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