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