out of their way to try to14 help, because basically in the initial15 bill when we're having quadrupled taxes16 on the gross receipts tax, we're17 basically -- it's a compounded tax,18 because we have subcontractors beneath19 us, vendors beneath them. There could be20 two to three different tiers. Each21 person provides that tax and then passes22 it along to the next tier. They tax the23 total tax and so on and so forth. So24 it's not just quadrupling. I mean, it's25 221 11/30/10 - WHOLE - BILL 1006351 a compounded tax.2 So when you eliminate the fact3 that the general contractor pays the4 total compounded tax, there is in fact a5 savings. What we're arguing with6 Councilman Green about is, is it revenue7 neutral. The answer is, no, it's not8 revenue neutral. There's still an9 increase in the cost of the tax, but it10 is lessened per se.11
I see.12 Let me pose a question I asked of one of13 the earlier testifiers. Some of us have14 a practice here where we like to see15 where an idea has been tested in other16 parts of the country or is there17 precedent that we can look to, which then18 gives us some sense of predictability19 around how it may or may not impact20 various industries.21 Do you know of any other22 municipality in the country where -- I23 won't say idea, because that diminishes24 this type of public policy proposal --25 222 11/30/10 - WHOLE - BILL 1006351 has been put forth and with some level of2 success?3
The bill? No. In7 fact, we met with, at the request of8 Councilman Green and Quinones-Sanchez, we9 met with Steve Mullin from Econsult. We10 reviewed and we listened eagerly to try11 to find out where this could be possibly12 good for us, and we actually posed that13 question to him, is show us where in the14 country somewhere this type of policy is15 actually in effect and positive and16 demonstrates positive growth.17 We want to be part of the18 solution. We want to be part of making19 this region grow, but you can't point20 anywhere to where this has actually been21 a positive growth.22 As it relates to the amendment,23 it was evident in our discussion with24 Econsult and Mr. Mullin that they clearly25 223 11/30/10 - WHOLE - BILL 1006351 don't have a good understanding of the2 way construction works, and they were3 unaware of this multiplying effect as to4 this tax, and it was our suggestion to5 them -- it was actually Mr. Tarditi's6 suggestion to them to look at other7 states like Delaware that actually deals8 with this type of issue, where Delaware9 lets you get credit for a subcontractor10 paying the tax. So you don't have to pay11 the tax several times.12 The only thing Delaware does,13 which actually we think is a good idea,14 is that you have to register your15 business privilege license to get the16 credit. Therefore, everybody has the17 ability to then get credit, number one,18 for paying the tax, so we know they've19 paid the tax. Because today in the City20 we have people that come and drop stuff21 off at our job sites that don't --22 located in the City of Philadelphia, that23 we have no idea whether they've paid the24 tax or not.25 224 11/30/10 - WHOLE - BILL 1006351 So we believe that thought is2 actually a very good and positive3 thought. Attached to this bill we think4 it's a bad idea. It is a fundamental5 issue in our argument that we definitely6 need tax reform. We applaud Councilman7 Green and Sanchez for digging into this8 issue. It's a good discussion to have.9
But there are11 several things that need to happen, and12 making one industry losers and one13 industry winners is not the way to go.14 And so that's why we are not supportive15 of this amendment attached to this bill.16 We're not interested in -- we're not17 interested in that, because we don't18 think it's a good policy. It's a better19 policy to have a good discussion, a20 healthy discussion and not divide us all21 into winners and losers, but to make us22 all have stake in the game and all dig in23 and get this thing moving forward.24
And/or all25 225 11/30/10 - WHOLE - BILL 1006351 evenly burdened.2
To the5 Delaware practice that requires6 construction subcontractors to register7 their business privilege, is that what8 you said?9
Does that11 also help in bringing folks above ground12 to being bona fide --13
It helps them in14 compliance, yes, because it -- and it was15 Mr. Tarditi that actually brought that16 up.17 Maybe you want to comment on18 it.19
Yeah. What it20 does is, for us as a contractor in21 Delaware, we --22 COUNCIL PRESIDENT VERNA:23 Excuse me, sir. Councilwoman Sanchez has24 a point of information.25 226 11/30/10 - WHOLE - BILL 1006351
I just2 wanted to, for the sake of my colleague,3 to let her know that we have encompassed4 all of the good ideas of Delaware at5 their suggestion. So they will benefit6 from the items that they're outlining.7
The way it works13 in Delaware is, you file quarterly or14 monthly based upon your volume of work,15 your receipts, and then you have to16 supply a list each quarter of17 subcontractors you pay to. And so what18 we do is -- we are subcontractors right19 off the bat -- to make sure they have a20 state-registered ID number with the21 Department of Revenue for Delaware. That22 way, there's no slip-up.23
And the24 credit equals what?25 227 11/30/10 - WHOLE - BILL 1006351
The credit equals2 the tax that they're paying basically.3 In other words, under the current law now4 and under the current law proposed and5 amended, everybody paid -- it was6 cumulative. If the job is $30 million, I7 paid $159,000. If a sub is added $278 million from work, they pay another 143.9 It doubled that. It double counted. So10 really it was a huge double up. In fact,11 I figured it's about 1.2 percent right12 now you're getting on what should be not13 more than one percent -- excuse me; not14 more than -- I said that wrong. It's15 more than double what you should get16 right now if you use the Delaware system,17 which is an appropriate way to do it,18 because you don't want to have a building19 cost -- a one percent sales tax on a20 building. It doesn't make sense, and it21 doesn't make sense -- as an example, New22 Jersey doesn't tax -- there's no sales23 tax in New Jersey on taxes in buildings,24 schools, churches, what-have-you. In25 228 11/30/10 - WHOLE - BILL 1006351 Pennsylvania, there's no sales tax on2 taxes in buildings for personal -- that3 the Department of Revenue can identify,4 which is good. You don't have to -- the5 taxing authorities go out and have to6 sell bonds, what-have-you, for sales tax,7 pay back to the state. It doesn't make8 sense.9 So this is the same kind of10 thing. You don't want to put things onto11 a building cost that don't bring value to12 the building, and receipts tax doesn't13 bring value to the building.14
Okay. And15 just for the record, you represent a16 cross-section of persons in your17 industry, correct?18
Yes. We19 represent -- there are two things. We're20 a member-based organization. We have 35021 members. They're made up of prime22 contractors, subcontractors, material23 suppliers and then service companies that24 support the construction industry. We25 229 11/30/10 - WHOLE - BILL 1006351 also communicate to 700 other unionized2 construction firms within the region.3
So we're the5 collective bargaining group for the6 eastern part of Pennsylvania. So anybody7 that utilizes carpenters, laborers,8 cement masons, operating engineers, rod9 setters, painters, tapers, glazers, we10 negotiate those contracts. Our11 contractors employ those people.12
And why we feel14 we're correct is that we actually -- we15 have a good cross-section, and I think16 you've all received letters from material17 suppliers, subcontractors, minority18 subcontractors, women-owned businesses,19 prime contractors, general contractors,20 construction managers. We're a diverse21 group. We speak from the center, and22 that's why we feel this is so detrimental23 to our industry.24
If I can25 230 11/30/10 - WHOLE - BILL 1006351 just add, we also employ, as we said,2 approximately 62,000 people in the3 construction industry, many of whom4 are -- they're skilled labor, but are not5 educated, and we pay them extremely fair6 wage rates. I think between us and the7 restaurant, hoteliers, bar owners, we are8 bearing a large piece of this brunt of9 this "losers" category. But the fact is,10 even though we're a high volume, low11 margin, our employees really make an12 amazing wage rate. So our average guys,13 we run between 30 and 50 guys in the14 field -- they're carpenters, tapers,15 laborers -- and their average salary is16 about $77,000 a year, which means that17 they can buy a new home, buy a new car,18 put their kids in school, college, and19 the majority of those employees actually20 live here and work here.21
That was22 going to be my follow-up question. We're23 rather selfish in this Chamber, as well24 we should be. So my follow-up question25 231 11/30/10 - WHOLE - BILL 1006351 was going to be, and what percentage of2 those are Philadelphians.3
I can't tell4 you the exact number of my employees, but5 we employ male, female, minority, gay,6 lesbian. I mean, it's a whole7 cross-section of Philadelphia that is8 employed either in the educated side of9 construction and basically the skilled10 labor section.11
Thank15 you.16 The Chair recognizes Councilman17 Goode.18
Thank you,19 Madam President.20 Is it Mr. Perlman from Building21 Industry Association?22
You25 232 11/30/10 - WHOLE - BILL 1006351 testified on behalf of the Building2 Industry Association?3
And your5 testimony was that you were against the6 bill, but now you're for it?7
So when the10 bill was introduced and you were against11 it, did you believe the bill was fair?12
But you24 don't care about that?25 233 11/30/10 - WHOLE - BILL 1006351
Thank you.11 Thank you, Madam President.12 COUNCIL PRESIDENT VERNA:13 You're welcome.14 The Chair recognizes Councilman15 Green.16
Thank you17 very much.18 We can discuss with Mr. Dubow19 and Mr. Mullin who the winners and losers20 are today, because, of course, there is a21 status quo that creates winners and22 losers and there's a shift that will23 create winners and losers, including24 shifting from inside the City to out.25 234 11/30/10 - WHOLE - BILL 1006351 I just wanted to finish with2 this. Ms. Bittenbender, we got3 distracted or I got distracted when I was4 asking you about bidding on projects in5 the City of Philadelphia. And you only6 are a contractor in the City of7 Philadelphia; is that right?8
Primarily.9 We've done projects throughout the10 region.11
So when you12 bid on a contract in the City of13 Philadelphia against a firm that is not14 bid -- that is not -- a general15 contractor that is not in the City of16 Philadelphia, do you have a higher tax17 burden as a consequence of being here18 going into that bid?19
Yes, we do,20 but -- and you've asked me this question21 before, and you and I have debated this22 question before. It depends -- on bid23 day -- and bid day determines whether you24 win or you lose. You decide as a general25 235 11/30/10 - WHOLE - BILL 1006351 contractor if you're going to pass on2 your total tax burden. On bid day you3 decide, I want to bid two percent fee or4 I've got to win this job to meet my5 payroll, so I'm going to bid one percent6 fee.7 So it's really -- those factors8 which you're about to ask me about are9 different depending on who you bid on,10 what the project is, how desperate you11 are that day, whether you want to lay off12 Johnny and Ricky and Joey.13
I agree with14 that, but sort of aside from winning the15 project, when you actually bid whatever16 you bid compared to a contractor from17 outside the City, you will be paying more18 in taxes than that contractor from19 outside the City; is that correct?20
Thank24 you all very much. We appreciate your25 236 11/30/10 - WHOLE - BILL 1006351 testimony.2 Our next panel?3 MR. McPHERSON: Our next panel4 consists of Michael Chapman, Anthony5 Tigano, William Gonzalez and Danilo6 Burgos.7 (Witnesses approached witness8 table.)9
Good10 afternoon. Kindly identify yourself for11 the record and proceed with your12 testimony.13
Hello. My name is14 Anthony Tigano. I'm Chief Financial15 Officer of Chapman Auto Group.16 COUNCIL PRESIDENT VERNA:17 Please proceed.18
First, I would19 like to thank the City Council for20 listening to our testimony today. 2 We have -- we sell three brands, car3 dealers, Ford, Chevy and Nissan. We4 generate approximately 100 million in5 annual revenues at these three locations6 in the City of Philadelphia. We employ7 more than 224 people, most of whom are8 Philadelphia residents. The average9 salary of our workers is approximately10 $45,000 a year. 14 We are proud to do business in15 Philadelphia and love the City, but the16 cost of doing business here has become17 too much to bear, especially in this18 economy. Our current business privilege19 tax is $118,000 per year across the three20 stores, of which $87,000 is net income21 and 30,000 is derived from gross22 receipts. Under this proposed BPT23 change, our company would save24 approximately $26,000 per year in25 238 11/30/10 - WHOLE - BILL 1006351 business taxes starting in the year 20102 through 2015. Over this five-year period3 at average growth rates, our savings4 would be approximately $132,000. Under5 this proposed BPT change, our company6 would save approximately $40,000 per year7 starting in 2015, and over another8 five-year period at average growth rates,9 this would be an additional $200,000. 22 The current tax structure23 creates a disincentive for profitable24 businesses to headquarter and stay in the25 239 11/30/10 - WHOLE - BILL 1006351 City. 5 Unfortunately, in our industry, franchise6 laws negate our ability to just pick up7 and move whenever we so choose. 5 percent on sales -- can21 calculate their gross receipts tax based22 on their net receipts; for example, after23 deducting cost of goods and labor. 6 The net income tax is also7 difficult for us to calculate. The8 apportioning formulas are confusing, and9 preparing our tax returns is time10 consuming -- a very time-consuming11 process. Calculating our total sales,12 however, is extremely straightforward in13 comparison and taxing those is much14 easier to understand. 21 Doing so, more importantly, will help22 level the playing field between Philly23 and the suburbs. 3
Thank4 you.5 Mr. Chapman, are you testifying6 on your own behalf or on behalf of the7 automobile industry?8
I'm sorry. My9 name is Anthony Tigano and I work for the10 Chapman Auto Group.11
Are15 you speaking for Chapman Auto or are you16 speaking for --17
You24 are what?25 242 11/30/10 - WHOLE - BILL 1006351
Good afternoon,10 Council President Verna and the members11 of City Council. My name is William12 Gonzalez. I am here today --13 COUNCIL PRESIDENT VERNA:14 Mr. Gonzalez, excuse me a minute.15 Councilman Green.16
Thank you,17 Madam President.18 The Automobile Dealers19 Association, in addition to sending20 Mr. Tigano, sent a separate letter, which21 is on the table, in favor of the22 proposal, which I'd like added to the23 record.24
Thank25 243 11/30/10 - WHOLE - BILL 1006351 you.2 Mr. Gonzalez, please proceed.3
Thank you. I am4 here today representing HACE, the5 community development corporation and our6 President, Guillermo Salas, Jr., who is7 also a Board member of the Hispanic8 Chamber of Commerce, who unfortunately9 could not be here today. But HACE has10 worked in Eastern North Philadelphia of11 Fairhill and St. Hugh's for decades12 pursuing a mission of neighborhood13 economic development, combatting blight14 and developing affordable housing15 opportunities. In addition, HACE has16 worked hard to strengthen our17 neighborhood commercial corridors and18 support entrepreneurship in our19 community.20 I strongly believe that Bill21 100635 proposed by Councilmembers Sanchez22 and Green will support HACE's economic23 development mission and improve the24 business climate of Philadelphia's small25 244 11/30/10 - WHOLE - BILL 1006351 businesses. This proposal will level the2 business tax playing field for3 Philadelphia manufacturers and businesses4 which compete nationally and5 internationally. It will also level the6 playing field between small retail7 businesses and the big-box stores who use8 their corporation structures to gain9 unfair tax advantages.10 The $100,000 exemption and11 fresh food tax credit will remove12 barriers to small businesses and13 encourage the sale of healthy foods in14 our communities. The BRT reform will15 help reduce the tax burden of the current16 inequitable tax structures, which present17 some serious equality issues on how we18 place tax burdens on some businesses more19 than others, who pay less, resulting in20 the reduction of jobs, losses of new21 business opportunities.22 The inefficiency of the current23 tax structure presents many challenges to24 the small businessowner. The tax reform25 245 11/30/10 - WHOLE - BILL 1006351 bill should reduce the burden of2 non-economic tax carried mostly by local3 Philadelphia-based businesses. The4 shifting away from the net income tax5 towards a gross receipt business tax6 structure will improve the fairness of a7 sound and equitable tax reform system,8 thereby making the tax reform package9 more fiscally responsible to generate10 additional tax revenue from jobs and tax11 base growth and expanding efforts to12 achieve efficiency in all City13 departments.14 After reviewing the data, it is15 clear to me that small businesses like16 the ones on North 5th Street, El Centro17 de Oro and neighborhood commercial18 corridors throughout the City will be the19 principal beneficiaries of such20 legislation. The City, through the21 restored corridor bond program, has22 invested thousands of dollars throughout23 the City's commercial corridors.24 I urge you to pass this bill25 246 11/30/10 - WHOLE - BILL 1006351 out of Committee to take a major step in2 reforming Philadelphia's business3 privilege tax and, in return, assisting4 thousands of small businesses that5 continue to support and invigorate our6 neighborhood economies.7
Thank8 you, Mr. Gonzalez.9 At this time, the Chair10 recognizes Councilman Goode.11
Thank you,12 Madam President.13 Mr. Tigano, I'll ask the same14 question I asked the previous witnesses.15 Should there be winners and losers in16 terms of business taxation?17
It's a very good18 question. I believe presently the way19 the system is set up, it's presently20 unfair. I think firms set outside the21 City --22
My question23 is, should there be winners and losers?24
I'm answering your25 247 11/30/10 - WHOLE - BILL 1006351 question. The present system is unfair.2
Okay. Well, let5 me finish my answer to your first6 question.7
Do you11 support the land value tax where we would12 shift assessment to 50 percent on land13 and 50 percent on property?14
Are you not17 familiar with the Automobile Association18 Dealers' position on land value tax?19
The22 Automobile Dealers Association has23 consistently come into City Council and24 we have considered a land value tax and25 248 11/30/10 - WHOLE - BILL 1006351 suggested that it was unfair because it2 shifts the tax in a way that's3 detrimental to them, while at the same4 time it would lower property taxes for5 the majority of Philadelphia homeowners.6 So is that a fair position?7
But I'm10 asking you a question about land value11 tax.12
I'm not prepared13 to answer that question. I'm not -- you14 know, I need -- I may need to take --15
You do16 realize that as we talk about tax reform17 in general, we never do it in isolation.18 We have to consider our tax structure in19 terms of business taxes, real estate20 taxes, sales tax, all of it.21
I understand your25 249 11/30/10 - WHOLE - BILL 1006351 position.2
And so if3 the land value tax hurts auto dealers but4 helps the majority of homeowners, could5 you support it?6
Can we take it7 under consideration and give us an8 opportunity to review it?9
I'm asking10 you. If it hurts your particular11 industry but it helps the majority of12 homeowners, could you support it?13
Simply put,16 if you win, you're for it. If you lose,17 you're against it.18 Thank you, Madam President.19 COUNCIL PRESIDENT VERNA:20 You're welcome.21 The Chair recognizes Councilman22 Kenney.23
Thank you,24 Madam President.25 250 11/30/10 - WHOLE - BILL 1006351 Just a question for Mr. Tigano.2 In your testimony I thought you said that3 your profit margin is about one or one4 and a half percent?5
It seems to7 go against the argument that other people8 have been making who are opposed to the9 tax shift, that if your profit margin is10 one and a half, two, two and a half11 percent, you're likely to be a loser in12 this scenario. If it's six, seven, eight13 percent, you possibly could be a winner.14 Could you explain to me why15 your industry is different?16
I think my17 interpretation of that has to do with the18 alternative method and having the19 opportunity to deduct cost of goods sold.20 We sell an automobile that has a higher21 cost of goods sold, and that is netted22 down to come up with a net sale number.23
So what do24 you base your gross receipts on? I mean,25 251 11/30/10 - WHOLE - BILL 1006351 you sell --2
But there is a6 deduction for cost of goods sold in7 there. So it lowers the sale number.8
No. I guess what11 I'm trying to say is, we inherently sell12 a vehicle that has a higher cost and it's13 my understanding that the cost of goods14 sold, you have the opportunity to reduce15 your sales by that number.16
The actual cost of19 the vehicle that the manufacturer charges20 us.21
Okay. So22 your sticker price is 30. Say you sell23 the car for 30. Your cost of buying the24 car is 25, or whatever.25 252 11/30/10 - WHOLE - BILL 1006351
Or 27, 28,3 whatever it is. So you deduct that, so4 your overall gross receipts is only5 $2,000 or $3,000?6
And that's8 your interpretation as -- your position9 as financial person for the company?10
Is that13 something that's been vetted with or14 discussed with the Revenue Department15 here? Would they agree with you, I16 guess?17
Was it the20 Finance Director or the Revenue21 Department?22
You know, our23 accounting firm, our CPA firm, has been24 preparing the return for the last 4025 253 11/30/10 - WHOLE - BILL 1006351 years. So, I mean, we do -- that is my2 interpretation.3
As with --4 I mean, this is hypothetical. As with5 the IRS or State Department of Revenue or6 City Department of Revenue, they could7 maybe potentially make an argument that8 that calculation is not correct, and in9 the event that that calculation remained10 incorrect in view of the City maybe11 through a court action of some kind, that12 would really put you in a different13 situation.14
No. I'm17 saying as far as your calculation of the18 tax, now with the gross receipt -- the19 gross receipts would be the $27,000?20
As opposed22 to -- okay. So I just want to make sure23 that of all the industries that testified24 today, when it came to a lower profit25 254 11/30/10 - WHOLE - BILL 1006351 margin, you're the only industry that2 said it would benefit them, but that's3 based on your deduction for the cost of4 the car?5
Thank9 you.10 The Chair recognizes Councilman11 Goode.12
Thank you,13 Madam President.14 Mr. Gonzalez, in your testimony15 you reference a lot of community economic16 development initiatives; namely, the17 commercial corridor bond program, which I18 am personally responsible for. You did19 not reference the targeted support from20 the Commerce Department, which I'm also21 responsible for. You did not reference22 the CDC tax credit program, which I'm23 also responsible for. But my question is24 really related to the CDC tax credit25 255 11/30/10 - WHOLE - BILL 1006351 program. Is HACE a participant in that2 program?3
Is HACE a5 participant in the CDC tax credit6 program?7
I can't attest8 to that. I'm not involved in the9 community development projects, but at10 this point, I believe so.11
And maybe12 Councilwoman Sanchez can remind me. Who13 is HACE's partner?14
I'm not15 sure if it was Blackwell or -- it's not16 PECO. It's a law firm.17
It's a law18 firm.19 Are you aware of how many20 corporations in the community development21 corporation tax credit program are law22 firms?23
Probably25 256 11/30/10 - WHOLE - BILL 1006351 half or more than half. So the question2 is twofold. First, should there be3 winners and losers when we do tax policy?4
Well, I5 represent HACE and I also represent a6 constituency in the Fairhill and St.7 Hugh's neighborhood with a population of8 about 20,000 people. In addition to9 that, more than 250 businesses.10 So I think that question would11 be best directed to a community that has12 struggled through decades of13 disinvestment, and many of the businesses14 have managed to overcome a lot of these15 obstacles, so --16
My question17 is, should there be winners and losers --18
Should there25 257 11/30/10 - WHOLE - BILL 1006351 be winners and losers as we're developing2 business tax policy?3
Okay. You9 came to the witness table. You provided10 testimony. The other part of that is,11 you're supposed to answer questions, and12 the question is, should there be winners13 and losers as we're developing business14 tax policy?15
That question16 should be presented to the constituency17 of our community.18
So you don't19 know. Okay. So the losers in this are20 going to be heard. They include small21 businesses. They include Philadelphia22 businesses. And the winners in this win23 big because there are losers. The24 winners in this are law firms. Because25 258 11/30/10 - WHOLE - BILL 1006351 it's a lopsided victory, there are not2 just winners. Because it's a lopsided3 victory, it's actually going to4 jeopardize the community development5 corporation tax credit program. Does6 that help community economic development?7
Based on the way8 you presented the question, I think9 economic development has its pros and10 cons, and I believe that it's necessary11 for us to continue these discussions,12 because a lot of this, it relates to13 changes, you know, within legislation.14 So I can't attest to most of this. I'm15 not really a businessowner. Okay? But16 basically HACE as a community development17 corporation has a vested interest in the18 commercial businesses. Unfortunately,19 Bill Salas couldn't be here today. But20 this much I do know: We do have a21 constituency in our communities that have22 suffered the consequence of this23 investment and many changes within24 governing structures throughout the last25 259 11/30/10 - WHOLE - BILL 1006351 30 years. And, you know, I understand2 that tax reform is necessary, but at this3 point, you know, we support the bill4 because of the way it supports the small5 business structure, tax structure. So6 that much I do say.7
So you don't8 believe that it raises taxes on small9 businesses?10
Well, I believe11 it will create a more equitable playing12 field in regards to the way the tax13 structure is presented. So it gives14 people more of an opportunity.15
But does it16 raise taxes on any neighborhood small17 businesses?18
Does it21 raise taxes on any neighborhood small22 businesses?23
I'll wait25 260 11/30/10 - WHOLE - BILL 1006351 for Econsult to come up. Thank you,2 Mr. Gonzalez.3
Thank6 you.7 The Chair recognizes Councilman8 Kenney.9
Thank12 you.13 The Chair recognizes14 Councilwoman Sanchez.15
Thank you,20 Madam Chair.21 I want to thank you both for22 your testimony.23 Mr. Tigano, the tax that you24 pay is not based on your gross receipts.25 261 11/30/10 - WHOLE - BILL 1006351 It is one of the alternative rates, and I2 think in your colloquy with Councilman3 Kenney, you brought out a really good4 point that you mention in your testimony,5 and, that is, it is the retail rate that6 would apply to you, which is a very low7 rate after your cost of goods and labor8 actually. You can then -- so what you9 pay your salesmen, what you pay for your10 car. You then take that and you apply a11 higher rate in millage to your12 essentially net receipts, but because we13 have eliminated the net income tax and we14 have not increased the alternative rate15 proportionately to the gross receipts16 rate for low margin businesses like17 yours, you are actually better off with18 this tax structure even though your19 margins or your net income is very small.20 Is that a fair summary of the colloquy?21
Thank you.23 COUNCIL PRESIDENT VERNA:24 Gentlemen, thank you very much.25 262 11/30/10 - WHOLE - BILL 1006351 We are now calling Bill Walsh,2 Stan Shapiro, Bruce Koch.3 (Witnesses approached witness4 table.)5
Good6 afternoon, gentlemen.7 Mr. Shapiro, please identify8 yourself for the record and proceed with9 your testimony.10
Thank you, Madam11 President. I'm Stan Shapiro. 14 I do have testimony which I'd be happy to15 distribute. 16 But I'm not going to read the17 testimony. I'm going to try to respond18 to some of the themes that I've heard19 here today from the perspective of20 Neighborhood Networks, which is a21 community organization with members all22 around the City that is really concerned23 at this point at something which has, I24 think, only been raised on the margins25 263 11/30/10 - WHOLE - BILL 1006351 here today, and, that is, the incredibly2 challenging circumstances that we're3 going to be in as a city given what4 happened on November 2nd. 12 So I would want to stipulate13 first that we would like -- all of us14 would like zero taxes. We would like15 zero real estate taxes, zero wage taxes,16 zero business taxes, and we would also17 like all of them to be lowered, if at all18 possible. 20 We'd also like it if the State21 would give the City more flexibility in22 the way in which it levied taxes. So if23 perhaps we could have a business net24 income tax or other taxes which were25 264 11/30/10 - WHOLE - BILL 1006351 graduated, I'm sure that this Council2 might entertain that kind of change so3 that tax rates could be specifically made4 as fair as possible. But in the wisdom5 of the General Assembly, we've not been6 given that authority, so Council has got7 to deal with what is before it, the8 possibilities that are before it. 16 If we just go down that road17 and we find that we're being eviscerated18 by Harrisburg, which is extremely likely,19 we're going to be living in a totally20 different city that we're not going to21 recognize and we're not going to22 particularly enjoy. 24 We think, looking at the25 265 11/30/10 - WHOLE - BILL 1006351 proposal before us, that it's not, again,2 the perfect proposal that would be3 written if we could in fact graduate4 taxes, but it's something which is an5 improvement over the present structure if6 we're looking at preserving the portion7 of our tax revenue that comes from the8 business privilege tax. And since we've9 just had a ten percent increase in the10 real estate tax, the wage tax is capped,11 there are no other really robust taxes12 that we can go to. 20 As we understand it, it would increase21 the revenue that's coming from -- that is22 coming from outside the City; that is,23 revenues which now flow outside of the24 City to businesses which don't have to25 266 11/30/10 - WHOLE - BILL 1006351 pay a net income tax. Those businesses2 would, by having their gross receipts3 tax, which they do pay, be paying a4 larger portion of the tax. It would5 exempt 45,000 businesses, approximately6 45,000 businesses from the tax, small7 businesses from the tax. It would lower8 the tax for other businesses, because the9 $100,000 exemption is available to all10 businesses. 14 From the statistics that I've15 seen, the average business, the average16 business -- and I'm talking about all17 businesses -- with receipts of less than18 a million dollars would benefit from this19 proposal. 17
Thank you24 very much, and I'll be short. But tongue25 268 11/30/10 - WHOLE - BILL 1006351 and cheek, I have to comment, that after2 all the years working with the late3 Councilman Cohen and your work on tech4 staff, it seems to me that in this bill5 under the calculations being done by the6 Revenue Department, a company like Sunoco7 would get a windfall in tax benefits, and8 I never thought you'd be in here9 promoting a piece of legislation that10 would help Sunoco. So I'm sure they must11 have fallen off their chairs when they12 heard your support for Sunoco's tax13 break.14 I told you, it's tongue and15 cheek.16
I don't really --20 I'm not crazy about some of the results21 of this legislation, and there are22 probably others that we could discuss,23 but we don't have a bill in front of us24 which would or a clear opportunity in25 269 11/30/10 - WHOLE - BILL 1006351 front of us which would make Sunoco pay2 more. This will pay -- this will, as I3 understand it, this will make a large4 range of businesses outside of the City,5 Coors Beer is one that's been mentioned,6 some that are in the City that are7 evading taxes, Toys 'R Us has been8 mentioned -- and I'm not here to validate9 that those assertions are 100 percent10 correct, and if it turns out that we find11 out that a substantial share of this tax12 is not in fact being shifted to13 out-of-City corporations, then we would14 have to again look at it. And the good15 thing is that we are doing this early.16 This is coming up early before budget17 choices have to be made. So there's18 between now and May when different19 decisions can be made.20 But I don't think there is the21 opportunity, that I'm aware of, for22 Council to actually put up a list of23 those that they would like to have be24 winners and those that they would like to25 270 11/30/10 - WHOLE - BILL 1006351 have be losers and pick among them and2 enact that bill. I don't think that3 that's an option that's in front of you.4
I was just9 commenting on the benefit to Sunoco and10 the fact that you're promoting it. So I11 just wanted to say hello.12
Thank14 you.15 The Chair recognizes Councilman16 Greenlee.17
Thank18 you, Madam President.19 Just one question, Mr. Shapiro.20 I know there's been a lot of debate about21 job loss and job gain and all like that.22 Have you or your organization looked at23 that? Obviously you're aware of24 Professor Inman's opinion that was in the25 271 11/30/10 - WHOLE - BILL 1006351 paper today. I'm not saying that's2 correct. I don't know. But I know one3 of the concerns is that by raising the4 gross receipts, some of these bigger5 companies will lay people off. A lot of6 those people are working-class7 Philadelphians. Has that factored into8 your thinking at all? Have you looked at9 that?10
We haven't11 specifically looked at losers and12 winners. I don't think that anybody can13 actually, including Professor Inman, can14 precisely predict that. I think,15 frankly, an examination of the tax which16 focuses just on the impact of changes in17 the gross receipts tax, without having18 any comment at all about the impact of19 what happens to the net income tax, is20 pretty worthless, because the net income21 tax raises three-quarters of the revenue22 from the business privilege tax right23 now.24 So I just don't give much25 272 11/30/10 - WHOLE - BILL 1006351 credence to that. Linking tax policy in2 general to growth of employment or lack3 of growth in employment, I think, is an4 incredibly inexact science. I mean, we5 can say that the tax changes in recent6 years increased growth, but we could also7 talk about the development of the arts8 district in Center City as something9 which attracts people and businesses.10 Studies have shown that business leaders11 tend to put their businesses where they12 themselves want to live. So if we have13 improved services, that might well be a14 much greater inducement for business15 growth.16 We've heard that in fact the17 retail sector doesn't do badly. I can't18 really tell you one way or the other for19 sure. We'll hear people who have20 examined those statistics more than I.21 But the bottom line is that it appears22 that companies that are now outside the23 City or inside the City able to evade the24 net income tax would no longer get the25 273 11/30/10 - WHOLE - BILL 1006351 benefit of either choosing to be outside2 the City or choosing to be inside the3 City and hiring good accountants who can4 help them evade the tax. So on5 large-scale terms, it would seem to me6 that this tax is more fair, more robust,7 more predictable and, therefore, can be8 better linked to the provision of City9 services.10 So without saying that this is11 the tax bill that I would write -- and12 it's not -- we have to recognize the13 choices that are before us, and this14 seems to be a better choice than the15 choice of what is now in The Philadelphia16 Code, in our opinion.17
Thank20 you.21 The Chair recognizes Councilman22 Goode.23
Thank you,24 Madam President.25 274 11/30/10 - WHOLE - BILL 1006351 Stan, you know it wouldn't be2 the same without you here.3
I know that.4 That's why I stayed this long. The same5 with you, Councilman.6
A few7 questions, a couple I've asked before.8 You have read the bill?9
From your14 understanding of the bill, does the bill15 raise taxes on any small businesses?16
That specific17 item of information is not in the bill,18 so I can't tell you from reading the19 bill.20
So you don't21 know whether it raises taxes on small22 businesses?23
And, of course,24 it depends on how you define "small25 275 11/30/10 - WHOLE - BILL 1006351 business." If you're saying --2
Annual gross3 receipts of less than a million dollars4 is the standard definition.5
I'm sure that it6 does. But that information is not7 available from just reading the bill.8 You'd have to look at what the particular9 business is earning.10
But even if11 the bill raises taxes on small12 businesses, you're still for it?13
Even if the18 bill raises taxes on Philadelphia19 businesses, you're for it?20
It's not a fair25 276 11/30/10 - WHOLE - BILL 1006351 question.2
Well, I'm sure9 that's true, but I thought I'd point out10 right now that it's not a fair question.11 You know, the bottom line is12 that there are many different bottom13 lines and some -- no matter what you do14 with taxes, there are going to be winners15 and losers. So it's kind of, frankly --16
Let me move21 to question three. And we're going to22 get the most relevant question fourth.23 The third question is, if the24 bill is not revenue neutral, if it25 277 11/30/10 - WHOLE - BILL 1006351 actually costs $23 million, as the2 Administration and the Controller3 suggest, are you still for it?4
No, but my5 understanding is that the authors of the6 bill, the sponsors of the bill, will cure7 that particular problem.8
The fourth12 question is a real kicker. We actually13 have the same goal in this, because we've14 discussed this online, blogging about it,15 and we discussed it by phone. I16 co-sponsored the bill because I like the17 $100,000 exemption on gross receipts.18 That's because I'm still pursuing my19 gross receipts strategy, and we would20 reach that goal for a majority of21 businesses with that $100,000 exemption.22 We don't have to enact this bill to get23 there, do we?24
And this2 bill has a schedule that eliminates the3 net income portion of the business4 privilege tax. We don't have to do that5 to achieve that, do we?6
Okay. In8 fact, if we stop the schedule in the9 first year, 2011, and raise the gross10 receipts to 1.7 mill and lower the net11 income to 5.2 percent and allow for the12 $100,000 gross receipts exemption, we13 would achieve your goal; is that correct?14
To, one,17 have the $100,000 exemption on the gross18 receipts; to, two, to raise the gross19 receipts to capture more tax revenue from20 out-of-town businesses. We can achieve21 that by stopping the schedule in 2011; is22 that correct?23
It would probably24 not capture as much --25 279 11/30/10 - WHOLE - BILL 1006351
-- revenue from4 out of City, no. It would not capture as5 much revenue from out of City if the6 gross receipts tax did not go to the7 level that it goes to in 2013.8
And I'm9 getting there, but I'm starting with10 2011.11 Do we achieve most of what12 you're trying to achieve in 2011?13
We achieve14 one-fifth, as I calculate it, one-fifth15 of the revenue --16
So you17 actually believe that the net income18 portion of the business privilege tax has19 to be eliminated to achieve your goal?20
I wouldn't say it21 has to be eliminated. I'm not saying22 that --23
So if it24 does not happen --25 280 11/30/10 - WHOLE - BILL 1006351
I'm not saying --2 if I could clarify, I'm not saying that3 there are no conceivable amendments that4 could be offered that would still make5 this bill acceptable.6
I'm not saying it9 should be amended. I'm saying that there10 might --11
There could be18 amendments which would still make the19 resulting bill superior to what is now in20 the Code, but I'm not aware that there21 are any such amendments that are being22 offered, that are being considered, and23 I'm not sure that they would be superior.24 I'm saying that they might be -- they25 281 11/30/10 - WHOLE - BILL 1006351 might render the bill as effective as2 otherwise.3
Let me4 simplify it. Do we have to lower the net5 income portion at all to achieve your6 goal?7
-- of helping16 make the tax a more fair tax and a robust17 tax, which brings in substantial revenue18 from businesses that are located outside19 of the City.20
Not if we intend23 to bring in more revenue than is24 currently in the bill. If we intend to25 282 11/30/10 - WHOLE - BILL 1006351 bring in more revenue, then we could2 obviously increase --3
It is stated --10 this is outside the bill, but it is11 understood and I think everyone will be12 at a place where they understand that the13 bill is revenue neutral. So if the bill14 remains revenue neutral, you have to15 lower the net income tax to zero in order16 to get all the revenue that is going to17 compensate for the credits to small18 business that are in the bill. So if19 we're going to in fact be revenue neutral20 and not cutting revenue from the business21 privilege tax --22
We would not23 be cutting revenue by lowering -- by24 keeping the net income the same.25 283 11/30/10 - WHOLE - BILL 1006351
Or rather we're2 not going to raise revenue through an3 increase on the one side but not a4 decrease on the other. If the Council is5 ready to raise revenue from the business6 privilege tax, we can consider that, but7 I'm not aware that that's an option.8
My question9 is simply -- well, you're here to testify10 on the bill, including as it is and what11 amendments you think should take place.12 My question is, to achieve what you13 really want, do we have to lower the net14 income portion and do we have to15 eliminate the net income portion to16 achieve what you want?17
I'm trying to21 answer that.22 I actually think that in terms23 of additional revenue, which is also what24 I want, that what I probably want -- we25 284 11/30/10 - WHOLE - BILL 1006351 don't really know how much more revenue2 we need until a little bit later in the3 year. So I think it is appropriate at4 this point for this legislation to be5 revenue neutral. It may be that -- and I6 think it's likely -- that as we get into7 budget season, we're going to see that a8 lot more revenue is needed. So it may at9 that point be necessary to make further10 adjustments in the rates. But I think at11 this point, in terms of creating a base12 tax that is appropriately bringing13 revenues from where they ought to come14 and is amenable to adjustment, without15 hammering Philadelphia businesses, I16 think this bill is structured pretty17 well.18
Stan, I let19 you finish and you didn't answer the20 question. The question was, in order to21 achieve your goal, do we have to actually22 lower the net income portion and do we23 actually have to eliminate the net income24 portion to achieve what you want? And25 285 11/30/10 - WHOLE - BILL 1006351 from our discussions, the answer is no.2
To achieve the3 goal of -- I've actually since we4 discussed -- since we've had our5 discussions, I've had an opportunity to6 review this legislation. The revenue7 projections -- so my view is not exactly8 what it was the last time we talked.9
So you're10 for elimination of the net income11 portion?12
If it is13 compensated for by the robust increase in14 gross receipts that's in this bill. Not15 otherwise. Only under these16 circumstances.17
I'm not18 going to try to pin you down too much,19 but so you are for the elimination of the20 net income portion?21
Thank you,24 Madam President.25 286 11/30/10 - WHOLE - BILL 1006351
Thank5 you, Stan.6 Good afternoon. Kindly7 identify yourself for the record.8
Good afternoon. My9 name is Bruce Koch. I'm the Chief10 Financial Officer for Starr Restaurant11 Organization, which some of you probably12 know as Stephen Starr Restaurants. 19 So I think most of you know20 about our company. We're headquartered21 here in Philadelphia. We are actually22 internationally known. We have23 restaurants in New York City, Atlantic24 City, Fort Lauderdale, but here in25 287 11/30/10 - WHOLE - BILL 1006351 Philadelphia we have 13 restaurants and2 catering organization, plus our corporate3 headquarters. We have over 2,0004 employees. So I think we're recognized5 as being a medium-sized business in6 general. 6 As an example of the employment7 that we've had here, our restaurant Parc,8 which a lot of you know, at 18th and9 Locust, on its last payroll had 22110 employees, of which 196 are City of11 Philadelphia residents. Our employees12 are generally rank and file, hourly type13 of employees, although we spend a lot of14 time training them very carefully so that15 they can deliver the kind of food and16 beverage and service and entertainment17 value that our customers expect. 4 million. About two percent of2 revenue is our net income. 6 Reviewing this bill, it's clear7 to me -- and I don't know -- I just came,8 and I'm sorry I haven't been here all9 day. 21 I'm really just focused on how it affects22 us. 2 Now, why do we have a low3 profit margin? There are a number of4 reasons why. One reason is that we have5 cost of sales. We buy product and we6 prepare it and we sell it again. And, by7 the way, a lot of that product is bought8 right here in Philadelphia. A lot of our9 food is purchased from vendors who are at10 the Food Distribution Center in South11 Philadelphia. Their drivers are driving12 from South Philadelphia to our Center13 City residents -- to our Center City14 restaurants. 18 Our cost of labor, as I19 mentioned, is very significant. All of20 our employees pay City wage tax. Many of21 our employees earn significant tip income22 due to the nature of the product and our23 restaurants. They're generally24 recognized as quality restaurants, and25 291 11/30/10 - WHOLE - BILL 1006351 the customers tip very generously. 6 We collect City of Philadelphia7 two percent sales tax on all of our food8 sales and remit that to the City. We9 collect City of Philadelphia ten percent10 liquor tax on all of our alcoholic11 beverage sales and remit that to the City12 of Philadelphia. 16 We have high depreciation17 expenses because we make significant18 investments into the improvement of the19 real estate that we occupy and into20 purchasing of equipment and furniture to21 support our operations, and we also22 finance a good portion of our development23 and pre-opening costs of new restaurants24 with bank debt, which we pay interest on,25 292 11/30/10 - WHOLE - BILL 1006351 and interest is another deduction. And2 all of these expenses are factors that3 drive down our net income percentage, our4 profit margins, and that's the nature of5 the business. 21 So based upon the current tax22 rates, our business privilege tax this23 year, 2010, will be about 228,000. 5 If the proposed change is6 not -- does not become adopted, in the7 year 2015 -- and I'm looking at 20158 because that's when the proposed changes9 become fully effective. In the year10 2015, using the same revenue and profits11 that we're expecting for 2010, under the12 currently scheduled tax rates, which come13 down a little bit, our business privilege14 tax will be about 213,000, a little bit15 less than what it is we're going to pay16 for 2010. 24 Now, the effect on us is25 294 11/30/10 - WHOLE - BILL 1006351 actually even worse because of the --2 because of our structure, our legal3 structure. Like many small businesses --4 and even though I said we're a5 medium-sized business based upon gross6 revenue, we still look at ourselves as a7 small business. 11 At any rate, like a lot of12 small businesses, we are organized as a13 limited partnership.
So as such, we are14 also subject to the net profits tax. And15 I don't know if there's been much16 discussion today about the net profits17 tax. The net profits tax is a little18 less than four percent on net income, and19 if the owners of a partnership are City20 of Philadelphia residents, there is no21 apportionment that gets done. 928 percent of all net income,23 company-wide, including the net income24 that we're earning in New York and25 295 11/30/10 - WHOLE - BILL 1006351 Philadelphia and Florida. And most of2 our owners are City of Philadelphia3 residents. 14 That credit would be about 65,000,15 yielding a net net profits tax of about16 30,000. 8 Now, my testimony is from a9 very narrow perspective. I'm not trying10 to consider any of the greater11 considerations that we need to make for12 our city, but I can tell you that when13 we're evaluating -- if this law does come14 through and we're looking at the year15 2014, 2015 in our plan and we're16 evaluating developing another restaurant17 in Philadelphia versus a restaurant in18 some other city that we might have an19 opportunity in, the increased20 Philadelphia taxes will certainly be a21 consideration. 5
Thank you9 so much.10 Councilman Kenney, you're11 listed here.12
You're15 on -- now it flipped over to Councilman16 Green.17
Okay.21 Thank you.22 Let me ask you a little bit23 about your employees. I mean, I remember24 being in the restaurant business as an25 299 11/30/10 - WHOLE - BILL 1006351 employee myself back in, I guess, late2 high school, college days, starting out3 in the kitchen washing dishes and bussing4 tables and hopefully tending bar. I5 mean, it wasn't my profession forever,6 but I was there enough years to kind of7 have a feel for it.8 You talk about your 2,0009 employees. How many are in the wait10 staff, in the back of the house, in the11 kitchen?12
Of our 2,00013 employees, about 300 are salaried. That14 includes the salaried managers, the15 front-of-the-house managers we call them,16 general manager, assistant manager. The17 back-of-the-house managers, it would be18 the executive chef, the sous chefs, and19 the corporate-level employees, those20 directors that oversee multiple21 restaurants, the accounting department,22 HR, marketing, computer.23 So of the 2,200 employees we24 have company-wide, probably 1,900 of them25 300 11/30/10 - WHOLE - BILL 1006351 are hourly employees, and they have a2 variety of jobs, as you mentioned. In3 the kitchen they'll be from the lowly4 dishwasher to a pretty talented line5 cook, who may be a step away from6 becoming a salaried chef.7 In the front of the house, it8 runs from the busser of the tables to the9 food runner, who explains the food when10 he or she brings it to your table, to the11 server, who really needs great knowledge12 of the product and great skill in dealing13 with customers, to the host and hostesses14 at the host stand and the bartenders.15 So that -- I don't know if that16 answered your question.17
And I18 suspect that you would expect that this19 bill would impact not only the Starr20 Organization but just about every other21 restaurant in the same way?22
Yes. I mean, some23 very small restaurants, maybe some of24 your BYOBs that might only do half a25 301 11/30/10 - WHOLE - BILL 1006351 million dollars a year in revenue, might2 benefit from it with the $100,0003 exclusion. But I think most restaurants4 at least of our caliber are doing a5 couple million dollars a year in sales6 and -- it's interesting, I thought I7 heard Councilman Goode maybe say that a8 small business, a million dollars in9 sales, is the threshold. Well, a small10 decent-sized restaurant -- we don't have11 any restaurant that's doing less than $212 million in sales, so -- but, once again,13 I mentioned in my testimony that with our14 low margins, we need to produce a lot of15 revenue in order to generate a modest16 profit.17
So in the18 event that your tax burden shifts to a19 higher number, what alternatives do you20 have to keeping your restaurants open?21
We certainly have22 the alternative of trying to pass the23 additional cost onto the consumers in24 price increases. And since every,25 302 11/30/10 - WHOLE - BILL 1006351 theoretically, every restaurant will be2 facing that, it might not be that3 difficult to do that. I don't know. I4 never like to face those situations,5 because I think in the end, the effect on6 consumers is that they find other7 alternatives like eating at home or8 buying fresh food, which is good, by the9 way.10
Well, Starr11 has fresh food, too.12 But what's the option for13 layoffs? I mean, I would see that would14 be one of your higher costs.15
Well, we faced this16 last year when we had the economy. We17 had to cut back on staff. We first cut18 back at the high level, the salaried19 people, and just put extra burden on20 those other salaried people. We're21 reluctant to cut at those rank and file22 levels because they directly affect the23 customers' experience, and that's really24 the essence of our business. So that25 303 11/30/10 - WHOLE - BILL 1006351 would be one of our last resorts. We do2 manage our labor very closely because of3 our small margins. So I think we've done4 as much as we can really.5
We do. We have8 healthcare plans available for all9 employees. Our contribution is not that10 great, but we have a modest contribution.11
No, not in the14 restaurant industry. The industry is15 struggling with this, trying to find16 affordable solutions.17
I'm just18 trying to get a picture of your workforce19 and their mobility or lack of mobility20 relative to an overall impact on the21 restaurant industry generally. I mean, I22 assume your turnover is not as high as23 some other restaurants, but when folks24 turn over, I expect they go and work in25 304 11/30/10 - WHOLE - BILL 1006351 another restaurant setting, if that's2 their chosen profession.3
Well, that's right,4 if that's their chosen profession, but we5 also, like you, worked at a restaurant6 when you were young. We have a lot of7 young people like that who are trying to8 find their way, and they do some time at9 a restaurant, because it's a great job10 experience. Sometimes they find that11 that's their calling and they can work12 their way up. There definitely is in our13 business upward mobility, and then14 there's lateral mobility as well, because15 we train our people very well. They can16 move to another restaurant.17
But, again,18 around 1,900 of your folks are actually19 in the service end of it?20
About 70 percent of24 our business is in Philadelphia.25 305 11/30/10 - WHOLE - BILL 1006351
Oh, in the City?4 What I did was, I looked at -- I don't5 really know. So last night, because I6 anticipated this question, I looked at7 our last payroll for Parc. We're 196 out8 of 221 employees on the last payroll are9 City of Philadelphia residents. So10 that's over 80 percent.11
Thank you,17 Mr. Chair.18 I love Stephen Starr19 restaurants. I go to them all the time20 and enjoy the food and often always see21 an interesting crowd there. So I'm glad22 you're in the City of Philadelphia. I'm23 glad the company was founded here, and we24 want to do everything we can to help you25 306 11/30/10 - WHOLE - BILL 1006351 be successful and grow in the City of2 Philadelphia and around the country. And3 I want to thank you for coming and4 sharing your testimony with me. I wish5 we had a chance to speak prior to your6 coming here today, because I have spoken7 to many restauranteurs. I'm reluctant to8 use their names because they told me what9 their profit margins are, but let's just10 say that there are some restaurants and11 bars on Rittenhouse Square, where you12 compete, and there are restaurants and13 bars on Walnut Street, and the average14 profit margin that these very successful,15 as Stephen Starr is, restauranteurs --16 now, they weren't groups. They were one17 or two establishments -- had was between18 six and ten percent, even in this19 economy.20
Right. If they've21 been in existence for a while, their22 profit margins would improve as their23 assets that are allowed to be depreciated24 quickly under the tax laws become fully25 307 11/30/10 - WHOLE - BILL 1006351 depreciated. In fact, we do project that2 our profit margins will be improving over3 the next couple of years because some of4 the older restaurants will be running at5 the end of their depreciation schedules.6
Right. So7 for your older restaurants, what is your8 profit margin? Is it in the six to ten9 percent range?10
I'm not sure. I11 actually don't have those numbers at12 hand. I looked at our overall13 company-wide.14
That's right. We're17 continuing making new investments, and18 that's why our profit margins probably19 are staying lower than a single20 established restaurant would be.21
But you22 would agree that mature restaurants have23 six to ten percent profit margins, if24 they survive, and that our tax policy25 308 11/30/10 - WHOLE - BILL 1006351 can't really help or hurt a restaurant2 that is not profitable for several years3 in a row, no matter what it is?4
I'm not sure. I5 can't answer your question about the six6 to ten percent.7
It seems11 reasonable, okay. So let's talk about12 your forecasted sales. That's 12013 million in 2010?14
Approximately, yes.21 COUNCILMAN GREEN:22 Approximately or -- that's what you have23 here on the sheet.24
Well, I took 7025 309 11/30/10 - WHOLE - BILL 1006351 percent of 120.2
Because that's about5 where we are. I took a look at this very6 quickly last night. So I took a look at7 what our last year's apportionment was,8 and I think that it's approximately the9 same this year.10
Okay. So we11 had testimony earlier today from a CPA,12 as you are, whose name I will not try to13 say because I couldn't remember --14
John19 Kostenbauder. Thank you.20 Mr. Kostenbauder. And he described21 various ways that people sort of hide net22 income in the City of Philadelphia23 because it's a lower -- it's a higher24 rate than, for example, a rate you would25 310 11/30/10 - WHOLE - BILL 1006351 pay to an owner of a business in salary.2 So if you show a profit in the company,3 you pay 6.45 percent, but if you4 distribute that as wages, you're only5 going to pay the equivalent of --6
-- the wage8 tax, which is 3.89 percent. And so you9 can have a tax savings simply by paying10 high salaries to managers who also own11 the business.12
Right. And that13 works especially if you have a14 single-owner business, which is not our15 case.16
No, no, but17 all owners could take salary and other18 things.19 He also described ways to have20 out-of-state companies essentially --21 out-of-state subsidiaries or related22 companies charge fees to the company in23 Philadelphia to legally avoid income tax24 in the City of Philadelphia. And when25 311 11/30/10 - WHOLE - BILL 1006351 you were practicing as a CPA, did you see2 companies do that?3
Okay. At6 any rate, I'm glad to hear -- one final7 question. We have talked to the Revenue8 Department, because before we went out9 and started talking to the restaurant10 industry -- and the restaurant11 association came and met with us and12 other people -- to take a look at the13 restaurant industry, because it is14 typically fairly low margin, high volume15 is how you make your money, unless, as16 you say, you're a small restaurant, there17 is no determination by the City of18 Philadelphia at this moment that you19 could not use the retail alternative rate20 structure for a restaurant, and I'm21 wondering why you file under the gross22 receipts rate rather than --23
Because the retail24 method is based upon gross profit, not25 312 11/30/10 - WHOLE - BILL 1006351 net profit, right?2
So what that3 would allow you to do -- and if this4 restaurant math doesn't work for Starr,5 let me know, but it's usually like a6 third, a third, a third?7
Okay. So9 what this method would allow you to do is10 to pay a net receipts tax after deducting11 your cost of goods and labor.12
It's a17 higher rate, but for every low margin18 business that has taken advantage of19 the -- that has been here today that has20 taken advantage of the alternative rates,21 including car dealers you would think22 would be big losers under this, because23 we're eliminating the net income and24 we're not increasing the alternative rate25 313 11/30/10 - WHOLE - BILL 1006351 like this, we're increasing it like2 this -- sorry.3
But we are10 only increasing the retailer portion by11 less than 20 percent. So you would pay12 no net income and --13
Let's say -- I'm14 sorry, because I do apologize. I didn't15 look at that. I assumed that since it16 wasn't benefitting us now, that it17 wouldn't benefit us then. But we can do18 that calculation very quickly, I think.19
So if our -- I25 314 11/30/10 - WHOLE - BILL 1006351 believe that our gross profit would be2 about 37 percent. So let's use $1003 million.4
So it would be --7 oh, yeah, sure. Use those numbers.8 Eighty-four.9
Eighty-four10 million. So that would be 37 percent of11 84 million.12 You're right, let's use 10013 million.14
So the gross19 receipts tax is 0.53. So that would be20 530 --21
It's 2822 million, 37 percent. And so that would23 be $28,000 in gross receipts, wouldn't24 it?25 315 11/30/10 - WHOLE - BILL 1006351
Wait. I'm sorry.2 On gross receipts if the rate goes up to3 5.3 mills --4
No, no,5 because you don't pay gross receipts when6 you use the alternative method.7
Okay. So if it's on8 the net receipts, if we're at 37 percent9 gross profit margin, 370,000 times one10 percent would be -- I'm sorry; 37 million11 times one percent would be 370,000.12
And it's13 actually 28 million, so it would be14 $280,000. Thirty-seven percent of 8415 is --16
-- is 28.18 So it would be $280,000, which is more19 than but not as much of a jump than the20 $228,000 you pay today.21
Thank you for25 316 11/30/10 - WHOLE - BILL 1006351 pointing that out to me.2
So as the3 restaurants mature, you'll actually have4 much more cash flow from them that you5 can then reinvest in new ventures.6 So I'm not saying that you can7 do that, but you should explore it with8 the Revenue Department, because they have9 not given us a definitive answer that10 it's not possible. And also I don't want11 to -- I don't think it's a good use of12 our time today to go through how you13 apportion what you apply to Philadelphia14 and what you don't apply to Philadelphia,15 but it would be fair to say that the16 Starr Restaurant Group is rational17 economic actors and they are apportioning18 as little as they view as legally19 possible or making reasonable20 assumptions, which is the standard, about21 what they need to apportion into the City22 of Philadelphia?23
Well, I think that24 that's true, but the way our business25 317 11/30/10 - WHOLE - BILL 1006351 works with the sales occurring at the2 restaurants where they're physically3 located, there's not a lot of room for4 funny business.5
I6 understand. I understand. So there's a7 little bit of room, though.8
Okay. He11 said there's a little bit of room, in12 case anybody couldn't hear him.13 Okay. So --14
No, but --17 so I appreciate that. I think there's18 another way you could look at your taxes19 where you could actually lower your20 burden under this bill. And I was glad21 to hear you say, as the Administration22 testified during the sugar-sweetened23 beverage tax debate, I was glad to hear24 you say that you believe that you25 318 11/30/10 - WHOLE - BILL 1006351 probably would be able to pass this on to2 your customers, because it would apply to3 everybody else in the industry, and so as4 a consequence, what would be a $60,0005 increase in your taxes could be spread6 across $84 million in customers pretty7 successfully.8
I wish I had time to9 be here all day today to understand why10 this is even happening.11
Well, the12 answer is actually we're helping low13 margin businesses, because we have only14 tinkered with the alternative rate15 method. So we're helping manufacturers.16 We're completely leveling the playing17 field for our manufacturers. So a18 manufacturer in the City and out of the19 City now will pay the same tax in the20 City and out of the City on their sales21 in the City and out of the City. So22 everybody who sells goods, including your23 wholesalers, et cetera, will now be24 competing on a completely level playing25 319 11/30/10 - WHOLE - BILL 1006351 field with their competitors from around2 the country and around the world. And we3 have a very underdeveloped --4 under-skilled workforce. Only 20 percent5 of our residents are college grads, and6 we need a back-to-the-future strategy7 with respect to economic development, and8 being able to bring manufacturers into9 neighborhoods again, because they're not10 at a competitive disadvantage compared to11 the suburbs and other places, is good.12 Also, we want to -- if you go13 to the other side of City Line Avenue,14 the glass towers that are there, et15 cetera, they have all highly profitable16 firms that mostly used to be in Center17 City, like Susquehanna Financial,18 Susquehanna Investments and other places,19 where I worked.20 And so the policy is to remove21 the profitability penalty that causes22 people to move out of the City so that23 there are more people in Center City to24 go to your restaurants. That's what25 320 11/30/10 - WHOLE - BILL 1006351 we're trying to do.2
By removing the3 effect that salaries in the City have on4 the calculation of taxes?5
Right.6 Thank you.7 COUNCILMAN KENNEY:8 Mr. Chairman?9 Mr. Chairman?10
I'm sorry,11 sir. I'm not used to being called that.12 Sorry.13
I have a14 request. Anecdotally, I probably go to15 as many restaurants as anybody in here,16 have had conversations with restaurant17 owners and managers, do not get the same18 feedback that Councilman Green has gotten19 from the people he's spoken to. We've20 had lots of segments of industry in here21 and business and hospitality and tourism22 and car dealers and you name it, and23 they've all come and given their24 opinions, some in favor and some against.25 321 11/30/10 - WHOLE - BILL 1006351 So rather than anecdotally try to2 determine whether the restaurants are3 losers or winners, perhaps the Restaurant4 Association, because they're not here --5 or I don't know if they were invited or6 they care, but if we could get some7 definitive answer as we're going to get8 from hotel, as we've gotten from9 manufacturing, as we've gotten from other10 segments of our economy here. I'd rather11 get that from the horse's mouth as12 opposed to trying to figure out with this13 kind gentleman, who is cooperating14 wonderfully, to try to figure out whether15 the Starr Restaurants on the16 back-of-a-napkin calculation can17 determine whether or not this is going to18 benefit them or hurt them. I'd rather19 try to get in -- and the request I'm20 making to you as Chairman currently is21 that we reach out to the Restaurant22 Association and get a definitive answer23 from them as opposed to trying to doing24 it anecdotally.25 322 11/30/10 - WHOLE - BILL 1006351 Thank you.2
Well, as3 the temporary Chair, I concur that having4 the ability to talk to an association is5 obviously more beneficial to us. But I'm6 also a little concerned about the7 inability at this point to talk to8 somebody who is probably sitting9 somewhere in a store up at 3rd and10 Norris, or wherever, who has no clue what11 we're doing down here. So our need to12 reach out --13
But I would17 like a formal position of them. Whenever18 we've had issues like this, liquor tax,19 sugar-sweetened beverage, we've always20 had the official position of the industry21 that was being affected. And while this22 gentleman has done his best and been very23 cooperative in giving his opinion based24 on his experience, I'd really like to25 323 11/30/10 - WHOLE - BILL 1006351 hear something from somebody that2 represents the group as a whole.3
Because I5 can't believe there's many six to eight6 to ten percent profit margin restaurants7 in the City today.8
I can11 commit as temporary Chair. I don't know.12 That will probably last as long as the13 Council President comes back.14
But your15 temporary chairmanship does not relieve16 you from the request.17
So when you19 relieve it, your request is not relieved.20
Thank you.24 Thank you very much for your25 324 11/30/10 - WHOLE - BILL 1006351 testimony.2 (Witnesses approached witness3 table.)4
I'm not5 sure I can -- is this Grose and Walsh?6 Ed Grose?7
You9 gentlemen already know who you are.10 Thank you.11 Mr. Campoli, I understand you12 were here earlier and you came back, so13 we're going to let you go first, if it's14 okay with the other gentlemen.15 Mr. Campoli is whom?16 Mr. Campoli, you were here17 earlier and you came back to testify.18 You were supposed -- so we're going to19 let you go first in testimony. So you20 want to just come up.21 And we'll immediately shift22 over to you, gentlemen, if it's okay.23 (Witness approached witness24 table.)25 325 11/30/10 - WHOLE - BILL 1006351
Thank you,2 Mr. Chairman and members of Council. My3 name is Dave Campoli. I'm the4 Vice-President for the Northeastern5 Central Region of REIT Management6 Research, which includes 14 million7 square feet of office space in8 Pennsylvania, New Jersey, New York and9 Delaware. We are one of the largest10 owners of commercial real estate in the11 City of Philadelphia. 14 I represent the operating arm15 of the public company. 16 It's CommonWealth REIT, formerly known as17 HRPT Properties Trust. As of March 31st,18 2010, the company owned office and19 industrial properties with approximately20 67 million square feet in 35 states and21 Washington, DC. 6 My duties, in addition to7 running the region, include the8 negotiation of all leases, both new and9 renewals. 15 You've heard a lot today from16 different industries. 23 Rents for Class A office space24 are essentially the same in Philadelphia25 327 11/30/10 - WHOLE - BILL 1006351 as in the suburbs, ranging between $262 and $27 a square foot. Conversely, space3 in New York, DC and Boston average well4 over $50 a foot. 6 Due to City-level taxes like7 business privilege tax and the use and8 occupancy tax, it costs tenants about $49 more in those taxes alone per square foot10 to locate in Center City than in the11 suburbs. Most of this cost differential12 is due to the BPT. 7 Eliminating the net income tax8 will dramatically reduce the economic9 rent paid by many Center City tenants,10 especially the professional firms that11 occupy most Class A office space, and12 eliminate a large barrier to locate in13 the City. 16 The cost reduction for typical17 Class A office space tenants should drop18 by over $3 a foot and for large19 partnerships by over $7 a foot once fully20 implemented. Over time, as leases come21 up for renewal, these savings would help22 tenants continue operations in the City23 and likely push up rental rates. 6 A good example of this is Cira Centre,7 where tenants are exempted from the BPT8 as well as all non-wage taxes, the result9 of a poorly placed KOZ. 18 The fact that average rental19 rates in the last 20 years in the20 Philadelphia CBD have remained constant21 is not a result to be proud of. 2 Since over the same period3 operating expenses have increased, return4 on investment has been diminished. 9 Job-killing taxes like the net10 income tax push companies to other11 pro-business areas and leave us with12 companies who have to be here versus13 those who want to be here. Fewer jobs14 means less demand, higher vacancies and15 depressed rental rates. It adds to a16 decreasing tax base, especially those17 taxes dependent on valuation. 23 In addition, dealing with24 relocation specialists, brokers and25 331 11/30/10 - WHOLE - BILL 1006351 potential tenants from around the2 country, we have looked at relocating --3 who have looked at relocating in downtown4 Philadelphia, I've personally been in5 three recent situations where the income6 tax was the deciding factor on where7 these companies base their decision. 10 Under the proposed BPT changes,11 our gross receipts tax liability as a12 company would go up, and we understand13 that. We estimate our gross receipts14 would rise from 150,000 per year to over15 $500,000. 20 Despite this cost increase, we21 support the proposal for two fundamental22 reasons. 20 Demand drives occupancy rates,21 which drives rents, which drives value,22 which in turn produces higher property23 tax revenue. 9 So while we, as well as others, may see10 short-term losses, we firmly believe that11 the long-term gains are worth it. 15 I thank you for your time and16 your attention. 18
Madam Chair,21 I'm sorry. The panel -- Mr. Grose needs22 to testify.23
Good24 afternoon. Thank you so much for your25 334 11/30/10 - WHOLE - BILL 1006351 patience. We appreciate it.2
Good afternoon,3 Madam Chairman and esteemed members of4 City Council. My name is Ed Grose. I am5 the Executive Director of the Greater6 Philadelphia Hotel Association, which7 represents 87 hotels around the region,8 including all of the hotels in Center9 City. With me today is Bill Walsh, the10 General Manager of the Philadelphia11 Marriott Downtown, and Jim Gratton,12 General Manager of the Courtyard by13 Marriott Philadelphia Downtown. We are14 here to express the hotel industry's15 concern regarding Bill No. 20 First, let me thank the21 sponsors of the legislation for their22 willingness to think outside of the box23 and consider different ways to revitalize24 our business sector. 5 Councilmembers Green and Quinones-Sanchez6 have presented a very intriguing idea7 that, if implemented, may indeed improve8 the tax climate for new businesses to9 locate in Philadelphia. 25 336 11/30/10 - WHOLE - BILL 1006351 I must acknowledge that there2 are a number of hotels that are3 headquartered in Philadelphia that will4 actually see their tax burden reduced as5 a result of this legislation. However,6 most of the large Center City hotels will7 see their business taxes increase by8 several hundred thousand dollars on9 average. 14 There are over 15,000 hotel15 rooms in Philadelphia currently,16 employing 10,750 people, 80 percent of17 whom are Philadelphia residents, making18 an average living wage of $24,000. GPHA19 works closely with agencies such as20 Philadelphia OIC, Congreso de Latinos21 Workforce Development and Philadelphia22 Academies, Inc. to ensure a diverse23 workforce from the front-line employees24 to upper management. 4 Philadelphia hotels currently5 generate over $110 million annually in6 tax revenue for the City and Commonwealth7 through real estate, wage, liquor, use8 and occupancy, and amusement taxes. 12 The second largest hotel in Philadelphia13 recently foreclosed and others in Center14 City are dangerously close as well, as15 most in the region are just barely16 turning a profit. It is no exaggeration17 to say that adding additional costs at18 this time, like dramatically increasing19 business taxes, could jeopardize the20 existence of several hotels and hundreds21 of jobs each represents. 25 338 11/30/10 - WHOLE - BILL 1006351 The business model for hotels2 is driven entirely by our occupancy rate3 and average daily rate. If we were4 certain this tax-shifting proposal would5 fill hotel rooms in the future, we could6 support the tax increase, despite the7 very real possibility that it might have8 a negative short-term impact on some of9 our hotels and jobs. 16 When we as an industry came to17 you two years ago and asked Council to18 increase the hotel sales tax, we did this19 only after great deliberation to ensure20 that this new tax would not result in21 less occupancy and less return for our22 tax dollars. 14 The expanded Convention Center15 creates a demand for more hotel rooms,16 both with a new Convention Center anchor17 hotel and other Center City hotels. In18 the past, this hotel construction has19 been heavily subsidized by government,20 because our region's leaders recognized21 that high construction costs and low22 profit margins meant that hotels would23 not be built here without subsidy. 5 The sponsors of Bill 1006356 have rightfully pointed out that the7 current business privilege tax is a8 serious impediment to doing business in9 our city. 19
My name is Jim25 342 11/30/10 - WHOLE - BILL 1006351 Gratton and I'm General Manager of the2 Philadelphia Downtown Courtyard by3 Marriott and President of the Greater4 Philadelphia Hotel Association. Thank5 you for allowing me to testify today6 regarding Bill No. 100635, which changes7 the Philadelphia business privilege tax.8 My hotel has 498 guest rooms9 and we employ 178 people, of which 15010 are Philadelphia residents. My hotel is11 located directly across the street from12 the northeast corner of this building in13 what used to be the City Hall Annex. The14 building is an historic landmark, and15 when we converted the building into a16 hotel, we kept the historic charm and17 character of the building.18 I appreciate Councilman Green19 and Councilwoman Sanchez's efforts in20 trying to reform the Philadelphia21 business tax. We agree Philadelphia must22 become an easier place to do business if23 we are going to thrive as a city.24 However, this bill will damage an25 343 11/30/10 - WHOLE - BILL 1006351 industry which hires over 10,000 people2 and has become an economic engine for our3 city.4 Many of you remember when we5 came to you two years ago and voluntarily6 took the tax increase for the expansion7 of the Philadelphia Convention Center,8 along with supplying our marketing9 partners with dedicated funding to tell10 our story. At that time, we stated that11 we were okay with the new tax because it12 was good for our industry. We also13 stated that the industry could not absorb14 another tax increase because we would15 become less competitive with other cities16 attracting conventions and big meetings.17 Since October 2008, I have had18 to reduce staffing levels by more than 2019 percent, including eight leadership20 positions. If this law -- if this bill21 becomes law, I'm told that it could bring22 new business to Philadelphia, which I23 would certainly welcome. However, what24 if it doesn't? I will have even higher25 344 11/30/10 - WHOLE - BILL 1006351 tax burdens, which will require me to2 further cut costs, which will most likely3 include more jobs.4 As previously mentioned, the5 hotel industry is struggling with many6 hotels barely making debt service. To7 realize how tough it is for a hotel to8 make money, consider that for a new hotel9 to be built in Center City, it requires10 $7 million in tax incentives. This11 should demonstrate to you how hard it is12 to make money in the industry. When you13 consider that a bill is required to pay14 every tax that a city charges, an15 increase in any one tax, even slight, may16 increase -- will have a ripple effect on17 the tax burden of our industry. However,18 more than a $3 million impact on our19 industry, this increase is far from20 slight.21 I urge you not to pass this22 legislation and find other ways to make23 Philadelphia more business friendly.24 Thank you again for your time.25 345 11/30/10 - WHOLE - BILL 1006351
Good afternoon. My5 name is Bill Walsh. I'm currently the6 General Manager at the Philadelphia7 Marriott Downtown, and I appreciate the8 time you've given me to speak on the Bill9 100635.10 Our hotel has 1,408 guest rooms11 and is directly connected to the12 Pennsylvania Convention Center. We13 currently employ over 900 associates, of14 which over 80 percent are Philadelphia15 residents. Not unlike most businesses,16 the past few years have been tough for17 our hotel. Since the downturn of the18 economy in August 2008, I have had to lay19 off over 240 employees. Our hotel has20 seen a drop of 23 percent in revenue,21 thus lowering our profits.22 The Philadelphia Marriott is23 not vital just to the hospitality24 industry in our city but to the City of25 346 11/30/10 - WHOLE - BILL 1006351 Philadelphia in whole. Since we opened2 in 1995, we've been the anchor hotel for3 the Pennsylvania Convention Center. We4 are a desired location because meeting5 planners prefer hotels that are close or6 connected to the Convention Center to cut7 down on their transportation costs and to8 keep attendees closer to convention9 activities.10 The business model for a hotel11 includes a very small profit margin, and,12 in fact, our hotel has had eroding13 profits for the last three years.14 Without government funding and15 incentives, our hotel would not have been16 built, which further demonstrates the17 fragile nature of our industry, and now18 would not be the time to raise taxes.19 Proponents of this legislation20 claim it would result in increased21 occupancy for the City's hotel. How can22 they be sure, what would that occupancy23 be, and how long would we have to wait to24 see that spike in occupancy?25 347 11/30/10 - WHOLE - BILL 1006351 In such time I'd be forced to2 increase rates or reduce service3 opportunities in order to maintain profit4 margins. Unfortunately, we've already5 reduced service opportunities, so our6 next step would be to continue reducing7 positions or institute hiring freezes.8 To make up for the estimated9 tax increase of almost $400,000, we would10 have to eliminate 20 to 25 jobs,11 including management positions. This12 would be in addition to the 240 that I13 laid off since September of 2008.14 For my hotel to survive we must15 remain competitive as a city. If the16 business privilege tax is increased by17 almost 150 percent, we'll have to raise18 our rates and be less competitive to19 other cities for conventions and20 meetings, which is the most important21 segment for a city.22 We also subsidize conventions23 by giving $375,000 in rebates to offset24 the high cost of the Philadelphia25 348 11/30/10 - WHOLE - BILL 1006351 Convention Center.2 I urge you please do not add3 further damage to our industry and our4 hotel by increasing the business5 privilege tax.6 Thank you for your time today.7
Thank8 you.9 The Chair recognizes Councilman10 Green.11
Thank you,12 Madam Chair.13 I want to thank everybody for14 their testimony.15 Mr. Campoli, you came -- you16 were here earlier this morning and have17 been very patient with us today, so I'll18 just ask you a few questions, and then if19 anybody else on Council has questions for20 you, I would understand if you wanted to21 leave.22 You mentioned that recently23 you've been involved in three site24 selection opportunities for the City of25 349 11/30/10 - WHOLE - BILL 1006351 Philadelphia where the City of2 Philadelphia was competing, and I wasn't3 sure whether you said we were competing4 within the region or we were competing5 nationally for companies to move into6 Philadelphia and headquarter here.7
In two of the8 cases, it was Bala Cynwyd or Horsham to9 Philadelphia, and in the third it was10 Newark into Philadelphia, but we were11 competing against Wilmington, Delaware.12
Okay. And13 we lost all three of those opportunities?14
How many16 jobs would that have been if all three17 had come to us?18
In total -- in19 the initial phase, there was close to20 1,000 jobs.21
A thousand22 jobs. And how many square feet of office23 space would they have filled in the24 initial phase?25 350 11/30/10 - WHOLE - BILL 1006351
And what4 would that have done to occupancy rates5 in the City?6
Well, the City7 has 35 million square feet of office8 space.9
Would a one13 and a half percent increase in occupancy14 in your own buildings dwarf the tax, the15 additional tax that you would pay?16
Absolutely.17 Absolutely. We are going to be hit with18 additional taxes. It will go up -- it19 will be quadrupled, but I spend almost20 all of my day negotiating leases and21 dealing with the tenant brokers and very22 sophisticated brokers for very23 sophisticated tenants. It is -- in a24 number of cases, we don't even get the25 351 11/30/10 - WHOLE - BILL 1006351 look of the downtown, but in the last2 several years with Philadelphia, prior to3 the crash in '08, you did see more4 businesses or companies willing to look,5 because the change -- the shift that I6 noticed was that instead of the employee7 following the employers into the suburbs,8 as has gone on for 20 years here, more9 and more employers were following the10 employees, the young, educated workforce11 that wants to be in downtown Philadelphia12 that lives here.13 So we were starting to see more14 people open up to it, and working with15 PIDC and others, trying to find ways16 around that tax, but that specific tax17 has become a bigger hindrance than the18 wage tax in what we're seeing.19
So is it24 fair to say -- well, I think you said in25 352 11/30/10 - WHOLE - BILL 1006351 your testimony that the three companies2 specifically cited the net income tax as3 reasons not to come -- as the major4 reason not to come to Philadelphia.5
Absolutely. It6 put them at too much of a competitive7 disadvantage.8
Okay. Thank9 you. That's all the questions I have for10 you.11 I want to allow anybody else to12 ask questions of Mr. Campoli before I13 continue.14
I have17 questions for the Hotel Association, but18 I know Mr. Campoli has been here all day,19 so I wanted to allow -- I wanted to see20 if people wanted to ask questions of him21 so that we can excuse him.22
Well,23 I think they've all been here all day;24 have you not?25 353 11/30/10 - WHOLE - BILL 1006351
Oh, okay.8 That's fine. Well, then I'll continue --9 if we're going to do that, I'll continue10 with my questioning.11
Madam12 President?13 COUNCIL PRESIDENT VERNA:14 Councilman, it is now 4 o'clock. I15 understand that Mr. Dubow will testify16 next. However, he has to be out of the17 building by 5 o'clock. So if you could18 speed up your questions, I think it would19 be to everybody's benefit.20
Yes, Madam21 President. I have very few questions22 actually for the Hotel Association.23 There is a chart up there that24 describes -- there's a chart that we have25 354 11/30/10 - WHOLE - BILL 1006351 up there called "A Level Playing Field -2 Hospitality Sector," and it's based on3 information that you provided to us for4 non-Philadelphia-based hotels and hotels5 headquartered in Philadelphia. And we6 took a look at the Philadelphia-based7 Hotel N. We took a look at the8 Philadelphia-based Hotel N, and in Hotel9 N, which is a hotel with $18 million in10 revenue, based on the description you11 gave us in our meeting -- and we had a12 two-hour meeting, and I thank you for13 spending so much time with us -- the14 Hotel N had total revenue of -- and this15 is average over the last four years -- of16 19 million -- so I'm in the far right17 column -- $19,197,770. It paid in gross18 receipts only, which is the next line19 down, $27,164, and the gross receipts20 based on the proposed change of gross21 receipts, it would pay $101,748, for a22 total increase in gross receipts taxes to23 the City of Philadelphia of $74,000.24 That hotel had net income of $2.8 million25 355 11/30/10 - WHOLE - BILL 1006351 and it paid $184,000 in taxes to the City2 of Philadelphia in net income. That's a3 profit margin of seven or eight percent4 on $2.8 million. It realized the entire5 net income portion tax of savings, so it6 has a net savings, this7 Philadelphia-based hotel headquartered8 here, of $110,313.9 When you compare that to Hotel10 F, which is in the non-Philadelphia-based11 hotel category, it has $18 million in12 income. Its gross receipts goes from 2613 to 98, and it has $72,000 in increased14 taxes. So hotels of similar size, inside15 and outside the City, essentially offset16 each other.17 Now, missing from Hotel F is18 any net income payment, whereas Hotel N19 and all of the Philadelphia-based hotels,20 you have a payment of net income tax to21 the City of Philadelphia.22 So the first thing I'd like you23 to explain is how all the24 Philadelphia-based hotels, which are25 356 11/30/10 - WHOLE - BILL 1006351 generally union hotels with higher wage2 bases, can end up -- well, forget that;3 how the Philadelphia hotels all have net4 income on average of around seven to ten5 percent and all of the hotels not based6 in Philadelphia apparently have no net7 income tax because -- in other words, are8 Philadelphia-based hotels run seven to9 ten percent more efficiently than your10 hotels, or what is going on where they're11 paying net income tax and you're paying12 none?13
I think as we14 spoke that day, this was a very small15 sampling of the hotels, and we could not16 confirm these numbers. These were17 individuals that we asked to try to get18 some data for together. So as far as19 this sheet goes and, again, as we spoke20 last week, this really is not valid21 information that I would want to speak to22 compared to what the City has told us in23 Rob Dubow's -- you know, that will cost24 our industry in excess of $3 million a25 357 11/30/10 - WHOLE - BILL 1006351 year by changing this. There's a lot of2 other hotels that are not necessarily3 included in this sheet.4
Sure. I5 understand that, but of the -- this is6 your data that we're working from. So of7 the nine Philadelphia hotels that are on8 here, eight will have their taxes go9 down. Of the nine non-Philadelphia10 hotels, their taxes will go up. So11 basically what is happening in the hotel12 industry is essentially what we're saying13 is going to happen in every industry, and14 here is your data. Philadelphia-based15 businesses will pay less to the City of16 Philadelphia and non-Philadelphia-based17 businesses will pay more to the City of18 Philadelphia because they can no longer19 legally avoid through the tax-shifting20 mechanisms, Delaware Holding Company,21 management fees outside of the City and22 state to avoid Pennsylvania income tax23 and Philadelphia tax. And so, yes, it24 will cost the industry, but it's proving25 358 11/30/10 - WHOLE - BILL 1006351 the point that we're making at large,2 which is it will help Philadelphia3 companies and hurt Philadelphia -- and4 allow us to get our fair share of taxes5 from businesses that are not6 headquartered here and are legally7 avoiding the net income tax.8
I don't know if9 that's 100 percent accurate, in this10 regard: The hotels that are based11 outside of Philadelphia are the hotels12 that drive the business into13 Philadelphia. If those owners and those14 businesses are hurt because the owners15 are making service reductions or not16 spending capital to improve their17 product, the larger hotels won't get the18 occupancy, which very candidly and has19 been proven is what drives the occupancy20 for the other hotels. So --21
I'm not22 going to debate it with you. I'm just23 going off the data you provided.24 So the other thing is, in every25 359 11/30/10 - WHOLE - BILL 1006351 other major city in the country, what are2 the most high occupancy days for hotel3 stays? I mean, are there more stays4 during the week or on the weekend in New5 York and Boston and LA?6
In our9 meeting, I think Jim -- the hotel10 industry business days during the week11 are the bread and butter, and in most12 cities in the country --13
Your question a22 minute ago was to compare us to New York,23 Boston, DC.24
Okay. Fair25 360 11/30/10 - WHOLE - BILL 1006351 enough. As the industry as a whole,2 business days are more than weekend3 stays?4
In the City6 of Philadelphia, do you have more weekend7 stays or business days?8
Weekend occupancy9 is slightly higher than mid week,10 Tuesday, Wednesday, by less than a point.11
Right. And12 is that very unusual for the Marriott13 chain?14
Is it very17 unusual for the industry nationally to18 have fewer business stays?19
As nationally,20 weekend occupancy, as an industry as a21 whole, is lower than weekday.22
If you were to24 look at the City's specific -- speak25 361 11/30/10 - WHOLE - BILL 1006351 apples to apples of an urban environment2 like you're asking, that data may very3 well be very different.4
And you5 heard Mr. Campoli's testimony about how6 he is convinced that he is willing to pay7 more to increase, because he believes it8 will drive demand for office space, and9 if there are more businesspeople in town,10 that presumably would increase business11 hotel stays in town. I know you're not12 willing to accept that this will happen.13 The proof will have to be in the pudding14 for you, but I think the data you've15 provided really proves our point, not16 just for your industry but for most17 industries. So I thank you for your18 testimony.19
Thank20 you.21 The Chair recognizes Councilman22 Kenney.23
Thank you,24 Madam President.25 362 11/30/10 - WHOLE - BILL 1006351 I think it's interesting that2 Mr. Campoli appeared at the witness table3 at the same time the hotel industry did,4 because it shows a very clear picture of5 winners and losers and that juxtaposition6 of folks who want this to happen because7 it's in their economic interest as8 opposed to those who are apparently quite9 concerned and -- quite concerned about10 the future that they're facing over the11 next five years under this legislation.12 The question that I have,13 though, relates to the over $700 million14 investment that the State and City has15 made around the corner and the need to be16 able to be competitively going after17 convention business that can fill both18 buildings, because the purpose of having19 an expanded Convention Center was to be20 able to have two major conventions or21 three at the same time. But in order to22 have that, not only do we need the23 $700-and-some million building, we need24 how many more hotel rooms to deal with25 363 11/30/10 - WHOLE - BILL 1006351 that scenario that we want to fill both2 buildings? How many more hotels room?3 I've heard as many as 2,000.4
With all due5 respect to Mr. Muldoon, it is anywhere6 from 2,000 to 2,500 hotel rooms.7
Now, even8 if the sponsors of the legislation are9 correct in their assertions that in this10 laboratory experiment, five years from11 now the whole world shifts and we are12 back on this competitive level with other13 states and cities in the world, how many14 hotel rooms do you think are going to be15 developed while we're waiting to see the16 proof in the pudding?17
And none20 certainly from hoteliers who are located21 outside the City of Philadelphia?22
Do you24 expect that companies like Marriott and25 364 11/30/10 - WHOLE - BILL 1006351 Hyatt and others would now move to2 Philadelphia as a result of this change3 in tax burden?4
So6 potentially what you're telling me, from7 your industry's perspective and from the8 hospitality industry perspective, is that9 over the next three, four, five years10 under this scenario, potentially we'd11 have no development of hotel rooms12 because people are waiting to see what13 happens and no ability to fill the two14 buildings at the same time?15
Thank19 you.20 The Chair recognizes Councilman21 Greenlee.22
Thank23 you, Madam President.24 Good afternoon. Very quickly,25 365 11/30/10 - WHOLE - BILL 1006351 I know we've been here a long time. As2 far as I've asked a couple different3 witnesses about jobs, and, Mr. Walsh, I4 think you said your estimation is that it5 could be 20 to 25 jobs that could be6 lost. You're talking about your hotel?7
Has the9 Hotel Association generally looked at10 that in any estimate? I know it has to11 be an estimate. There's been a lot of12 estimates thrown around. How many jobs,13 if you could see, possibly losing over14 the whole industry in Philadelphia?15
I didn't18 know if the Association generally looked19 at that.20
You could also look23 at how many people were employed in this24 industry three or four years ago versus25 366 11/30/10 - WHOLE - BILL 1006351 how many are employed against it now and2 see a big disparity.3
I'm sure4 that's true obviously, but here we're5 talking about a major change, and some6 people would say that change is helpful,7 some say -- it would be interesting to8 see if you could forward to the9 President, if you do do that study, just10 your estimation of the job situation.11 Thank you.12 Thank you, Madam President.13 COUNCIL PRESIDENT VERNA:14 You're welcome.15 The Chair recognizes16 Councilwoman Brown.17
Madam18 President, I'll --19 COUNCILMAN DiCICCO: She will20 yield until she's done eating.21
Thank you,24 Madam President.25 367 11/30/10 - WHOLE - BILL 1006351 My questions are actually for2 Mr. Campoli.3 Good afternoon, Mr. Campoli.4 We've worked together before when you5 came to Council to oppose the Comcast6 KOZ. We've worked together on an7 initiative called the Keep Philadelphia8 Competitive Tax Credit where we created a9 separate alternative incentive for10 higher-paying jobs. We wanted to do it11 on a larger scale. It did not happen.12 You opposed the Comcast KOZ and you13 supported the concept of a Keep14 Philadelphia Competitive Tax Credit for15 what reason?16
Because you're17 talking all day about picking winners and18 losers, and the Comcast battle was19 picking a winner and we were the losers.20 Whereas your bill was more spread and21 available to everyone, as this bill would22 be to the businesses or the majority of23 the businesses that occupy Center City24 towers.25 368 11/30/10 - WHOLE - BILL 1006351
I think the4 winner is the City of Philadelphia. I5 think every bill has winners and losers.6
But this7 bill still has winners and losers. I8 stood with you then on principle that we9 should not be picking winners and losers.10 Do you acknowledge that this bill does11 exactly that, picks winners and losers?12
I don't know any17 bill that passes through any houses of18 any government that doesn't pick winners19 and losers, but not as directly as the20 KOZ did.21
No. It's24 never -- it's all about the City. It25 369 11/30/10 - WHOLE - BILL 1006351 should be about the City of Philadelphia2 and all of the residents in it. I have a3 lot of blue-collar workers that work for4 me in these buildings, as well as City5 residents who work in these buildings6 that many of which now are forced to live7 out in the suburbs and drive in and out8 and still pay the wage tax.9
So the10 Comcast KOZ was negated on the state11 level?12
But had we14 done the Comcast KOZ rather than15 alternative funding that was provided,16 was the Comcast project in the end17 positive for the City?18
So the21 Comcast project was beneficial for the22 City, but there were winners and losers,23 and at that point, you were a loser and24 it was still good for the City.25 370 11/30/10 - WHOLE - BILL 1006351
We won that2 battle. The City won that battle,3 because we beat them in Harrisburg, and4 they are paying taxes today and they5 expanded, like we knew they would, and it6 improved the downtown area, without major7 tax cuts to the City of Philadelphia for8 15 years.9
Okay. So10 your position for the record is that11 there has to be losers in order for the12 City to benefit?13
I don't14 necessarily agree that there's going to15 be a lot of losers. I do understand that16 there are uncertainties on certain17 industries, but I think on the larger18 scale, there are many more winners. If19 there are losers --20
Manufacturing,23 office, I think restaurants. I think24 that if you have a vibrant downtown, that25 371 11/30/10 - WHOLE - BILL 1006351 it has created for us a downtown now that2 is completely different than 20 years3 ago. So more people will live here,4 downtown. I mean, Philadelphia still has5 its ultimate problems with its school6 system, but as far as -- what I would7 have a difficulty understanding -- and8 I'm a lifelong resident here -- is, it9 appears to me that we look at the10 businesses that are located in these11 Center City towers as if they can't go12 anywhere because the buildings can't.13 But if you look at a vibrant city like14 Boston -- New York is an anomaly, as15 Washington is, because they have separate16 generators. But the fact that we haven't17 had a new building in 20 years that was18 demand related, that's terrible.19
Let me just20 end this by asking a rhetorical question.21 Should we do some KOZs in Center City?22
Thank you,24 Madam President.25 372 11/30/10 - WHOLE - BILL 1006351 COUNCIL PRESIDENT VERNA:2 You're welcome.3 The Chair recognizes Councilman4 Green -- oh, I'm sorry. Councilwoman5 Brown, are you ready?6
Yes.7 Thank you very much.8 COUNCIL PRESIDENT VERNA:9 You're welcome.10
It is no11 secret that throughout this debate, one12 of my concerns has been what impact this13 would have on the hotel, restaurant,14 tourism industry, recognizing that it's15 the number two industry in the City and,16 as Councilman Kenney has stipulated,17 we've gone -- how many millions is that?18
Million to21 enhance our hospitality industry.22 With that said, I want to focus23 on a statement made on of your24 testimony. "Other hotels will be forced25 373 11/30/10 - WHOLE - BILL 1006351 to cut costs to survive, and too often2 the only cost remaining is staff."3 So I wanted to take a closer4 look at what "staff" means and who they5 are.6 Break down, if you will, the7 various levels of staff in a hotel,8 starting with the executive staff, just9 call three or four categories for me.10
If we look from11 senior leadership, that would be on12 average about two percent of the staff.13 Management as a whole, including senior14 leadership, would probably be about six15 to eight percent of the total staff. And16 then the remaining would be hourly17 workers, ranging from -- just really all18 levels of the hourly worker range, but19 pay raises would range anywhere from, I20 would say, about $13 an hour upwards to21 about $25 an hour.22
So 80-plus23 percent of the remaining staff are hourly24 workers?25 374 11/30/10 - WHOLE - BILL 1006351
Give me a3 profile of who or what that hourly worker4 looks like.5
Well, as we6 stated, 80-plus percent of our industry7 comes from Philadelphia.8 COUNCILWOMAN BROWN:9 Philadelphia first.10
Public11 transportation is critical to get them to12 and from our hotels.13 I would say that the majority14 of them are not college educated. So15 they are lifelong Philadelphians, who16 have grown up here, lived all their life17 in Philadelphia, and are looking for18 opportunities to grow, looking for19 opportunities to make a better life for20 themselves.21
Within an24 industry. And the one nice thing about25 375 11/30/10 - WHOLE - BILL 1006351 our industry is, it's not an industry2 that you have to have a formal education.3 Good people can succeed in our industry,4 unlike other industries that may require5 more formal education to move up.6
Councilwoman, I7 made a note of this before I came here.8 In September of 2008, our hotel employed9 1,100 people in hourly positions. We10 employed 85 people in management11 positions, for a total of 1,185 people.12 Currently, I have 885 people in hourly13 positions, which is a reduction of 215,14 and I have 60 people in management15 positions, which is a reduction of 25 out16 of 60, for a total of 945. So you can17 see where that comes from.18 As Jim alluded to, we also19 provide opportunities. Over 50 percent20 of the 60 people in my management staff21 have come from hourly positions.22
Ranks into25 376 11/30/10 - WHOLE - BILL 1006351 management in our organization.2
I worked from 11:005 at night to 7:00 in the morning as a6 night auditor at Marriott Sussex House in7 New York City.8
Thank you9 for that.10 With the continuation of the11 profile they're not college educated, you12 said 80 percent of them come from13 Philadelphia, are Philadelphia residents.14
I would probably18 say gender is about 60 percent female, 6519 percent female.20
I would say23 that's probably about 85, 90 percent24 African American, Hispanic.25 377 11/30/10 - WHOLE - BILL 1006351
Okay. And2 so when we look to see who the potential3 losers are, they are in many ways the4 very constituents who so often don't get5 opportunity in other industries for all6 the reasons you just stipulated, not well7 educated -- well, principally because8 they're not well educated, and this9 industry becomes one where you can get10 your toe in the door and have an11 opportunity to grow within the ranks.12 Thank you for your testimony.13
Just one other14 thing I mentioned. In our industry and15 especially over the last years, the16 failure to control cost as revenues have17 declined have been very difficult,18 because there's a lot of costs that19 somewhat are uncontrollable. We see20 healthcare costs going up much more. We21 see utility costs going up. So when we22 start having to look at opportunities to23 cut costs to take care of this, wages is24 often the very first thing that we have25 378 11/30/10 - WHOLE - BILL 1006351 and one of the few things that we really2 control anymore as leaders, because a lot3 of these other costs, we have to put4 shampoos in the room, we have to have5 toilet paper in the room. Those costs6 are what they are, and so ultimately it7 comes to the wages that we have to sit8 there -- and if we look over the last9 couple years, as we look at the numbers10 we've talked about, the only way we could11 survive as an industry was to cut these12 costs, because we're going to have to13 have sheets on the bed when you come to14 stay with us. We may just have a few15 less staff serving you as you come to16 stay with us.17
The additional18 losers in this, ma'am, are that -- and I19 can't answer for every hotel, but I can20 certainly answer for Jim and I. We work21 for the same company. Eighty percent of22 our direct spend that's not contracted by23 Marriott has to be with women or24 minority-owned businesses in25 379 11/30/10 - WHOLE - BILL 1006351 Philadelphia.2
Eighty percent of5 our non-contracted spend with Marriott6 national vendors has to be from local7 vendors in Philadelphia, minority and8 women-based organizations. We have9 several of them that we have not used10 their services in a couple of years11 because we haven't had the business to12 do, so they're hurting as well. We don't13 keep our vendors busy. Our vendors14 aren't getting business from us.15
There was16 some discussion given to a level playing17 field, and in no way to discredit the18 thinkers behind this, based on your19 experience in looking at that grid, does20 that capture a potential reality based on21 this proposal?22
No, because23 that's isolating two specific hotels on24 that chart. So there are 60-plus hotels25 380 11/30/10 - WHOLE - BILL 1006351 that fall into the Philadelphia City2 limits and in that one you're looking at3 two specific examples.4
I see.5 Okay, then. Again, thank you for your6 testimony.7 Thank you, Madam Chair.8 COUNCIL PRESIDENT VERNA:9 You're welcome.10 The Chair recognizes Councilman11 Green.12
Thank you,13 Madam Chair. I'll be very brief.14 Hopefully I'll keep my questions short;15 you can keep your answers short, Jim.16 Jim, when you were in my office17 last week, I guess it was, we agreed that18 at a $150 a room average stay in Center19 City Philadelphia, that no hotel pencils20 regardless of the tax, without21 significant RCAP or other state resources22 being provided, to make that hotel work.23
To be built,25 381 11/30/10 - WHOLE - BILL 1006351 right. Okay. And so it's actually 792 cent -- on $150 it's 79 cents a room at3 5.3 mills. I know your testimony said4 several dollars, but do you -- and I5 think you agreed with this premise also6 while you were in the office. Is anybody7 going to stay in Camden or Montgomery8 County to avoid a 79 cent increase on9 their bill?10
If they're12 coming to Philly, they're going to stay13 here regardless, so --14
Right. So,19 you know, I appreciate what you're20 saying. You happen to represent -- and21 just in response to Councilwoman Brown's22 last question, that chart does represent23 two specific examples, two specific24 examples taken from a chart of nine25 382 11/30/10 - WHOLE - BILL 1006351 non-Philadelphia headquartered hotels who2 apparently pay no net income, because3 they legally avoid it, when the industry4 as a whole among Philly-based firms has a5 seven to ten percent margin.6 So I haven't heard an7 explanation of how you avoid making a8 profit when the Philadelphia-based hotels9 do, unless it's through apportionment.10 You can respond to that if you11 want, but I don't expect you to. But the12 chart has nine non-Philadelphia hotels,13 nine Philadelphia hotels, and with14 respect to all nine, it's the same story15 as in that representative sample.16 So thank you for your17 testimony.18
Thank19 you.20 The Chair recognizes Councilman21 DiCicco.22 COUNCILMAN DiCICCO: Thank you,23 Madam Chair.24 Mr. Campoli, you keep getting25 383 11/30/10 - WHOLE - BILL 1006351 up. Why don't you just slide a chair2 over. It might be easier.3 I was interested in your last4 comment about there hasn't been any high5 rise or office development in the last 156 years in the City of Philadelphia that7 had not been somewhat subsidized by8 government. This bill will either pass9 as is, maybe pass in an amended form or10 maybe not pass at all. Let's assume for11 the moment it's the status quo, the bill12 doesn't pass, there's no changes.13 In your opinion, being in this14 business for all these years, what else15 do you think is contributing to the16 non-development of office buildings in17 the City of Philadelphia, outside of18 maybe the tax structure? Are there any19 other factors that are causing that to20 happen?21
Not -- nothing,22 in my estimation, as significant as the23 tax structure. Nothing. I mean,24 construction costs are equal up and down25 384 11/30/10 - WHOLE - BILL 1006351 the eastern seaboard in major cities.2 It's demand here, and demand is driven by3 companies who want to relocate here, of4 which it's -- they want to. I talked to5 them. They want to come here. They6 feel -- and even people in our -- I mean,7 they feel Philadelphia is poised to8 really take off, in a position to move9 out of this recession, but it's being10 held back significantly, particularly by11 the income tax.12 COUNCILMAN DiCICCO: I would13 agree that the cost of construction,14 based on my knowledge having worked with15 a number of developers, is pretty much16 equal up and down the coast. The17 difference is, we don't get the return or18 the value on the per square foot rental19 as they would in New York and Washington,20 DC, and it's the same in the residential21 industry as well. We can't charge $1,60022 a square foot, although our costs of23 construction are comparable to New York,24 as an example. And I ask you that25 385 11/30/10 - WHOLE - BILL 1006351 because even with the ten-year tax2 abatement, that does not give enough3 incentive for people to want to build?4
Philadelphia's5 property taxes are lower from an office6 building basis than New York, Boston,7 others. Obviously their tax structure is8 based on property. And, yes, our margins9 are lower because our rents are lower,10 because our operating expenses are close11 to the same. I mean, other than take12 some of the property taxes. But the fact13 of the matter is, we don't have the14 demand to drive the rates to the levels15 to draw a new office building, which16 would -- then the margin would get more17 closer to what you see up in the other18 cities.19 COUNCILMAN DiCICCO: So the tax20 abatement or an increase in the years of21 the tax abatement has expired.22 Hypothetically, if you did a 15-year tax23 abatement for new construction, which we24 have ten years now for commercial25 386 11/30/10 - WHOLE - BILL 1006351 buildings, went to 15 years, would that2 be a driving factor?3
Well, no, because4 where we are -- and that's why the KOZ5 has been so effective in other areas, is6 that we are eliminating the onerous7 corporate taxes versus New York and8 Boston will give relief for development.9 COUNCILMAN DiCICCO: Okay. I10 thought I understood. I wanted to make11 sure of that.12 No other questions. Thank you.13
Thank15 you very much. I think we did have -- we16 do have another panel. However, I'm told17 that they're kind enough to wait until18 after Mr. Dubow provides his testimony,19 and we do appreciate that.20 Gentlemen, thank you very much.21 You've been extremely patient. Thank22 you.23 (Short recess for court24 stenographer.)25 387 11/30/10 - WHOLE - BILL 1006351
We're2 back in session.3 Mr. Dubow, you're excused. I4 know you have a very important meeting,5 so we will excuse you this evening and6 we'll see you tomorrow.7
Thank you.11 COUNCIL PRESIDENT VERNA:12 You're welcome.13 MR. McPHERSON: Our next panel14 consists of Randy Hofer, Henri Marcial,15 Robert Wonderling and Anne C. Croisier.16 (Witnesses approached witness17 table.)18
Good19 afternoon. Please identify yourself for20 the record and proceed with your21 testimony.22
Anne C.23 Croisier, Ph.D., MBA.24 COUNCIL PRESIDENT VERNA:25 388 11/30/10 - WHOLE - BILL 1006351 Please proceed.2
Pardon?3 COUNCIL PRESIDENT VERNA:4 Please proceed with your testimony.5
Well, I6 misunderstood. I thought you were going7 to eliminate that business privilege tax8 altogether. I misunderstood. I haven't9 watched television in five or six years.10 I rarely read the newspaper, because I11 can't afford it. But I got in the City's12 web and see you were testifying about13 this business privilege tax, but I was14 told it was a $300 flat rate, but I found15 out now that's the registration fee.16 But I work for a small17 business, and the reason small businesses18 hire people as independent contractors is19 because they can't afford to pay someone20 to take the taxes out of people's21 paychecks, so they just write a regular22 check, like you would a personal check.23 And from what I heard, like I pay sky24 high taxes because it's a business25 389 11/30/10 - WHOLE - BILL 1006351 privilege tax instead of a wage tax, and2 I earn $108 a week in total gross wages.3 I didn't begin the job until May 18th of4 this year, so my income would be about5 $3,200 or $3,500, about 65 percent below6 the federal poverty line. It's going to7 be like sky high taxes. The percentage8 of the tax is going to be sky high.9 So I think maybe -- I realize10 you might not want to eliminate it11 altogether, but I think for people with12 low wages working for small business,13 maybe you should make it more like a wage14 tax or the rate more like a wage tax.15 I do telemarketing in the16 suburbs and I've been told that17 telemarketing is even more unskilled, is18 even more unskilled than fast food work,19 but I know -- I thought practically20 everybody that works for small business21 worked five or ten hours a week in a22 corner coffee shop or a corner hoagie23 shop or that type of thing. But maybe24 something could be done about people who25 390 11/30/10 - WHOLE - BILL 1006351 pay the business privilege tax who are2 earning really low wages. And next3 year -- oh, yeah. My federal4 unemployment extensions will be cut off5 December 11th and the state government6 might eliminate the state unemployment7 extensions. I'll be earning about $5,0008 a year, about 50 percent below the9 federal poverty line. Countless citizens10 in Philadelphia spend their entire life11 50 percent or more below the federal12 poverty line.13 When I wrote my intent14 statement to come to graduate school in15 1984 in Philadelphia, I said I want to16 understand what it really feels like to17 be poor.18 But I think the reason we have19 such high tax rates in the City of20 Philadelphia is because we have one of21 the most deeply impoverished cities in22 the country, so that's why we have to23 have high tax rates. We're largely a24 city of really affluent Caucasian25 391 11/30/10 - WHOLE - BILL 1006351 professionals and executives in Center2 City and deeply impoverished people of3 color in most of the other parts of the4 City. There's working-class Caucasians5 south of Snyder and Passyunk in South6 Philadelphia, some working-class7 Caucasians in Roxborough and in Northeast8 Philadelphia. But --9
I don't want to12 waste your time. I hope I didn't get off13 the point.14
I hope I didn't17 disagree with the Mayor. I'm sorry if I18 did. He means more to me than anyone in19 the universe. Of course, first comes my20 faith.21
Thank22 you so much for coming in to testify. We23 do appreciate it. And I think you've24 been here since 9 o'clock this morning.25 392 11/30/10 - WHOLE - BILL 1006351
Oh,4 okay. Thank you so much for your5 patience.6
Thank11 you.12 Our next speaker? Thank you.13 Good evening. You all have been so14 patient. Thank you.15
17 My name is Henri Marcial. I'm here to18 testify in my capacity as General Counsel19 for the Small Business Union regarding20 City of Philadelphia Bill No. 100635. 9 The membership, which numbers10 in the thousands, consists of the11 smallest businesses here in the City, the12 mom-and-pop shops, the corner grocers,13 the mechanics, the restaurant owners, the14 hairdressers. The majority of these are15 members of the minority community,16 whether it's African American, Hispanic17 or Asian. 22 The members of the Small23 Business Union are generally in favor of24 the proposed ordinance. 7 The two main concerns at this8 time are, first, that with regard to9 businesses that have a low or no margin,10 these businesses would not necessarily11 benefit from the structure as it's12 currently written. 14 These businesses have fought to remain15 open simply to help provide some income16 and livelihood to their employees during17 these hard times. Although there are18 some forms of relief in terms of the19 release valves in the bill as it's20 structured and the alternative paragraphs21 we're filing, we do not believe that this22 is enough. 2 Now, I must emphasize that3 these are businesses that are locked in4 the City of Philadelphia. Please note5 the districts that I mentioned. 9 There are still many businesses10 closing in this current economic11 environment and few opening by12 comparison. Each of these businesses13 provides on average support and14 livelihood for four families. 21 The second concern is that the22 bill does not do enough to encourage the23 creation of new small businesses. It24 principally addresses existing and stable25 396 11/30/10 - WHOLE - BILL 1006351 businesses. We do understand that the2 current proposal tries to balance the3 requirements of the state Uniformity4 Clause. 12 It's important to note that13 there is no credit available for these14 individuals, especially considering the15 neighborhoods they live in. So they are16 literally taking a gamble attempting to17 live and risk losing everything to have a18 shot at the American dream. Many of them19 are immigrants. 8 Right now the members of the9 Small Business Union provide a livelihood10 and support for approximately 50,00011 families in the City of Philadelphia. We12 estimate that every new business created13 would provide for four families. 20
Thank21 you.22 We'll now hear from the other23 two witnesses before we recognize anyone24 for questions.25 399 11/30/10 - WHOLE - BILL 1006351 Thank you.2
7 I'm Executive Vice-President at the8 Greater Philadelphia Chamber of Commerce9 and I'm joined this evening by Stewart10 Weintraub, who is well known to all of11 you and is the Co-Chair of our Tax12 Committee for some support in the13 testimony. Rob Wonderling apologizes for14 not being here himself. He was chosen to15 the transition team for the new Governor16 and their first meeting was this17 afternoon in Harrisburg. 19 First, let me say that we20 applaud the two main sponsors of this21 bill, Councilwoman Maria Quinones-Sanchez22 and Councilman Bill Green, for their23 forward thinking in recognizing the24 onerous tax burden on businesses in25 400 11/30/10 - WHOLE - BILL 1006351 Philadelphia. Again, I want to thank2 them for the numerous conversations that3 we have had about the measure both here4 and at the Chamber offices over the past5 year. However, let me state at the6 outset that the Greater Philadelphia7 Chamber of Commerce would oppose the bill8 moving forward in its present form and at9 this particular time for the following10 reasons:11 Based on correspondence that we12 have reviewed between Councilmembers13 Green, Sanchez and the Nutter14 Administration, there is considerable15 disagreement on some elemental fiscal16 facts surrounding this matter. For17 example, there appears to be a difference18 of opinion as to whether or not the19 proposal is revenue neutral. There is20 also disagreement as to the proportionate21 impact of job losses or gains that may be22 achieved by this proposal. We would23 encourage the City government, as24 represented by the executive and25 401 11/30/10 - WHOLE - BILL 1006351 legislative branches, to come to2 agreement on the basic fiscal tenets of3 the proposal so that our business4 community could complete a thorough5 analysis of its impact. 7 Again, we applaud8 Councilmembers Green and Sanchez for9 their very thoughtful approach to this10 matter. However, at the end of the day,11 this bill in its present form is a tax12 shift and not a tax cut. 19 From the beginning of our20 discussions, we have questioned the21 revenue neutrality of the bill and,22 perhaps as importantly, the impact that23 it would have on employment of24 Philadelphia residents. We recognize25 402 11/30/10 - WHOLE - BILL 1006351 that within those economic strata that2 are seen as winners, there are also mixed3 results. 5 Legal services have both6 winners and losers, and components of7 each are within our membership. 20 Small companies domiciled in21 the City appear to win, as do some22 manufacturers whose sales are primarily23 outside the City. 25 403 11/30/10 - WHOLE - BILL 1006351 We have met with the2 Administration and they have grave3 concerns about the revenue neutrality of4 the bill. 38 mills. 11 We are concerned that there12 appears to be such a difference in13 conclusion between the sponsors and the14 Administration when we believe the data15 came from the same source. 19 As you know, the proposal to20 eliminate the net income portion of the21 BPT and increase the gross receipts22 portion is the opposite approach to all23 recent studies and recommendations. The24 mercantile license tax, which was a25 404 11/30/10 - WHOLE - BILL 1006351 straight gross receipts tax, pre-dates2 the BPT. 11 The Pennsylvania Retailers12 Association asked us to convey their13 strong opposition to this measure. Based14 in Harrisburg, PA, the Pennsylvania15 Retail Association represents the16 majority of regional and national17 discount department and big-box stores in18 Philadelphia. Retailers large and small19 are among those hardest hit by the20 proposal shift in taxation, according to21 the PRA. Their President, Brian Rider,22 told us, and I quote, "An increase of23 this magnitude in the cost of doing24 business in the City will plausibly lead25 405 11/30/10 - WHOLE - BILL 1006351 to the reevaluation and closure of2 unprofitable store locations.
10 Another organization, the Tax11 Foundation, is a non-partisan, non-profit12 organization that has monitored fiscal13 policy at the federal, state and local14 levels since 1937. According to the Tax15 Foundation, the growing difficulty of16 administering corporate income taxes has17 prompted resurgence in one of the world's18 oldest broad-based tax structures, the19 gross receipts tax, also known as the20 turnover tax. Gross receipts taxes have21 a simple structure, taxing all business22 sales with few or no deductions. Because23 they tax transactions, they are often24 compared to retail sales taxes. However,25 406 11/30/10 - WHOLE - BILL 1006351 while well-designated sales taxes --2 well-designed sales taxes apply only to3 final sales to consumers, gross receipts4 taxes tax all transactions, including5 intermediate business-to-business6 purchases of supplies, raw materials and7 equipment. As a result, gross receipts8 taxes create an extra layer of taxation9 at each stage of production that sales10 and other taxes do not, something11 economists call tax pyramiding. In a12 2007 study, the Foundation concluded that13 a gross receipts tax interferes with14 private market decisions. Its pyramiding15 creates a haphazard pattern of incentives16 and disincentives for business17 operations. 20 The Pennsylvania Chamber of21 Business and Industry is the largest22 broad-based business association in23 Pennsylvania, serving more than 24,00024 members and customers throughout the25 407 11/30/10 - WHOLE - BILL 1006351 Commonwealth. 4 The Pennsylvania Chamber also5 expressed to us their opposition to gross6 receipts taxation, because it hinders a7 company's ability to compete in today's8 global market. This tax will embed9 itself in a goods price as the product is10 passed along a production chain within11 the taxing jurisdiction. In essence,12 gross receipts taxes are stealth taxes13 that hide their true costs from the14 consumer. Ultimately the tax pyramiding15 initiated by the gross receipts taxation16 forces businesses to make operating17 decisions they might otherwise not make,18 such as sending production outside the19 taxing jurisdiction or bringing20 production in-house, which could mean21 expending capital they might not have22 budgeted to do so. The economic23 distortion of the marketplace caused by a24 gross receipts tax will not promote a25 408 11/30/10 - WHOLE - BILL 1006351 climate of business growth and2 development in Philadelphia. 6 Rather than expedite a major7 tax change -- a major change in tax8 policy at this time, the Greater9 Philadelphia Chamber of Commerce supports10 the recommendations of the two most11 comprehensive tax studies -- most recent12 comprehensive tax studies, the13 Philadelphia Tax Reform Commission of14 2003 and the Mayor's Tax Force on Tax15 Policy and Economic Competitiveness in16 Philadelphia of 2009. 23 The Chamber is opposed to24 moving this legislation forward until25 409 11/30/10 - WHOLE - BILL 1006351 there is more clarity on the facts. We2 believe that a change of this magnitude3 needs to be discussed and understood,4 with agreement by both Council and the5 Administration, with input from all6 concerned parties. 16
Thank you,21 Madam President. I'm here accompanying22 Mr. Mahoney to help him respond to some23 of the questions that we anticipate from24 Councilmembers.25 410 11/30/10 - WHOLE - BILL 1006351
Fine.2 Thank you.3 The Chair recognizes Councilman4 Green.5
Thank you,6 Madam Chair.7 Mr. Mahoney, I appreciate your8 testimony and I thank you for the year we9 spent discussing this issue. I think10 Councilwoman Quinones-Sanchez and I first11 came to the Chamber's state and local tax12 committee almost a year ago today to13 discussion this proposal, and we've met,14 I think, formally four or five more times15 in meetings with the leadership of the16 Chamber at the state and local tax17 committee again, had the opportunity to18 present to many businesses, and I think19 you sent out to all of your membership20 sort of a general survey, like do you21 have any questions for us to ask and22 other things like that. And so, I mean,23 I think you would agree that we've24 undertaken an extremely long --25 411 11/30/10 - WHOLE - BILL 1006351
--4 thoughtful, fair process, provided a lot5 of notice to the Chamber about what it is6 we're thinking about. You've provided7 notice to your members about the proposal8 we have in hand.9 And so we would love -- I share10 your goal. We would absolutely love for11 the Administration and Council to be able12 to agree on some basic issues as you13 mention in your testimony, but I fear14 that we're going to be stuck in a15 situation where Council and the16 Administration, unless we can get some17 data out of the Administration, are not18 going to agree, and in that situation,19 the legislative branch has to make its20 decision about what the best policy is21 and the Administration has to make its22 decision about what the best policy is.23 And so I don't want that to be the24 outcome.25 412 11/30/10 - WHOLE - BILL 1006351 We met with the Administration2 on Sunday for several hours. We'll3 continue to meet with them, but I just4 want to sort of talk about your5 testimony.6 So the first thing is the7 mercantile tax, which was a very bad tax8 for Philadelphia, which you mentioned,9 and we replaced it with our current10 structure. I know the history of this11 from Mr. Weintraub because he gave me an12 education on it after our first meeting.13 That tax was a tax only on14 Philadelphia businesses. The mercantile15 tax was -- on sales in Philadelphia, but16 there were 12 or 16 industries either17 through the courts or other things who18 were in Philadelphia who weren't paying19 it. So in order to be able to apply a20 broad-based tax like the mercantile tax21 to every industry in Philadelphia County,22 we had to have change of state law to put23 in place the gross receipts tax.24 Mr. Weintraub, correct me if25 413 11/30/10 - WHOLE - BILL 1006351 I'm wrong about that.2
Only in part3 would I disagree with what you just said,4 Councilman. I agree with everything you5 just said concerning the court decisions6 under the old mercantile tax that didn't7 include a number of 12, 13 different8 industries. That part I agree with. But9 the characterization that the old10 mercantile tax only applied to11 Philadelphia businesses is where I12 disagree.13
I corrected14 myself. I said it applied to sales in15 Philadelphia.16
Just like the17 current business privilege tax does,18 applies to businesses outside the City19 that are doing business in the City.20
Exactly.21 Right. And didn't the mercantile tax22 also for a manufacturer in the City apply23 to its sales outside the City?24
No. The25 414 11/30/10 - WHOLE - BILL 1006351 mercantile tax had -- from 1953 when the2 tax was enacted until approximately 1983,3 the mercantile tax had a 100 percent4 exemption for Philadelphia businesses5 that delivered product that they sold to6 customers outside the City. In roughly7 1983, I think it was, there was an8 amendment to that exemption which limited9 the exemption to 50 percent of their10 sales, but that was -- and it was that11 limiting exemption that triggered --12 maybe it was '82 -- that triggered all of13 the debate for the creation of the14 business privilege tax. It was a15 combination of the reducing of the16 exemption as well as rate increases that17 were up to five mills that created the18 hotbed of controversy within the business19 community that led to the business20 privilege tax.21
Right. So22 when we put in place the gross receipts23 tax, there was a mercantile tax that24 taxed our manufacturers on goods they25 415 11/30/10 - WHOLE - BILL 1006351 sold outside the City of Philadelphia.2
You just4 said in 1982 they passed a law that5 taxed 50 percent --6
Fifty percent,7 yeah. It was in effect for like one or8 two years before the BPT.9
But it was a10 major driver for going from the11 mercantile tax to the business privilege12 tax we have today.13
I don't know14 that I would say it was a major driver,15 Councilman, because the business16 community had been objecting and opposing17 the old mercantile tax even before that.18 When, as we discussed,19 ironically your father became Mayor, the20 rate was three-tenths of a percent, three21 mills, and then it was raised to four22 mills and then it was raised to five23 mills with the corresponding reduction in24 the exemption. So when the rate started25 416 11/30/10 - WHOLE - BILL 1006351 going up from three mills is when the2 impetus began to get rid of the3 mercantile tax.4
Right. So5 when we replace the -- when the new tax6 structure was put in place, it was7 originally sort of proposed that the8 sales tax -- or the net income tax,9 excuse me, would make up the large bulk10 of the income the City received and that11 essentially there was a very low gross12 receipts rate, is my memory of our13 conversation. And what happened is, when14 we put those new taxes in place, all of15 the Pennsylvania companies that already16 were using Delaware Company Loophole17 exemptions and doing other tax things to18 avoid the Pennsylvania income tax ended19 up being able to avoid -- so the Chamber20 created a situation where its large21 members could take advantage of the same22 loopholes they were using to avoid the23 Pennsylvania state income tax, and as a24 consequence, the net income receipts came25 417 11/30/10 - WHOLE - BILL 1006351 in lower than usual and the Goode2 Administration had to insist that the3 gross receipts rate go up to compensate4 for the lost tax revenue.5
I will disagree6 with that statement, Councilman. Back in7 the early 1980s, the magnitude of the use8 of the Delaware Holding Company was not9 even close to what it evolved over the10 next 25, 30 years, number one.11 Number two, there was never12 even any discussion about the Delaware13 Holding Company in the context of the14 enactment of the business privilege tax.15 The whole discussion at that time was a16 gross receipts tax was an unfair tax.17 The better tax policy was a tax on18 ability to pay. If you made money in the19 City, you should be paying taxes to the20 City. If you didn't make money in the21 City, you shouldn't be paying taxes to22 the City.23 When the Administration -- the24 way it came about was, the Chamber came25 418 11/30/10 - WHOLE - BILL 1006351 to Mayor Green and said, The current2 structure is intolerable, we need to make3 a change. Mayor Green said to the4 Chamber, I will be happy to make the5 change, any change you want us to make,6 as long as, as you just said, revenue7 neutral. And the Chamber then said,8 Well, fine, we believe as a matter of9 policy, ability to pay tax on income10 should be the driving force.11
When the13 Administration met with the Chamber14 committee that was working on the tax, we15 were told that the rate on the net income16 tax would have to be in the area of six17 to six and a half percent in order to not18 have a tax on gross receipts. The19 committee at that time decided that when20 you combine the six or six and a half21 percent net income tax at the City level,22 combined with a 10 or a 12 percent tax on23 income at the corporate level, that was a24 tremendous business disincentive.25 419 11/30/10 - WHOLE - BILL 1006351
So as a result4 of that, the committee said, Well, we5 can't have a tax that is that high, but6 we want a tax that is based on ability to7 pay, at what rate would we have to impose8 a gross receipts tax to drive that net9 income rate down. And if I recall10 correctly, the original net income rate11 was 3.7 percent and the original gross12 receipt rate was 3.05 mills, and the hope13 was to even drive that 3.05 mills rate14 down.15
Thank19 you.20 You made a point and I just21 want you to repeat it. You said that22 during all of these discussions, in light23 of the testimony this morning, everybody24 knew that folks were using the Delaware25 420 11/30/10 - WHOLE - BILL 1006351 Loophole, but that was never part of the2 discussion.3
No, I didn't --4 discussion -- I didn't hear some of the5 discussion this morning, but I can tell6 you since I co-chaired the Chamber7 committee that was working on the BPT,8 the Delaware Holding Company was never9 mentioned once in almost a year of10 discussions.11
So my12 question is, why not since we know that13 it is a practice that is utilized by14 folks who have the ability to do so?15
I am not saying16 it is not utilized. What I am17 suggesting, Councilwoman, is that it is18 not utilized to the magnitude as it is19 being represented.20 After I had my discussions with21 you and with Councilman Green, I met with22 Steve Mullin, and in my conversation with23 Steve Mullin, he acknowledged to me that24 the Delaware Holding Company was not the25 421 11/30/10 - WHOLE - BILL 1006351 driving force for some of these2 out-of-City companies only paying a small3 portion of the net income to4 Philadelphia. The driving force was the5 fact that their apportionment factors6 were so small that if you have a major7 multi-national company that has 0.000018 percent of their property, payroll and9 sales in Philadelphia, that's all they're10 going to be paying of their income to11 Philadelphia.12
That's13 exactly right, and that's what we're14 trying to correct.15
Well, you know,16 the courts have consistently said that a17 taxpayer must be paying a fair share in18 order to not be burdening interstate19 commerce. What is the fair share? If a20 company has 0.00001 percent of their21 activity in Philadelphia and that's what22 they're paying tax on, but a change like23 this might raise their taxable activity24 in Philadelphia -- their tax obligation25 422 11/30/10 - WHOLE - BILL 1006351 to Philadelphia to two percent --2
The question7 is, on the profits they make in8 Philadelphia, without an apportionment9 formula, they'd pay 6.45 percent just10 like Philadelphia businesses, and is it11 fair to Philadelphia businesses who have12 to pay 6.45 percent to have a company13 that may make $10 million here not pay14 6.45 percent on that, but pay 0.0000115 percent because most of their employees,16 property, plant, equipment is in China.17
Well,18 apportionment is a very -- not flexible,19 is not the word I'm looking for. When20 the taxpayer files their tax return, they21 follow the apportionment regulations22 promulgated by the Commissioner. Today23 those regulations have four factors:24 Property in the City, payroll in the City25 423 11/30/10 - WHOLE - BILL 1006351 and a double weighting of their sales in2 the City.3 If there is such a distortion4 as you're suggesting that they're paying5 tax on $1,000 of income when they're6 generating $10 million of income, the7 Commissioner currently has the power to8 go in and come up with a different9 apportionment formula, one that might10 be -- and which is specifically permitted11 in the regulations -- what is called12 separate accounting, where the13 Commissioner can go in and say, Your14 particular store generated $10 million of15 net profit, you're only reporting based16 on this apportionment formula $10,000 of17 profit, we're going to change your18 apportionment factors and make you pay19 tax on 10 million. That's currently in20 the law today.21
Well, no,22 it's not the law. That's what we could23 do in regulation, which we haven't done.24
It is in the25 424 11/30/10 - WHOLE - BILL 1006351 regulations today, Councilman.2
Well, my3 point is that we have a very complex tax4 system in the City of Philadelphia5 because of the apportionment formulas,6 and messing around with apportionment7 formulas only makes our tax system more8 complex than every other jurisdiction in9 the country except for potentially10 Washington, DC, New York City and11 Detroit, who all have net income taxes.12
Well, there are13 different methodologies of apportionment,14 and if you look at the trend of15 apportionment around the country, many16 jurisdictions, state and local, are17 moving to what they call single-sales18 factor, which would achieve a lot of the19 goals you're trying to achieve with this20 bill.21
Single-sales22 factor apportionment, according to the23 Administration's own estimates, would24 only have a $30 or $40 million impact.25 425 11/30/10 - WHOLE - BILL 1006351 Also, the problem with single-sales2 factor apportionment is that it does not3 help service industries. It does not4 help the highly profitable firms in5 Center City. You'd have to do6 market-based sourcing for that. We can't7 do market-based sourcing because we don't8 have the data available and it would take9 years to get it.10 What we're looking at is under11 state law what exists for us to be able12 to do as a city on our own, what can we13 do to make us the most economically14 competitive city when competing with the15 region and the country for businesses.16 You heard Mr. Campoli. People are not17 moving in here because of the net income18 tax. The gross receipts tax is not a19 factor in people's decisions on where to20 locate. So we are losing jobs in Center21 City, losing the attendant wage taxes,22 and we will continue to have suburban23 sprawl building stuff in the surrounding24 counties until we create the best25 426 11/30/10 - WHOLE - BILL 1006351 possible tax system for us that is2 available to us under state law, and3 that's the purpose of it.4 But with respect to5 Mr. Mahoney's testimony --6
Councilman, can7 I comment about Mr. Campoli for you in a8 moment? Can I interrupt you to make a9 comment on your saying about Mr. Campoli?10
I don't know11 how you'd have relevant information, but12 go ahead.13
Well, I know14 Mr. Campoli very well, and one of the15 things that I've learned in this process16 myself is that many of the -- I won't say17 all, because I don't know all -- many of18 the major Center City developers,19 building owners in their leases already20 have built into those leases the ability21 to pass through to their tenants the22 gross receipts portion of the business23 privilege tax, not the net income24 portion. So a tenant in one of25 427 11/30/10 - WHOLE - BILL 1006351 Mr. Campoli's buildings, assuming his2 leases contain that provision, is going3 to be getting -- they might be saving on4 the net income portion. They're going to5 be paying the gross receipts portion of6 their business, plus the gross receipts7 portion of Mr. Campoli's business.8
Mr. Campoli9 testified that it would cost his business10 $500,000 instead of $150,000, and I take11 him at his word.12
Okay. So15 the point is, he's a loser, and I16 understand that many of the other REITs17 and commercial property owners in this18 city have determined that they will be19 losers, including some you work for as an20 attorney outside of your connection with21 the Chamber of Commerce.22
This is -- my23 work with the Chamber of Commerce is24 purely pro bono.25 428 11/30/10 - WHOLE - BILL 1006351
I2 understand, and I appreciate that. So I3 just didn't want to -- you have lots of4 stakeholders also.5
And so with7 respect to tax pyramiding that8 Mr. Mahoney mentioned, we completely9 agree that that's a major flaw in gross10 receipts taxes, and that's why unlike11 Washington state and other jurisdictions12 that have an issue with this, we actually13 have alternative rates for the low margin14 industries where a lot of pyramiding15 occurs, in retail, in wholesale, in16 manufacturing, and as a consequence of a17 very slight increase in the gross18 receipts rate for them -- in the net19 receipts rate for them, what we call the20 alternative rate, and the elimination of21 net income, the low margin businesses22 that testified here today are better off,23 including car dealers. And who would24 have thought that when we went down this25 429 11/30/10 - WHOLE - BILL 1006351 road?2 So with respect to the3 construction industry, through this4 process we uncovered tax pyramiding that5 the State Legislature didn't try to take6 care of, and we're trying to address that7 with this bill.8 So, you know, the bottom line9 is, the Administration and we do not10 disagree about revenue neutrality,11 because we have told the Administration12 that whatever number we need to plug in,13 we will plug in to make this bill revenue14 neutral. So that's sort of a red herring15 issue, because whatever number that has16 to be, it will be, and we've said that17 publicly at Chamber meetings and we've18 said that publicly at -- privately to the19 Administration.20
The fact of23 the matter is, after all of the work24 we've done --25 430 11/30/10 - WHOLE - BILL 1006351 COUNCIL PRESIDENT VERNA:2 Excuse me, Councilman.3 The Chair recognizes Councilman4 Goode for a point of information.5
May I ask6 Councilman Green a question?7 COUNCIL PRESIDENT VERNA:8 Certainly.9
Councilman10 Green, you said whatever number we have11 to plug in, we'll just plug in to make it12 revenue neutral, without regard to the13 impact on the industries.14
Well, the15 good news is, Councilman, that the16 Administration's current analysis17 shows -- we show a 5.33 mill.18
They show21 5.77. And the issue with that -- and it22 will be discussed tomorrow by Mr. Mullin23 and Mr. Dubow -- is that the24 Administration -- but the point is, if it25 431 11/30/10 - WHOLE - BILL 1006351 was 5.77 and that was based on 20152 numbers in terms of the Administration's3 own five-year estimate, I would say that4 this would have the same positive5 economic impact on the City.6
That's not7 my question. My question is, we've8 already had testimony against the bill,9 people who were against it at 5.3 and the10 impact it's going to have.11
The impact14 it's going to have. So to them it's15 obviously going to have an even worse16 impact at 5.77.17
Absolutely18 correct. And it will -- absolutely19 correct. I'm not -- I'm not arguing the20 point. You're right.21
So with24 respect to that, I just want the Chamber25 432 11/30/10 - WHOLE - BILL 1006351 to be aware of what the actual data2 differences are. The Administration used3 2008 data, not 2015 data, where they have4 a much higher base of total receipts in5 the City in order to come up with that6 calculation in their own five-year7 revenue estimates. So we are waiting for8 data from the Administration as to what9 the tax would have to be in 2015, not the10 2008 numbers they used. We are not11 capable as a body of producing that12 information. So if they never produce13 it, either because they can't figure it14 out or for some other reason, then we15 can't stop a process that's been a16 two-year process because the17 Administration, with over 300 people in18 Revenue and Finance, won't provide that19 to us.20 So it's not -- we want the21 data. We want to agree on the data. We22 began this process trying to agree on the23 data, and I just want to say, I share24 your goals with respect to that ultimate25 433 11/30/10 - WHOLE - BILL 1006351 happy place where we agree on the data2 and we can just debate the policy.3
Thank7 you.8 Are there any other questions9 from members of the Committee?10 (No response.)11 COUNCIL PRESIDENT VERNA:12 Gentlemen, thank you.13 MR. McPHERSON: We have written14 testimony --15 COUNCIL PRESIDENT VERNA:16 You've been extremely patient. We do17 appreciate it.18 MR. McPHERSON: We have written19 testimony that was left by David C.20 Thomsen.21
Do we22 have anyone else to testify on this bill?23 (No response.)24 COUNCIL PRESIDENT VERNA:25 434 11/30/10 - WHOLE - BILL 1006351 Seeing no one, the Committee will stand2 in recess until 1 o'clock tomorrow.3 Thank you very much.4 (Committee of the Whole5 adjourned at 5:40 p.m.)6 - - -7 8 9 10 11 12 13 14 15 16 17 18 435 CERTIFICATE2 I HEREBY CERTIFY that the3 proceedings, evidence and objections are4 contained fully and accurately in the5 stenographic notes taken by me upon the6 foregoing matter on November 30, 2010, and7 that this is a true and correct transcript of8 same.9 --------------------14 MICHELE L. MURPHY15 RPR-Notary Public16 (The foregoing certification of this20 transcript does not apply to any reproduction21 of the same by any means, unless under the22 direct control and/or supervision of the23 certifying reporter.)24