Committee Hearing, November 30, 2010

Absolutely. It6 put them at too much of a competitive7 disadvantage.8

Okay. Thank9 you. That's all the questions I have for10 you.11 I want to allow anybody else to12 ask questions of Mr. Campoli before I13 continue.14

I'm15 sorry. What was your statement?16

I have17 questions for the Hotel Association, but18 I know Mr. Campoli has been here all day,19 so I wanted to allow -- I wanted to see20 if people wanted to ask questions of him21 so that we can excuse him.22

Well,23 I think they've all been here all day;24 have you not?25 353 11/30/10 - WHOLE - BILL 1006351

Yeah,2 they've all been here all day.3

I4 think all of them have been here.5

They didn't6 leave.7

Oh, okay.8 That's fine. Well, then I'll continue --9 if we're going to do that, I'll continue10 with my questioning.11

Madam12 President?13 COUNCIL PRESIDENT VERNA:14 Councilman, it is now 4 o'clock. I15 understand that Mr. Dubow will testify16 next. However, he has to be out of the17 building by 5 o'clock. So if you could18 speed up your questions, I think it would19 be to everybody's benefit.20

Yes, Madam21 President. I have very few questions22 actually for the Hotel Association.23 There is a chart up there that24 describes -- there's a chart that we have25 354 11/30/10 - WHOLE - BILL 1006351 up there called "A Level Playing Field -2 Hospitality Sector," and it's based on3 information that you provided to us for4 non-Philadelphia-based hotels and hotels5 headquartered in Philadelphia. And we6 took a look at the Philadelphia-based7 Hotel N. We took a look at the8 Philadelphia-based Hotel N, and in Hotel9 N, which is a hotel with $18 million in10 revenue, based on the description you11 gave us in our meeting -- and we had a12 two-hour meeting, and I thank you for13 spending so much time with us -- the14 Hotel N had total revenue of -- and this15 is average over the last four years -- of16 19 million -- so I'm in the far right17 column -- $19,197,770. It paid in gross18 receipts only, which is the next line19 down, $27,164, and the gross receipts20 based on the proposed change of gross21 receipts, it would pay $101,748, for a22 total increase in gross receipts taxes to23 the City of Philadelphia of $74,000.24 That hotel had net income of $2.8 million25 355 11/30/10 - WHOLE - BILL 1006351 and it paid $184,000 in taxes to the City2 of Philadelphia in net income. That's a3 profit margin of seven or eight percent4 on $2.8 million. It realized the entire5 net income portion tax of savings, so it6 has a net savings, this7 Philadelphia-based hotel headquartered8 here, of $110,313.9 When you compare that to Hotel10 F, which is in the non-Philadelphia-based11 hotel category, it has $18 million in12 income. Its gross receipts goes from 2613 to 98, and it has $72,000 in increased14 taxes. So hotels of similar size, inside15 and outside the City, essentially offset16 each other.17 Now, missing from Hotel F is18 any net income payment, whereas Hotel N19 and all of the Philadelphia-based hotels,20 you have a payment of net income tax to21 the City of Philadelphia.22 So the first thing I'd like you23 to explain is how all the24 Philadelphia-based hotels, which are25 356 11/30/10 - WHOLE - BILL 1006351 generally union hotels with higher wage2 bases, can end up -- well, forget that;3 how the Philadelphia hotels all have net4 income on average of around seven to ten5 percent and all of the hotels not based6 in Philadelphia apparently have no net7 income tax because -- in other words, are8 Philadelphia-based hotels run seven to9 ten percent more efficiently than your10 hotels, or what is going on where they're11 paying net income tax and you're paying12 none?13

I think as we14 spoke that day, this was a very small15 sampling of the hotels, and we could not16 confirm these numbers. These were17 individuals that we asked to try to get18 some data for together. So as far as19 this sheet goes and, again, as we spoke20 last week, this really is not valid21 information that I would want to speak to22 compared to what the City has told us in23 Rob Dubow's -- you know, that will cost24 our industry in excess of $3 million a25 357 11/30/10 - WHOLE - BILL 1006351 year by changing this. There's a lot of2 other hotels that are not necessarily3 included in this sheet.4

Sure. I5 understand that, but of the -- this is6 your data that we're working from. So of7 the nine Philadelphia hotels that are on8 here, eight will have their taxes go9 down. Of the nine non-Philadelphia10 hotels, their taxes will go up. So11 basically what is happening in the hotel12 industry is essentially what we're saying13 is going to happen in every industry, and14 here is your data. Philadelphia-based15 businesses will pay less to the City of16 Philadelphia and non-Philadelphia-based17 businesses will pay more to the City of18 Philadelphia because they can no longer19 legally avoid through the tax-shifting20 mechanisms, Delaware Holding Company,21 management fees outside of the City and22 state to avoid Pennsylvania income tax23 and Philadelphia tax. And so, yes, it24 will cost the industry, but it's proving25 358 11/30/10 - WHOLE - BILL 1006351 the point that we're making at large,2 which is it will help Philadelphia3 companies and hurt Philadelphia -- and4 allow us to get our fair share of taxes5 from businesses that are not6 headquartered here and are legally7 avoiding the net income tax.8

I don't know if9 that's 100 percent accurate, in this10 regard: The hotels that are based11 outside of Philadelphia are the hotels12 that drive the business into13 Philadelphia. If those owners and those14 businesses are hurt because the owners15 are making service reductions or not16 spending capital to improve their17 product, the larger hotels won't get the18 occupancy, which very candidly and has19 been proven is what drives the occupancy20 for the other hotels. So --21

I'm not22 going to debate it with you. I'm just23 going off the data you provided.24 So the other thing is, in every25 359 11/30/10 - WHOLE - BILL 1006351 other major city in the country, what are2 the most high occupancy days for hotel3 stays? I mean, are there more stays4 during the week or on the weekend in New5 York and Boston and LA?6

Weekends, Fridays,7 Saturdays.8

In our9 meeting, I think Jim -- the hotel10 industry business days during the week11 are the bread and butter, and in most12 cities in the country --13

Rate-wise, not14 occupancy-wise.15

And also16 occupancy.17

As an industry as18 a whole, yes.19

As an20 industry as a whole.21

Your question a22 minute ago was to compare us to New York,23 Boston, DC.24

Okay. Fair25 360 11/30/10 - WHOLE - BILL 1006351 enough. As the industry as a whole,2 business days are more than weekend3 stays?4

Correct.5

In the City6 of Philadelphia, do you have more weekend7 stays or business days?8

Weekend occupancy9 is slightly higher than mid week,10 Tuesday, Wednesday, by less than a point.11

Right. And12 is that very unusual for the Marriott13 chain?14

I don't think we15 can speak to all of Marriott.16

Is it very17 unusual for the industry nationally to18 have fewer business stays?19

As nationally,20 weekend occupancy, as an industry as a21 whole, is lower than weekday.22

Okay.23

If you were to24 look at the City's specific -- speak25 361 11/30/10 - WHOLE - BILL 1006351 apples to apples of an urban environment2 like you're asking, that data may very3 well be very different.4

And you5 heard Mr. Campoli's testimony about how6 he is convinced that he is willing to pay7 more to increase, because he believes it8 will drive demand for office space, and9 if there are more businesspeople in town,10 that presumably would increase business11 hotel stays in town. I know you're not12 willing to accept that this will happen.13 The proof will have to be in the pudding14 for you, but I think the data you've15 provided really proves our point, not16 just for your industry but for most17 industries. So I thank you for your18 testimony.19

Thank20 you.21 The Chair recognizes Councilman22 Kenney.23

Thank you,24 Madam President.25 362 11/30/10 - WHOLE - BILL 1006351 I think it's interesting that2 Mr. Campoli appeared at the witness table3 at the same time the hotel industry did,4 because it shows a very clear picture of5 winners and losers and that juxtaposition6 of folks who want this to happen because7 it's in their economic interest as8 opposed to those who are apparently quite9 concerned and -- quite concerned about10 the future that they're facing over the11 next five years under this legislation.12 The question that I have,13 though, relates to the over $700 million14 investment that the State and City has15 made around the corner and the need to be16 able to be competitively going after17 convention business that can fill both18 buildings, because the purpose of having19 an expanded Convention Center was to be20 able to have two major conventions or21 three at the same time. But in order to22 have that, not only do we need the23 $700-and-some million building, we need24 how many more hotel rooms to deal with25 363 11/30/10 - WHOLE - BILL 1006351 that scenario that we want to fill both2 buildings? How many more hotels room?3 I've heard as many as 2,000.4

With all due5 respect to Mr. Muldoon, it is anywhere6 from 2,000 to 2,500 hotel rooms.7

Now, even8 if the sponsors of the legislation are9 correct in their assertions that in this10 laboratory experiment, five years from11 now the whole world shifts and we are12 back on this competitive level with other13 states and cities in the world, how many14 hotel rooms do you think are going to be15 developed while we're waiting to see the16 proof in the pudding?17

None. None of any18 substantial size.19

And none20 certainly from hoteliers who are located21 outside the City of Philadelphia?22

That's pretty --23

Do you24 expect that companies like Marriott and25 364 11/30/10 - WHOLE - BILL 1006351 Hyatt and others would now move to2 Philadelphia as a result of this change3 in tax burden?4

No.5

So6 potentially what you're telling me, from7 your industry's perspective and from the8 hospitality industry perspective, is that9 over the next three, four, five years10 under this scenario, potentially we'd11 have no development of hotel rooms12 because people are waiting to see what13 happens and no ability to fill the two14 buildings at the same time?15

I think that's a16 correct assumption.17

Thank you.18

Thank19 you.20 The Chair recognizes Councilman21 Greenlee.22

Thank23 you, Madam President.24 Good afternoon. Very quickly,25 365 11/30/10 - WHOLE - BILL 1006351 I know we've been here a long time. As2 far as I've asked a couple different3 witnesses about jobs, and, Mr. Walsh, I4 think you said your estimation is that it5 could be 20 to 25 jobs that could be6 lost. You're talking about your hotel?7

Correct.8

Has the9 Hotel Association generally looked at10 that in any estimate? I know it has to11 be an estimate. There's been a lot of12 estimates thrown around. How many jobs,13 if you could see, possibly losing over14 the whole industry in Philadelphia?15

I don't think every16 hotel has gone through that exercise.17

I didn't18 know if the Association generally looked19 at that.20

We can. We can get21 estimates.22

You could also look23 at how many people were employed in this24 industry three or four years ago versus25 366 11/30/10 - WHOLE - BILL 1006351 how many are employed against it now and2 see a big disparity.3

I'm sure4 that's true obviously, but here we're5 talking about a major change, and some6 people would say that change is helpful,7 some say -- it would be interesting to8 see if you could forward to the9 President, if you do do that study, just10 your estimation of the job situation.11 Thank you.12 Thank you, Madam President.13 COUNCIL PRESIDENT VERNA:14 You're welcome.15 The Chair recognizes16 Councilwoman Brown.17

Madam18 President, I'll --19 COUNCILMAN DiCICCO: She will20 yield until she's done eating.21

The22 Chair recognizes Councilman Goode.23

Thank you,24 Madam President.25 367 11/30/10 - WHOLE - BILL 1006351 My questions are actually for2 Mr. Campoli.3 Good afternoon, Mr. Campoli.4 We've worked together before when you5 came to Council to oppose the Comcast6 KOZ. We've worked together on an7 initiative called the Keep Philadelphia8 Competitive Tax Credit where we created a9 separate alternative incentive for10 higher-paying jobs. We wanted to do it11 on a larger scale. It did not happen.12 You opposed the Comcast KOZ and you13 supported the concept of a Keep14 Philadelphia Competitive Tax Credit for15 what reason?16

Because you're17 talking all day about picking winners and18 losers, and the Comcast battle was19 picking a winner and we were the losers.20 Whereas your bill was more spread and21 available to everyone, as this bill would22 be to the businesses or the majority of23 the businesses that occupy Center City24 towers.25 368 11/30/10 - WHOLE - BILL 1006351

But this2 bill still has winners and losers?3

I think the4 winner is the City of Philadelphia. I5 think every bill has winners and losers.6

But this7 bill still has winners and losers. I8 stood with you then on principle that we9 should not be picking winners and losers.10 Do you acknowledge that this bill does11 exactly that, picks winners and losers?12

On a much larger13 scale. Yes.14

Should we15 create losers?16

I don't know any17 bill that passes through any houses of18 any government that doesn't pick winners19 and losers, but not as directly as the20 KOZ did.21

So it's just22 about who wins and loses?23

No. It's24 never -- it's all about the City. It25 369 11/30/10 - WHOLE - BILL 1006351 should be about the City of Philadelphia2 and all of the residents in it. I have a3 lot of blue-collar workers that work for4 me in these buildings, as well as City5 residents who work in these buildings6 that many of which now are forced to live7 out in the suburbs and drive in and out8 and still pay the wage tax.9

So the10 Comcast KOZ was negated on the state11 level?12

Correct.13

But had we14 done the Comcast KOZ rather than15 alternative funding that was provided,16 was the Comcast project in the end17 positive for the City?18

Absolutely.19 They're paying taxes.20

So the21 Comcast project was beneficial for the22 City, but there were winners and losers,23 and at that point, you were a loser and24 it was still good for the City.25 370 11/30/10 - WHOLE - BILL 1006351

We won that2 battle. The City won that battle,3 because we beat them in Harrisburg, and4 they are paying taxes today and they5 expanded, like we knew they would, and it6 improved the downtown area, without major7 tax cuts to the City of Philadelphia for8 15 years.9

Okay. So10 your position for the record is that11 there has to be losers in order for the12 City to benefit?13

I don't14 necessarily agree that there's going to15 be a lot of losers. I do understand that16 there are uncertainties on certain17 industries, but I think on the larger18 scale, there are many more winners. If19 there are losers --20

How do you21 quantify that?22

Manufacturing,23 office, I think restaurants. I think24 that if you have a vibrant downtown, that25 371 11/30/10 - WHOLE - BILL 1006351 it has created for us a downtown now that2 is completely different than 20 years3 ago. So more people will live here,4 downtown. I mean, Philadelphia still has5 its ultimate problems with its school6 system, but as far as -- what I would7 have a difficulty understanding -- and8 I'm a lifelong resident here -- is, it9 appears to me that we look at the10 businesses that are located in these11 Center City towers as if they can't go12 anywhere because the buildings can't.13 But if you look at a vibrant city like14 Boston -- New York is an anomaly, as15 Washington is, because they have separate16 generators. But the fact that we haven't17 had a new building in 20 years that was18 demand related, that's terrible.19

Let me just20 end this by asking a rhetorical question.21 Should we do some KOZs in Center City?22

No.23

Thank you,24 Madam President.25 372 11/30/10 - WHOLE - BILL 1006351 COUNCIL PRESIDENT VERNA:2 You're welcome.3 The Chair recognizes Councilman4 Green -- oh, I'm sorry. Councilwoman5 Brown, are you ready?6

Yes.7 Thank you very much.8 COUNCIL PRESIDENT VERNA:9 You're welcome.10

It is no11 secret that throughout this debate, one12 of my concerns has been what impact this13 would have on the hotel, restaurant,14 tourism industry, recognizing that it's15 the number two industry in the City and,16 as Councilman Kenney has stipulated,17 we've gone -- how many millions is that?18

Seven19 hundred plus.20

Million to21 enhance our hospitality industry.22 With that said, I want to focus23 on a statement made on of your24 testimony. "Other hotels will be forced25 373 11/30/10 - WHOLE - BILL 1006351 to cut costs to survive, and too often2 the only cost remaining is staff."3 So I wanted to take a closer4 look at what "staff" means and who they5 are.6 Break down, if you will, the7 various levels of staff in a hotel,8 starting with the executive staff, just9 call three or four categories for me.10

If we look from11 senior leadership, that would be on12 average about two percent of the staff.13 Management as a whole, including senior14 leadership, would probably be about six15 to eight percent of the total staff. And16 then the remaining would be hourly17 workers, ranging from -- just really all18 levels of the hourly worker range, but19 pay raises would range anywhere from, I20 would say, about $13 an hour upwards to21 about $25 an hour.22

So 80-plus23 percent of the remaining staff are hourly24 workers?25 374 11/30/10 - WHOLE - BILL 1006351

Yes.2

Give me a3 profile of who or what that hourly worker4 looks like.5

Well, as we6 stated, 80-plus percent of our industry7 comes from Philadelphia.8 COUNCILWOMAN BROWN:9 Philadelphia first.10

Public11 transportation is critical to get them to12 and from our hotels.13 I would say that the majority14 of them are not college educated. So15 they are lifelong Philadelphians, who16 have grown up here, lived all their life17 in Philadelphia, and are looking for18 opportunities to grow, looking for19 opportunities to make a better life for20 themselves.21

Within an22 industry.23

Within an24 industry. And the one nice thing about25 375 11/30/10 - WHOLE - BILL 1006351 our industry is, it's not an industry2 that you have to have a formal education.3 Good people can succeed in our industry,4 unlike other industries that may require5 more formal education to move up.6

Councilwoman, I7 made a note of this before I came here.8 In September of 2008, our hotel employed9 1,100 people in hourly positions. We10 employed 85 people in management11 positions, for a total of 1,185 people.12 Currently, I have 885 people in hourly13 positions, which is a reduction of 215,14 and I have 60 people in management15 positions, which is a reduction of 25 out16 of 60, for a total of 945. So you can17 see where that comes from.18 As Jim alluded to, we also19 provide opportunities. Over 50 percent20 of the 60 people in my management staff21 have come from hourly positions.22

From the23 ranks.24

Ranks into25 376 11/30/10 - WHOLE - BILL 1006351 management in our organization.2

So what was your3 first hotel job?4

I worked from 11:005 at night to 7:00 in the morning as a6 night auditor at Marriott Sussex House in7 New York City.8

Thank you9 for that.10 With the continuation of the11 profile they're not college educated, you12 said 80 percent of them come from13 Philadelphia, are Philadelphia residents.14

Philadelphia15 residents.16

Gender?17

I would probably18 say gender is about 60 percent female, 6519 percent female.20

And21 ethnicity?22

I would say23 that's probably about 85, 90 percent24 African American, Hispanic.25 377 11/30/10 - WHOLE - BILL 1006351

Okay. And2 so when we look to see who the potential3 losers are, they are in many ways the4 very constituents who so often don't get5 opportunity in other industries for all6 the reasons you just stipulated, not well7 educated -- well, principally because8 they're not well educated, and this9 industry becomes one where you can get10 your toe in the door and have an11 opportunity to grow within the ranks.12 Thank you for your testimony.13

Just one other14 thing I mentioned. In our industry and15 especially over the last years, the16 failure to control cost as revenues have17 declined have been very difficult,18 because there's a lot of costs that19 somewhat are uncontrollable. We see20 healthcare costs going up much more. We21 see utility costs going up. So when we22 start having to look at opportunities to23 cut costs to take care of this, wages is24 often the very first thing that we have25 378 11/30/10 - WHOLE - BILL 1006351 and one of the few things that we really2 control anymore as leaders, because a lot3 of these other costs, we have to put4 shampoos in the room, we have to have5 toilet paper in the room. Those costs6 are what they are, and so ultimately it7 comes to the wages that we have to sit8 there -- and if we look over the last9 couple years, as we look at the numbers10 we've talked about, the only way we could11 survive as an industry was to cut these12 costs, because we're going to have to13 have sheets on the bed when you come to14 stay with us. We may just have a few15 less staff serving you as you come to16 stay with us.17

The additional18 losers in this, ma'am, are that -- and I19 can't answer for every hotel, but I can20 certainly answer for Jim and I. We work21 for the same company. Eighty percent of22 our direct spend that's not contracted by23 Marriott has to be with women or24 minority-owned businesses in25 379 11/30/10 - WHOLE - BILL 1006351 Philadelphia.2

Repeat3 that.4

Eighty percent of5 our non-contracted spend with Marriott6 national vendors has to be from local7 vendors in Philadelphia, minority and8 women-based organizations. We have9 several of them that we have not used10 their services in a couple of years11 because we haven't had the business to12 do, so they're hurting as well. We don't13 keep our vendors busy. Our vendors14 aren't getting business from us.15

There was16 some discussion given to a level playing17 field, and in no way to discredit the18 thinkers behind this, based on your19 experience in looking at that grid, does20 that capture a potential reality based on21 this proposal?22

No, because23 that's isolating two specific hotels on24 that chart. So there are 60-plus hotels25 380 11/30/10 - WHOLE - BILL 1006351 that fall into the Philadelphia City2 limits and in that one you're looking at3 two specific examples.4

I see.5 Okay, then. Again, thank you for your6 testimony.7 Thank you, Madam Chair.8 COUNCIL PRESIDENT VERNA:9 You're welcome.10 The Chair recognizes Councilman11 Green.12

Thank you,13 Madam Chair. I'll be very brief.14 Hopefully I'll keep my questions short;15 you can keep your answers short, Jim.16 Jim, when you were in my office17 last week, I guess it was, we agreed that18 at a $150 a room average stay in Center19 City Philadelphia, that no hotel pencils20 regardless of the tax, without21 significant RCAP or other state resources22 being provided, to make that hotel work.23

To be built, yes.24

To be built,25 381 11/30/10 - WHOLE - BILL 1006351 right. Okay. And so it's actually 792 cent -- on $150 it's 79 cents a room at3 5.3 mills. I know your testimony said4 several dollars, but do you -- and I5 think you agreed with this premise also6 while you were in the office. Is anybody7 going to stay in Camden or Montgomery8 County to avoid a 79 cent increase on9 their bill?10

Probably not.11

If they're12 coming to Philly, they're going to stay13 here regardless, so --14

For a business15 traveler.16

Individual business17 traveler.18

Right. So,19 you know, I appreciate what you're20 saying. You happen to represent -- and21 just in response to Councilwoman Brown's22 last question, that chart does represent23 two specific examples, two specific24 examples taken from a chart of nine25 382 11/30/10 - WHOLE - BILL 1006351 non-Philadelphia headquartered hotels who2 apparently pay no net income, because3 they legally avoid it, when the industry4 as a whole among Philly-based firms has a5 seven to ten percent margin.6 So I haven't heard an7 explanation of how you avoid making a8 profit when the Philadelphia-based hotels9 do, unless it's through apportionment.10 You can respond to that if you11 want, but I don't expect you to. But the12 chart has nine non-Philadelphia hotels,13 nine Philadelphia hotels, and with14 respect to all nine, it's the same story15 as in that representative sample.16 So thank you for your17 testimony.18

Thank19 you.20 The Chair recognizes Councilman21 DiCicco.22 COUNCILMAN DiCICCO: Thank you,23 Madam Chair.24 Mr. Campoli, you keep getting25 383 11/30/10 - WHOLE - BILL 1006351 up. Why don't you just slide a chair2 over. It might be easier.3 I was interested in your last4 comment about there hasn't been any high5 rise or office development in the last 156 years in the City of Philadelphia that7 had not been somewhat subsidized by8 government. This bill will either pass9 as is, maybe pass in an amended form or10 maybe not pass at all. Let's assume for11 the moment it's the status quo, the bill12 doesn't pass, there's no changes.13 In your opinion, being in this14 business for all these years, what else15 do you think is contributing to the16 non-development of office buildings in17 the City of Philadelphia, outside of18 maybe the tax structure? Are there any19 other factors that are causing that to20 happen?21

Not -- nothing,22 in my estimation, as significant as the23 tax structure. Nothing. I mean,24 construction costs are equal up and down25 384 11/30/10 - WHOLE - BILL 1006351 the eastern seaboard in major cities.2 It's demand here, and demand is driven by3 companies who want to relocate here, of4 which it's -- they want to. I talked to5 them. They want to come here. They6 feel -- and even people in our -- I mean,7 they feel Philadelphia is poised to8 really take off, in a position to move9 out of this recession, but it's being10 held back significantly, particularly by11 the income tax.12 COUNCILMAN DiCICCO: I would13 agree that the cost of construction,14 based on my knowledge having worked with15 a number of developers, is pretty much16 equal up and down the coast. The17 difference is, we don't get the return or18 the value on the per square foot rental19 as they would in New York and Washington,20 DC, and it's the same in the residential21 industry as well. We can't charge $1,60022 a square foot, although our costs of23 construction are comparable to New York,24 as an example. And I ask you that25 385 11/30/10 - WHOLE - BILL 1006351 because even with the ten-year tax2 abatement, that does not give enough3 incentive for people to want to build?4

Philadelphia's5 property taxes are lower from an office6 building basis than New York, Boston,7 others. Obviously their tax structure is8 based on property. And, yes, our margins9 are lower because our rents are lower,10 because our operating expenses are close11 to the same. I mean, other than take12 some of the property taxes. But the fact13 of the matter is, we don't have the14 demand to drive the rates to the levels15 to draw a new office building, which16 would -- then the margin would get more17 closer to what you see up in the other18 cities.19 COUNCILMAN DiCICCO: So the tax20 abatement or an increase in the years of21 the tax abatement has expired.22 Hypothetically, if you did a 15-year tax23 abatement for new construction, which we24 have ten years now for commercial25 386 11/30/10 - WHOLE - BILL 1006351 buildings, went to 15 years, would that2 be a driving factor?3

Well, no, because4 where we are -- and that's why the KOZ5 has been so effective in other areas, is6 that we are eliminating the onerous7 corporate taxes versus New York and8 Boston will give relief for development.9 COUNCILMAN DiCICCO: Okay. I10 thought I understood. I wanted to make11 sure of that.12 No other questions. Thank you.13

Sure.14

Thank15 you very much. I think we did have -- we16 do have another panel. However, I'm told17 that they're kind enough to wait until18 after Mr. Dubow provides his testimony,19 and we do appreciate that.20 Gentlemen, thank you very much.21 You've been extremely patient. Thank22 you.23 (Short recess for court24 stenographer.)25 387 11/30/10 - WHOLE - BILL 1006351

We're2 back in session.3 Mr. Dubow, you're excused. I4 know you have a very important meeting,5 so we will excuse you this evening and6 we'll see you tomorrow.7

At 1:00?8

One9 o'clock.10

Thank you.11 COUNCIL PRESIDENT VERNA:12 You're welcome.13 MR. McPHERSON: Our next panel14 consists of Randy Hofer, Henri Marcial,15 Robert Wonderling and Anne C. Croisier.16 (Witnesses approached witness17 table.)18

Good19 afternoon. Please identify yourself for20 the record and proceed with your21 testimony.22

Anne C.23 Croisier, Ph.D., MBA.24 COUNCIL PRESIDENT VERNA:25 388 11/30/10 - WHOLE - BILL 1006351 Please proceed.2

Pardon?3 COUNCIL PRESIDENT VERNA:4 Please proceed with your testimony.5

Well, I6 misunderstood. I thought you were going7 to eliminate that business privilege tax8 altogether. I misunderstood. I haven't9 watched television in five or six years.10 I rarely read the newspaper, because I11 can't afford it. But I got in the City's12 web and see you were testifying about13 this business privilege tax, but I was14 told it was a $300 flat rate, but I found15 out now that's the registration fee.16 But I work for a small17 business, and the reason small businesses18 hire people as independent contractors is19 because they can't afford to pay someone20 to take the taxes out of people's21 paychecks, so they just write a regular22 check, like you would a personal check.23 And from what I heard, like I pay sky24 high taxes because it's a business25 389 11/30/10 - WHOLE - BILL 1006351 privilege tax instead of a wage tax, and2 I earn $108 a week in total gross wages.3 I didn't begin the job until May 18th of4 this year, so my income would be about5 $3,200 or $3,500, about 65 percent below6 the federal poverty line. It's going to7 be like sky high taxes. The percentage8 of the tax is going to be sky high.9 So I think maybe -- I realize10 you might not want to eliminate it11 altogether, but I think for people with12 low wages working for small business,13 maybe you should make it more like a wage14 tax or the rate more like a wage tax.15 I do telemarketing in the16 suburbs and I've been told that17 telemarketing is even more unskilled, is18 even more unskilled than fast food work,19 but I know -- I thought practically20 everybody that works for small business21 worked five or ten hours a week in a22 corner coffee shop or a corner hoagie23 shop or that type of thing. But maybe24 something could be done about people who25 390 11/30/10 - WHOLE - BILL 1006351 pay the business privilege tax who are2 earning really low wages. And next3 year -- oh, yeah. My federal4 unemployment extensions will be cut off5 December 11th and the state government6 might eliminate the state unemployment7 extensions. I'll be earning about $5,0008 a year, about 50 percent below the9 federal poverty line. Countless citizens10 in Philadelphia spend their entire life11 50 percent or more below the federal12 poverty line.13 When I wrote my intent14 statement to come to graduate school in15 1984 in Philadelphia, I said I want to16 understand what it really feels like to17 be poor.18 But I think the reason we have19 such high tax rates in the City of20 Philadelphia is because we have one of21 the most deeply impoverished cities in22 the country, so that's why we have to23 have high tax rates. We're largely a24 city of really affluent Caucasian25 391 11/30/10 - WHOLE - BILL 1006351 professionals and executives in Center2 City and deeply impoverished people of3 color in most of the other parts of the4 City. There's working-class Caucasians5 south of Snyder and Passyunk in South6 Philadelphia, some working-class7 Caucasians in Roxborough and in Northeast8 Philadelphia. But --9

Thank10 you very much.11

I don't want to12 waste your time. I hope I didn't get off13 the point.14

Thank15 you.16

I hope I didn't17 disagree with the Mayor. I'm sorry if I18 did. He means more to me than anyone in19 the universe. Of course, first comes my20 faith.21

Thank22 you so much for coming in to testify. We23 do appreciate it. And I think you've24 been here since 9 o'clock this morning.25 392 11/30/10 - WHOLE - BILL 1006351

Oh, I was here2 since about 7:30. I got here about 7:30.3

Oh,4 okay. Thank you so much for your5 patience.6

You're welcome.7

We do8 appreciate it.9

Thank you.10

Thank11 you.12 Our next speaker? Thank you.13 Good evening. You all have been so14 patient. Thank you.15

17 My name is Henri Marcial. I'm here to18 testify in my capacity as General Counsel19 for the Small Business Union regarding20 City of Philadelphia Bill No. 100635. 9 The membership, which numbers10 in the thousands, consists of the11 smallest businesses here in the City, the12 mom-and-pop shops, the corner grocers,13 the mechanics, the restaurant owners, the14 hairdressers. The majority of these are15 members of the minority community,16 whether it's African American, Hispanic17 or Asian. 22 The members of the Small23 Business Union are generally in favor of24 the proposed ordinance. 7 The two main concerns at this8 time are, first, that with regard to9 businesses that have a low or no margin,10 these businesses would not necessarily11 benefit from the structure as it's12 currently written. 14 These businesses have fought to remain15 open simply to help provide some income16 and livelihood to their employees during17 these hard times. Although there are18 some forms of relief in terms of the19 release valves in the bill as it's20 structured and the alternative paragraphs21 we're filing, we do not believe that this22 is enough. 2 Now, I must emphasize that3 these are businesses that are locked in4 the City of Philadelphia. Please note5 the districts that I mentioned. 9 There are still many businesses10 closing in this current economic11 environment and few opening by12 comparison. Each of these businesses13 provides on average support and14 livelihood for four families. 21 The second concern is that the22 bill does not do enough to encourage the23 creation of new small businesses. It24 principally addresses existing and stable25 396 11/30/10 - WHOLE - BILL 1006351 businesses. We do understand that the2 current proposal tries to balance the3 requirements of the state Uniformity4 Clause. 12 It's important to note that13 there is no credit available for these14 individuals, especially considering the15 neighborhoods they live in. So they are16 literally taking a gamble attempting to17 live and risk losing everything to have a18 shot at the American dream. Many of them19 are immigrants. 8 Right now the members of the9 Small Business Union provide a livelihood10 and support for approximately 50,00011 families in the City of Philadelphia. We12 estimate that every new business created13 would provide for four families. 20

Thank21 you.22 We'll now hear from the other23 two witnesses before we recognize anyone24 for questions.25 399 11/30/10 - WHOLE - BILL 1006351 Thank you.2

Good evening,3 President Verna.4

Good5 evening.6

7 I'm Executive Vice-President at the8 Greater Philadelphia Chamber of Commerce9 and I'm joined this evening by Stewart10 Weintraub, who is well known to all of11 you and is the Co-Chair of our Tax12 Committee for some support in the13 testimony. Rob Wonderling apologizes for14 not being here himself. He was chosen to15 the transition team for the new Governor16 and their first meeting was this17 afternoon in Harrisburg. 19 First, let me say that we20 applaud the two main sponsors of this21 bill, Councilwoman Maria Quinones-Sanchez22 and Councilman Bill Green, for their23 forward thinking in recognizing the24 onerous tax burden on businesses in25 400 11/30/10 - WHOLE - BILL 1006351 Philadelphia. Again, I want to thank2 them for the numerous conversations that3 we have had about the measure both here4 and at the Chamber offices over the past5 year. However, let me state at the6 outset that the Greater Philadelphia7 Chamber of Commerce would oppose the bill8 moving forward in its present form and at9 this particular time for the following10 reasons:11 Based on correspondence that we12 have reviewed between Councilmembers13 Green, Sanchez and the Nutter14 Administration, there is considerable15 disagreement on some elemental fiscal16 facts surrounding this matter. For17 example, there appears to be a difference18 of opinion as to whether or not the19 proposal is revenue neutral. There is20 also disagreement as to the proportionate21 impact of job losses or gains that may be22 achieved by this proposal. We would23 encourage the City government, as24 represented by the executive and25 401 11/30/10 - WHOLE - BILL 1006351 legislative branches, to come to2 agreement on the basic fiscal tenets of3 the proposal so that our business4 community could complete a thorough5 analysis of its impact. 7 Again, we applaud8 Councilmembers Green and Sanchez for9 their very thoughtful approach to this10 matter. However, at the end of the day,11 this bill in its present form is a tax12 shift and not a tax cut. 19 From the beginning of our20 discussions, we have questioned the21 revenue neutrality of the bill and,22 perhaps as importantly, the impact that23 it would have on employment of24 Philadelphia residents. We recognize25 402 11/30/10 - WHOLE - BILL 1006351 that within those economic strata that2 are seen as winners, there are also mixed3 results. 5 Legal services have both6 winners and losers, and components of7 each are within our membership. 20 Small companies domiciled in21 the City appear to win, as do some22 manufacturers whose sales are primarily23 outside the City. 25 403 11/30/10 - WHOLE - BILL 1006351 We have met with the2 Administration and they have grave3 concerns about the revenue neutrality of4 the bill. 38 mills. 11 We are concerned that there12 appears to be such a difference in13 conclusion between the sponsors and the14 Administration when we believe the data15 came from the same source. 19 As you know, the proposal to20 eliminate the net income portion of the21 BPT and increase the gross receipts22 portion is the opposite approach to all23 recent studies and recommendations. The24 mercantile license tax, which was a25 404 11/30/10 - WHOLE - BILL 1006351 straight gross receipts tax, pre-dates2 the BPT. 11 The Pennsylvania Retailers12 Association asked us to convey their13 strong opposition to this measure. Based14 in Harrisburg, PA, the Pennsylvania15 Retail Association represents the16 majority of regional and national17 discount department and big-box stores in18 Philadelphia. Retailers large and small19 are among those hardest hit by the20 proposal shift in taxation, according to21 the PRA. Their President, Brian Rider,22 told us, and I quote, "An increase of23 this magnitude in the cost of doing24 business in the City will plausibly lead25 405 11/30/10 - WHOLE - BILL 1006351 to the reevaluation and closure of2 unprofitable store locations.

10 Another organization, the Tax11 Foundation, is a non-partisan, non-profit12 organization that has monitored fiscal13 policy at the federal, state and local14 levels since 1937. According to the Tax15 Foundation, the growing difficulty of16 administering corporate income taxes has17 prompted resurgence in one of the world's18 oldest broad-based tax structures, the19 gross receipts tax, also known as the20 turnover tax. Gross receipts taxes have21 a simple structure, taxing all business22 sales with few or no deductions. Because23 they tax transactions, they are often24 compared to retail sales taxes. However,25 406 11/30/10 - WHOLE - BILL 1006351 while well-designated sales taxes --2 well-designed sales taxes apply only to3 final sales to consumers, gross receipts4 taxes tax all transactions, including5 intermediate business-to-business6 purchases of supplies, raw materials and7 equipment. As a result, gross receipts8 taxes create an extra layer of taxation9 at each stage of production that sales10 and other taxes do not, something11 economists call tax pyramiding. In a12 2007 study, the Foundation concluded that13 a gross receipts tax interferes with14 private market decisions. Its pyramiding15 creates a haphazard pattern of incentives16 and disincentives for business17 operations. 20 The Pennsylvania Chamber of21 Business and Industry is the largest22 broad-based business association in23 Pennsylvania, serving more than 24,00024 members and customers throughout the25 407 11/30/10 - WHOLE - BILL 1006351 Commonwealth. 4 The Pennsylvania Chamber also5 expressed to us their opposition to gross6 receipts taxation, because it hinders a7 company's ability to compete in today's8 global market. This tax will embed9 itself in a goods price as the product is10 passed along a production chain within11 the taxing jurisdiction. In essence,12 gross receipts taxes are stealth taxes13 that hide their true costs from the14 consumer. Ultimately the tax pyramiding15 initiated by the gross receipts taxation16 forces businesses to make operating17 decisions they might otherwise not make,18 such as sending production outside the19 taxing jurisdiction or bringing20 production in-house, which could mean21 expending capital they might not have22 budgeted to do so. The economic23 distortion of the marketplace caused by a24 gross receipts tax will not promote a25 408 11/30/10 - WHOLE - BILL 1006351 climate of business growth and2 development in Philadelphia. 6 Rather than expedite a major7 tax change -- a major change in tax8 policy at this time, the Greater9 Philadelphia Chamber of Commerce supports10 the recommendations of the two most11 comprehensive tax studies -- most recent12 comprehensive tax studies, the13 Philadelphia Tax Reform Commission of14 2003 and the Mayor's Tax Force on Tax15 Policy and Economic Competitiveness in16 Philadelphia of 2009. 23 The Chamber is opposed to24 moving this legislation forward until25 409 11/30/10 - WHOLE - BILL 1006351 there is more clarity on the facts. We2 believe that a change of this magnitude3 needs to be discussed and understood,4 with agreement by both Council and the5 Administration, with input from all6 concerned parties. 16

Thank17 you. Thank you very much.18

I think Stewart19 is here just for questions.20

Thank you,21 Madam President. I'm here accompanying22 Mr. Mahoney to help him respond to some23 of the questions that we anticipate from24 Councilmembers.25 410 11/30/10 - WHOLE - BILL 1006351

Fine.2 Thank you.3 The Chair recognizes Councilman4 Green.5

Thank you,6 Madam Chair.7 Mr. Mahoney, I appreciate your8 testimony and I thank you for the year we9 spent discussing this issue. I think10 Councilwoman Quinones-Sanchez and I first11 came to the Chamber's state and local tax12 committee almost a year ago today to13 discussion this proposal, and we've met,14 I think, formally four or five more times15 in meetings with the leadership of the16 Chamber at the state and local tax17 committee again, had the opportunity to18 present to many businesses, and I think19 you sent out to all of your membership20 sort of a general survey, like do you21 have any questions for us to ask and22 other things like that. And so, I mean,23 I think you would agree that we've24 undertaken an extremely long --25 411 11/30/10 - WHOLE - BILL 1006351

Absolutely,2 Councilman.3

--4 thoughtful, fair process, provided a lot5 of notice to the Chamber about what it is6 we're thinking about. You've provided7 notice to your members about the proposal8 we have in hand.9 And so we would love -- I share10 your goal. We would absolutely love for11 the Administration and Council to be able12 to agree on some basic issues as you13 mention in your testimony, but I fear14 that we're going to be stuck in a15 situation where Council and the16 Administration, unless we can get some17 data out of the Administration, are not18 going to agree, and in that situation,19 the legislative branch has to make its20 decision about what the best policy is21 and the Administration has to make its22 decision about what the best policy is.23 And so I don't want that to be the24 outcome.25 412 11/30/10 - WHOLE - BILL 1006351 We met with the Administration2 on Sunday for several hours. We'll3 continue to meet with them, but I just4 want to sort of talk about your5 testimony.6 So the first thing is the7 mercantile tax, which was a very bad tax8 for Philadelphia, which you mentioned,9 and we replaced it with our current10 structure. I know the history of this11 from Mr. Weintraub because he gave me an12 education on it after our first meeting.13 That tax was a tax only on14 Philadelphia businesses. The mercantile15 tax was -- on sales in Philadelphia, but16 there were 12 or 16 industries either17 through the courts or other things who18 were in Philadelphia who weren't paying19 it. So in order to be able to apply a20 broad-based tax like the mercantile tax21 to every industry in Philadelphia County,22 we had to have change of state law to put23 in place the gross receipts tax.24 Mr. Weintraub, correct me if25 413 11/30/10 - WHOLE - BILL 1006351 I'm wrong about that.2

Only in part3 would I disagree with what you just said,4 Councilman. I agree with everything you5 just said concerning the court decisions6 under the old mercantile tax that didn't7 include a number of 12, 13 different8 industries. That part I agree with. But9 the characterization that the old10 mercantile tax only applied to11 Philadelphia businesses is where I12 disagree.13

I corrected14 myself. I said it applied to sales in15 Philadelphia.16

Just like the17 current business privilege tax does,18 applies to businesses outside the City19 that are doing business in the City.20

Exactly.21 Right. And didn't the mercantile tax22 also for a manufacturer in the City apply23 to its sales outside the City?24

No. The25 414 11/30/10 - WHOLE - BILL 1006351 mercantile tax had -- from 1953 when the2 tax was enacted until approximately 1983,3 the mercantile tax had a 100 percent4 exemption for Philadelphia businesses5 that delivered product that they sold to6 customers outside the City. In roughly7 1983, I think it was, there was an8 amendment to that exemption which limited9 the exemption to 50 percent of their10 sales, but that was -- and it was that11 limiting exemption that triggered --12 maybe it was '82 -- that triggered all of13 the debate for the creation of the14 business privilege tax. It was a15 combination of the reducing of the16 exemption as well as rate increases that17 were up to five mills that created the18 hotbed of controversy within the business19 community that led to the business20 privilege tax.21

Right. So22 when we put in place the gross receipts23 tax, there was a mercantile tax that24 taxed our manufacturers on goods they25 415 11/30/10 - WHOLE - BILL 1006351 sold outside the City of Philadelphia.2

No. No.3

You just4 said in 1982 they passed a law that5 taxed 50 percent --6

Fifty percent,7 yeah. It was in effect for like one or8 two years before the BPT.9

But it was a10 major driver for going from the11 mercantile tax to the business privilege12 tax we have today.13

I don't know14 that I would say it was a major driver,15 Councilman, because the business16 community had been objecting and opposing17 the old mercantile tax even before that.18 When, as we discussed,19 ironically your father became Mayor, the20 rate was three-tenths of a percent, three21 mills, and then it was raised to four22 mills and then it was raised to five23 mills with the corresponding reduction in24 the exemption. So when the rate started25 416 11/30/10 - WHOLE - BILL 1006351 going up from three mills is when the2 impetus began to get rid of the3 mercantile tax.4

Right. So5 when we replace the -- when the new tax6 structure was put in place, it was7 originally sort of proposed that the8 sales tax -- or the net income tax,9 excuse me, would make up the large bulk10 of the income the City received and that11 essentially there was a very low gross12 receipts rate, is my memory of our13 conversation. And what happened is, when14 we put those new taxes in place, all of15 the Pennsylvania companies that already16 were using Delaware Company Loophole17 exemptions and doing other tax things to18 avoid the Pennsylvania income tax ended19 up being able to avoid -- so the Chamber20 created a situation where its large21 members could take advantage of the same22 loopholes they were using to avoid the23 Pennsylvania state income tax, and as a24 consequence, the net income receipts came25 417 11/30/10 - WHOLE - BILL 1006351 in lower than usual and the Goode2 Administration had to insist that the3 gross receipts rate go up to compensate4 for the lost tax revenue.5

I will disagree6 with that statement, Councilman. Back in7 the early 1980s, the magnitude of the use8 of the Delaware Holding Company was not9 even close to what it evolved over the10 next 25, 30 years, number one.11 Number two, there was never12 even any discussion about the Delaware13 Holding Company in the context of the14 enactment of the business privilege tax.15 The whole discussion at that time was a16 gross receipts tax was an unfair tax.17 The better tax policy was a tax on18 ability to pay. If you made money in the19 City, you should be paying taxes to the20 City. If you didn't make money in the21 City, you shouldn't be paying taxes to22 the City.23 When the Administration -- the24 way it came about was, the Chamber came25 418 11/30/10 - WHOLE - BILL 1006351 to Mayor Green and said, The current2 structure is intolerable, we need to make3 a change. Mayor Green said to the4 Chamber, I will be happy to make the5 change, any change you want us to make,6 as long as, as you just said, revenue7 neutral. And the Chamber then said,8 Well, fine, we believe as a matter of9 policy, ability to pay tax on income10 should be the driving force.11

Right.12

When the13 Administration met with the Chamber14 committee that was working on the tax, we15 were told that the rate on the net income16 tax would have to be in the area of six17 to six and a half percent in order to not18 have a tax on gross receipts. The19 committee at that time decided that when20 you combine the six or six and a half21 percent net income tax at the City level,22 combined with a 10 or a 12 percent tax on23 income at the corporate level, that was a24 tremendous business disincentive.25 419 11/30/10 - WHOLE - BILL 1006351

Point of2 information.3

So as a result4 of that, the committee said, Well, we5 can't have a tax that is that high, but6 we want a tax that is based on ability to7 pay, at what rate would we have to impose8 a gross receipts tax to drive that net9 income rate down. And if I recall10 correctly, the original net income rate11 was 3.7 percent and the original gross12 receipt rate was 3.05 mills, and the hope13 was to even drive that 3.05 mills rate14 down.15

Point of16 information.17

Yes.18

Thank19 you.20 You made a point and I just21 want you to repeat it. You said that22 during all of these discussions, in light23 of the testimony this morning, everybody24 knew that folks were using the Delaware25 420 11/30/10 - WHOLE - BILL 1006351 Loophole, but that was never part of the2 discussion.3

No, I didn't --4 discussion -- I didn't hear some of the5 discussion this morning, but I can tell6 you since I co-chaired the Chamber7 committee that was working on the BPT,8 the Delaware Holding Company was never9 mentioned once in almost a year of10 discussions.11

So my12 question is, why not since we know that13 it is a practice that is utilized by14 folks who have the ability to do so?15

I am not saying16 it is not utilized. What I am17 suggesting, Councilwoman, is that it is18 not utilized to the magnitude as it is19 being represented.20 After I had my discussions with21 you and with Councilman Green, I met with22 Steve Mullin, and in my conversation with23 Steve Mullin, he acknowledged to me that24 the Delaware Holding Company was not the25 421 11/30/10 - WHOLE - BILL 1006351 driving force for some of these2 out-of-City companies only paying a small3 portion of the net income to4 Philadelphia. The driving force was the5 fact that their apportionment factors6 were so small that if you have a major7 multi-national company that has 0.000018 percent of their property, payroll and9 sales in Philadelphia, that's all they're10 going to be paying of their income to11 Philadelphia.12

That's13 exactly right, and that's what we're14 trying to correct.15

Well, you know,16 the courts have consistently said that a17 taxpayer must be paying a fair share in18 order to not be burdening interstate19 commerce. What is the fair share? If a20 company has 0.00001 percent of their21 activity in Philadelphia and that's what22 they're paying tax on, but a change like23 this might raise their taxable activity24 in Philadelphia -- their tax obligation25 422 11/30/10 - WHOLE - BILL 1006351 to Philadelphia to two percent --2

Well, the3 question --4

-- are they5 paying their fair share?6

The question7 is, on the profits they make in8 Philadelphia, without an apportionment9 formula, they'd pay 6.45 percent just10 like Philadelphia businesses, and is it11 fair to Philadelphia businesses who have12 to pay 6.45 percent to have a company13 that may make $10 million here not pay14 6.45 percent on that, but pay 0.0000115 percent because most of their employees,16 property, plant, equipment is in China.17

Well,18 apportionment is a very -- not flexible,19 is not the word I'm looking for. When20 the taxpayer files their tax return, they21 follow the apportionment regulations22 promulgated by the Commissioner. Today23 those regulations have four factors:24 Property in the City, payroll in the City25 423 11/30/10 - WHOLE - BILL 1006351 and a double weighting of their sales in2 the City.3 If there is such a distortion4 as you're suggesting that they're paying5 tax on $1,000 of income when they're6 generating $10 million of income, the7 Commissioner currently has the power to8 go in and come up with a different9 apportionment formula, one that might10 be -- and which is specifically permitted11 in the regulations -- what is called12 separate accounting, where the13 Commissioner can go in and say, Your14 particular store generated $10 million of15 net profit, you're only reporting based16 on this apportionment formula $10,000 of17 profit, we're going to change your18 apportionment factors and make you pay19 tax on 10 million. That's currently in20 the law today.21

Well, no,22 it's not the law. That's what we could23 do in regulation, which we haven't done.24

It is in the25 424 11/30/10 - WHOLE - BILL 1006351 regulations today, Councilman.2

Well, my3 point is that we have a very complex tax4 system in the City of Philadelphia5 because of the apportionment formulas,6 and messing around with apportionment7 formulas only makes our tax system more8 complex than every other jurisdiction in9 the country except for potentially10 Washington, DC, New York City and11 Detroit, who all have net income taxes.12

Well, there are13 different methodologies of apportionment,14 and if you look at the trend of15 apportionment around the country, many16 jurisdictions, state and local, are17 moving to what they call single-sales18 factor, which would achieve a lot of the19 goals you're trying to achieve with this20 bill.21

Single-sales22 factor apportionment, according to the23 Administration's own estimates, would24 only have a $30 or $40 million impact.25 425 11/30/10 - WHOLE - BILL 1006351 Also, the problem with single-sales2 factor apportionment is that it does not3 help service industries. It does not4 help the highly profitable firms in5 Center City. You'd have to do6 market-based sourcing for that. We can't7 do market-based sourcing because we don't8 have the data available and it would take9 years to get it.10 What we're looking at is under11 state law what exists for us to be able12 to do as a city on our own, what can we13 do to make us the most economically14 competitive city when competing with the15 region and the country for businesses.16 You heard Mr. Campoli. People are not17 moving in here because of the net income18 tax. The gross receipts tax is not a19 factor in people's decisions on where to20 locate. So we are losing jobs in Center21 City, losing the attendant wage taxes,22 and we will continue to have suburban23 sprawl building stuff in the surrounding24 counties until we create the best25 426 11/30/10 - WHOLE - BILL 1006351 possible tax system for us that is2 available to us under state law, and3 that's the purpose of it.4 But with respect to5 Mr. Mahoney's testimony --6

Councilman, can7 I comment about Mr. Campoli for you in a8 moment? Can I interrupt you to make a9 comment on your saying about Mr. Campoli?10

I don't know11 how you'd have relevant information, but12 go ahead.13

Well, I know14 Mr. Campoli very well, and one of the15 things that I've learned in this process16 myself is that many of the -- I won't say17 all, because I don't know all -- many of18 the major Center City developers,19 building owners in their leases already20 have built into those leases the ability21 to pass through to their tenants the22 gross receipts portion of the business23 privilege tax, not the net income24 portion. So a tenant in one of25 427 11/30/10 - WHOLE - BILL 1006351 Mr. Campoli's buildings, assuming his2 leases contain that provision, is going3 to be getting -- they might be saving on4 the net income portion. They're going to5 be paying the gross receipts portion of6 their business, plus the gross receipts7 portion of Mr. Campoli's business.8

Mr. Campoli9 testified that it would cost his business10 $500,000 instead of $150,000, and I take11 him at his word.12

I think I13 recall those being his numbers, yes.14

Okay. So15 the point is, he's a loser, and I16 understand that many of the other REITs17 and commercial property owners in this18 city have determined that they will be19 losers, including some you work for as an20 attorney outside of your connection with21 the Chamber of Commerce.22

This is -- my23 work with the Chamber of Commerce is24 purely pro bono.25 428 11/30/10 - WHOLE - BILL 1006351

I2 understand, and I appreciate that. So I3 just didn't want to -- you have lots of4 stakeholders also.5

I do.6

And so with7 respect to tax pyramiding that8 Mr. Mahoney mentioned, we completely9 agree that that's a major flaw in gross10 receipts taxes, and that's why unlike11 Washington state and other jurisdictions12 that have an issue with this, we actually13 have alternative rates for the low margin14 industries where a lot of pyramiding15 occurs, in retail, in wholesale, in16 manufacturing, and as a consequence of a17 very slight increase in the gross18 receipts rate for them -- in the net19 receipts rate for them, what we call the20 alternative rate, and the elimination of21 net income, the low margin businesses22 that testified here today are better off,23 including car dealers. And who would24 have thought that when we went down this25 429 11/30/10 - WHOLE - BILL 1006351 road?2 So with respect to the3 construction industry, through this4 process we uncovered tax pyramiding that5 the State Legislature didn't try to take6 care of, and we're trying to address that7 with this bill.8 So, you know, the bottom line9 is, the Administration and we do not10 disagree about revenue neutrality,11 because we have told the Administration12 that whatever number we need to plug in,13 we will plug in to make this bill revenue14 neutral. So that's sort of a red herring15 issue, because whatever number that has16 to be, it will be, and we've said that17 publicly at Chamber meetings and we've18 said that publicly at -- privately to the19 Administration.20