Committee Hearing, December 1, 2010

COUNCIL OF THE CITY OF PHILADELPHIA2 COMMITTEE OF THE WHOLE3 Room 400, City Hall6 Philadelphia, Pennsylvania Wednesday, December 1, 20107 1:35 p.m. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA10 COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DARRELL CLARKE11 COUNCILMAN FRANK DiCICCO COUNCILMAN W. WILSON GOODE, JR.12 COUNCILMAN BILL GREEN COUNCILMAN WILLIAM K. GREENLEE13 COUNCILMAN CURTIS JONES, JR. COUNCILMAN JACK KELLY14 COUNCILMAN JAMES KENNEY COUNCILWOMAN DONNA REED MILLER15 COUNCILWOMAN MARIA D. QUINONES-SANCHEZ COUNCILWOMAN BLONDELL REYNOLDS BROWN16 COUNCILWOMAN MARIAN B. TASCO BILL 100635 - An ordinance amending Chapter18 19-2600 of The Philadelphia Code, relating to tax rates, credits and alternative tax19 computation for the business privilege tax, by providing certain exclusions; revising certain20 tax rates; and creating certain fresh food tax credits; all under certain terms and21 conditions. - - -23 437

Good2 afternoon, everyone. This is a continued3 public hearing of the Committee of the4 Whole regarding Bill No. 100635.5 Our first witness will be?6 MR. McPHERSON: Mr. Dubow and7 Mr. Mullin.8

Is9 Mr. Mullin here?10 (Witnesses approached witness11 table.)12

Good13 afternoon. Welcome. Please identify14 yourself for the record and proceed with15 your testimony.16

Good afternoon.17 Who do you want to go first?18

It19 doesn't matter to me.20 Mr. Mullin, do you have21 prepared testimony? Mr. Mullin?22

Yes, I do.23

Has24 it been circulated to Councilmembers?25 438 12/1/10 - WHOLE - BILL 1006351

I have copies2 here.3

It's4 your choice. Who would you like to go5 first?6

Good afternoon,7 Council President Verna and members of8 Council. I'm Rob Dubow, the Finance9 Director for the City. 15 We're here today to testify and16 answer questions on Bill No. 100635,17 which would amend Section 19-2600 of the18 Code. It would eliminate the net income19 portion of the BPT over five years,20 almost quadruple the gross receipts21 portion of the BPT over the same time22 period, provide an exemption for the23 first 100,000 in gross receipts subject24 to the BPT, adjust the alternative25 439 12/1/10 - WHOLE - BILL 1006351 receipts tax calculation for retailers,2 manufacturers and wholesalers, and3 introduce a tax credit for some fresh4 food businesses. 13 Even before that, as a Councilman, Mayor14 Nutter, together with his colleagues,15 pushed relentlessly for the introduction16 and then continuation of business and17 wage tax reductions to benefit all18 Philadelphians. 24 Through the introduction of a25 440 12/1/10 - WHOLE - BILL 1006351 ballot question, approved by the voters,2 the City created a Tax Reform Commission,3 and then that Commission took a detailed4 and comprehensive look at the entire tax5 structure and issued a series of6 important recommendations, and in an7 effort to continue the ongoing8 improvement of our tax structure and9 economic competitiveness, despite the10 economic downturn, the Mayor recently11 commissioned a Task Force on Tax Policy12 and Economic Competitiveness. 14 We believe strongly that reform15 of our business taxes is needed in order16 for the City to be competitive with its17 peers and to better position the City for18 economic growth. Strengthening our19 economy is of ongoing importance as we20 began to turn the corner on one of the21 great economic recessions of our22 lifetime. We are encouraged that Council23 is focused on this critical issue, and24 we'd like to continue to work together to25 441 12/1/10 - WHOLE - BILL 1006351 further improve our tax structure. In2 particular, I'd like to thank3 Councilmembers Sanchez and Green for4 their efforts to improve the City's5 business tax structure. 9 Although the Administration10 thinks the proposal has many positive11 elements, we can't support it in its12 current form because of the concerns I13 will discuss during my testimony. 19 I would also like to note that20 although this is an extremely significant21 proposal with very wide-ranging effects22 throughout the Philadelphia business23 community, we are concerned that many24 members of that community are not fully25 442 12/1/10 - WHOLE - BILL 1006351 aware of the proposal and may not have2 considered how the change would affect3 their individual tax situation. 10 Many, particularly individual11 businessowners, were not aware of the12 proposal. 21 I'll explain the ways in which the22 proposal meets those objectives and23 describe where it may fall short or have24 unintended consequences. 6 As you know, this is a complex7 proposal that impacts the City's economy8 in many different ways, some of which,9 unfortunately, we can't accurately10 predict. The Revenue and Finance11 Departments have spent the past two and a12 half months analyzing the impact of the13 bill. We've met many times with the14 Councilmembers, and even before the bill15 was proposed, the Revenue Department had16 worked to provide all available data so17 that the Councilmembers, their staffs and18 their consultants could use that19 information to frame their proposal. 25 444 12/1/10 - WHOLE - BILL 1006351 The first objective, as we2 understand, of the bill is to create a3 larger positive impact on the economy4 than what is projected to occur under the5 gross receipts tax reduction plan under6 current law. Under that law -- the BPT7 is made up of two types of taxes, gross8 receipts and net income. 45 to percent over the next 1219 years.

23 The proposal before us takes24 the opposite approach and would eliminate25 445 12/1/10 - WHOLE - BILL 1006351 the net income portion of the tax and2 increase the gross receipts portion3 fourfold almost in order to make up --4 make the proposal revenue neutral. It's5 our understanding that the Councilmembers6 believe this shift will create a larger7 positive impact on Philadelphia compared8 to the planned elimination of the gross9 receipts tax and the reduction of the net10 income tax. 19 There are a variety of reasons20 that it's impossible to do that kind of21 analysis. 24 The uncertainty about the tradeoff25 446 12/1/10 - WHOLE - BILL 1006351 between the net income tax and the gross2 receipts tax and what it will mean for3 the City's economy is one of our most4 significant concerns with the bill. 10 We do know from analysis that11 reducing the gross receipts tax has12 helped create jobs. For over 30 years,13 we had a gross receipts only tax. It was14 called the mercantile license tax. 17 An independent business tax committee18 conducted an analysis and recommended19 creating the BPT in place of the20 mercantile license tax. 2 Furthermore, studies have3 consistently shown that increasing the4 gross receipts tax, as this proposal5 would do, results in a decrease in jobs,6 while lowering the gross receipts tax has7 been shown to retain and create jobs. In8 the environment of severe economic9 downturn in which we are only beginning10 to see sustained economic growth, there11 are strong arguments for maintaining the12 scheduled BPT rate reduction of the gross13 receipts portion. This strategy has been14 proven to restore and add jobs to15 Philadelphia's economy. Dramatically16 increasing the gross receipts portion of17 the tax as proposed would generate real18 costs for many important industries and19 businesses that are already suffering20 through the Great Recession. These added21 costs are likely to result in job losses22 for Philadelphians. 3 Let me also take a little time4 to expand on some of the conclusions from5 the analysis we shared with you earlier6 and describe what we understand to be the7 impact of the proposal on Philadelphia's8 economy. I should clarify that the9 analysis we did before did not impact the10 estimate -- did not estimate the impact11 of the proposal on jobs. The analysis we12 provided showed which industries would13 see their taxes go up the most under the14 proposal and the industries that would15 see their taxes go down the most, the16 biggest losers and biggest winners. Even17 within the same industry, there are18 winners and losers depending on their19 profit margin and other factors, such as20 type of business organization. As part21 of our analysis, we expressed that change22 in liability in terms of average salaried23 employees in industry. We weren't24 predicting the proposal's impact on jobs,25 449 12/1/10 - WHOLE - BILL 1006351 as we said, in our documents. 5 Under the revenue neutral6 version of the legislation as introduced,7 the biggest losers of the bill would be8 the construction industry, the wholesale9 trade industry, insurance -- and that's10 primarily four HMOs -- hotels and other11 accommodations and business support12 service firms such as janitorial and13 building services and security services14 firms. 15 More than half of the tax16 benefits that those biggest winners would17 receive would go to the legal services18 industry, which would see its taxes fall19 by more than million. 24 It's not clear what that $2025 451 12/1/10 - WHOLE - BILL 1006351 million reduction would do for the City's2 economy. Law firm growth typically3 depends not simply on the level of4 taxation but also on the availability of5 legal services generally. 11 While many of the firms have12 offices in Philadelphia, we are not aware13 of analysis to suggest such profits would14 be returned to the City's economy.

For15 example, we are not aware of studies16 showing what percent of partners in large17 law firms or accounting firms or18 financial investment firms live in the19 City. 10 The Administration is concerned11 about all the industries and firms that12 would have to pay more taxes under the13 bill and how their increases in costs14 would impact the City's economy. I want15 to address the negative impact on one16 industry in particular. 19 One of the major economic20 drivers for Philadelphia would see an21 increase of over $5 million in its tax22 bill. 6 billion in revenue for24 Philadelphia restaurants, shops, hotels25 453 12/1/10 - WHOLE - BILL 1006351 and attractions. 43 billion in4 wages paid to area residents. 67 million in 2008. Furthermore, hotels and8 restaurants employ over 46,000 people in9 Philadelphia, and that's a seven percent10 increase since 2003. Thousands more11 people work at tourism-related12 organizations in the City. 16 In addition, the hotel industry17 paid over 38 million in hotel tax18 revenues to support tourism generators19 such as the Convention Center and the20 Greater Philadelphia Tourism and21 Marketing Corporation. Additional tax22 burdens through the proposed BPT shift23 would presumably inhibit growth of the24 hospitality sector. 3 million. 20 Together, these 11 firms would incur a21 $17 million increase in tax liability as22 a result of the proposal. As I said23 earlier, though, within the same24 industry, depending on their profit25 455 12/1/10 - WHOLE - BILL 1006351 margin, there are winner businesses and2 loser businesses. 14 Most of the businesses that15 lose under this proposal do so because of16 their small profit margins. 12 While we're not able to13 estimate the potential effect for the14 exclusion for payment made by15 construction subcontractors, presumably16 some, if not most, of the firms in the17 construction industry would receive18 favorable treatment under the proposed19 amendment. 2 In addition, a variety of firms3 in a number of other service industries4 commonly use subcontractors and pay a5 portion of their receipts for their6 clients to the subcontractors. 13 Three is encouraging small14 business creation and growth. The15 proposal would eliminate the BPT16 liability for small businesses and17 start-up firms and ease the tax burden on18 mid-sized businesses. About 32,50019 current businesses would benefit by20 having a zero BPT tax liability under the21 proposal because of the $100,00022 exemption on the gross receipts tax and23 the elimination of the net income portion24 of the tax. The businesses that benefit25 458 12/1/10 - WHOLE - BILL 1006351 span all industries and are concentrated2 in small and mid-sized businesses. 7 The fourth objective is to8 remove the profitability penalty imposed9 on Philadelphia-based firms. The10 proposal tries to remove an incentive for11 companies to leave the City limits once12 they become profitable by eliminating the13 net income portion of the BPT, which is14 obviously a tax on profits. However,15 many businesses would continue to pay a16 tax on profits as a result in the shift17 in the tax burden to the City's net18 profits tax, which is incurred against19 unincorporated businesses, partnerships20 and self-employed. Since the proposal21 would eliminate the net income portion of22 the BPT, the 60 percent credit against23 the net profits tax liability that firms24 paying the net income portion of the BPT25 459 12/1/10 - WHOLE - BILL 1006351 currently receive would also be2 eliminated. That would make the net3 profits tax a much more significant4 revenue source for the City. And5 although the intent of the proposal is to6 eliminate profit tax, it would instead7 dramatically increase businesses' total8 net profits tax liability from9 approximately 12 million annually to more10 than 80 million annually. 12 The next objective is to13 provide a tax shift that's revenue14 neutral for the City's General Fund.

72 million loss to the General Fund assuming3 the rate reductions included in the FY114 to FY15 Five-Year Plan. 16 Councilmembers have put forth estimates17 that their proposed amendment would18 reduce the construction industry's tax19 liability from almost 38 million under20 their proposal down to 17 million. 25 461 12/1/10 - WHOLE - BILL 1006351 Objective No. 6 is to reduce2 the competitive disadvantage that3 Philadelphia companies have versus their4 regional competitors selling in the same5 market. 7 According to the Councilmembers, their8 analysis indicates that the proposal9 would shift $120 million of the BPT tax10 burden off of Philadelphia-based11 businesses and onto non-City firms. 13 We have determined, however, that of the14 top hundred businesses that would see15 their taxes go up the most under the16 proposal, 61 firms or more than 6017 percent would have businesses located or18 headquartered in Philadelphia. 4 Objective 7 is to give an5 advantage to growth factors of the local6 economy. 213 million. 21 The next objective is22 simplifying the business taxpayer filing,23 and the proposal would do that for firms24 by eliminating the net income portion of25 463 12/1/10 - WHOLE - BILL 1006351 the BPT and the associated credit against2 the net profits tax liability for3 affected firms. Simplification eases the4 administrative burden on firms, reduces5 the frequency of filing errors and may6 encourage non-filers to comply with7 tax-filing requirements. 12 However, the elimination of the13 60 percent credit against the net profits14 tax would undo some of that benefit since15 firms who are subject to the tax would16 have to spend more time computing their17 net profits tax payments. 21 Federal law requires manufacturers to22 include appropriate direct and indirect23 costs into the cost of goods sold,24 thereby allowing the federal tax25 464 12/1/10 - WHOLE - BILL 1006351 calculation to be used by the City for2 City filing purposes. 10 The next objective is to11 simplify tax return auditing to free up12 resources to identify non-filers. From a13 tax auditing perspective, the proposal14 would not simplify the City's tax return15 auditing as intended. 23 Before the 60 percent credit24 against the net profits tax liability was25 465 12/1/10 - WHOLE - BILL 1006351 introduced, that tax was one of the most2 highly contested City taxes and was3 particularly susceptible to tax avoidance4 techniques. 7 And for many retailers,8 manufacturers and wholesalers who would9 likely choose to use the alternate10 method, the Revenue Department would have11 to spend more time auditing the cost of12 goods sold and cost of labor amounts13 claimed by businesses when filing their14 returns. This would also be true for15 construction businesses under the16 proposed amendment. 21 The next objective is producing22 revenue stability. We agree that the23 proposal would produce greater revenue24 stability. Historical data indicates25 466 12/1/10 - WHOLE - BILL 1006351 that the gross receipts tax is generally2 a more stable revenue source compared to3 net income. 8 The next objective is applying9 a lower tax rate to a broader base. 11 Rather, the proposal reduces the number12 of businesses subject to the BPT from13 over 89,000 to around 56,600, in large14 part through the introduction of an15 exemption on the first 100,000 in gross16 receipts. 19 The next objective is more20 equitably allocating the business tax21 burden across businesses of different22 sizes. It's not clear to what extent the23 proposal achieves this objective. The24 Administration doesn't know of any25 467 12/1/10 - WHOLE - BILL 1006351 analysis on this topic, but with regard2 to improving other measures of business3 tax equity, the proposal appears to fall4 short. 14 And then I'd like to go through15 some additional concerns that we have16 with the proposal. One is the extent to17 which it could signal to businesses that18 our tax structure is unpredictable and19 subject to change.

Businesses understand20 our business and wage tax reductions that21 have taken place for a substantial number22 of years now and can anticipate what it23 means for their company. This proposal24 radically shifts the business tax25 468 12/1/10 - WHOLE - BILL 1006351 liability across the economy. 5 While we agree we should6 continually assess and pursue ways to7 improve our business tax structure, the8 government should not add to the9 confusion in these times of economic10 uncertainty. Businesses should be able11 to expect consistency in our tax policy12 so they may plan for growth. 12 Comparable cities such as13 Baltimore, Boston, Chicago and there's a14 list of others do not tax gross receipts15 at all. 8 Based on our analysis, we would9 like to suggest the following policy10 options be further pursued:11 We would consider providing an12 exemption from the gross receipts tax for13 certain dollar amounts of receipts like14 the bill does with the first 100,000. 18 We also agree that it makes19 sense to reassess our business rate tax20 reduction with the possibility of21 reducing the net income portion more and22 faster. 10 Before I conclude, I'd also11 like to talk a little bit about some of12 the other changes to the business13 privilege tax that have recently taken14 place. 24 As mentioned above, with the25 472 12/1/10 - WHOLE - BILL 1006351 objective of removing barriers to2 Philadelphia as a business location, the3 Task Force recommended implementing4 single-sales factor apportionment and5 market-based sourcing. 11 The first is a pilot program12 for market-based sourcing for computer13 system design and related services for14 the tax year that began January 1st,15 2010. Under this pilot program, a16 taxpayer's net income would continue to17 be apportioned based on property, payroll18 and business receipts, but the receipts19 factor would be based on the location of20 the customer. 23 The second pilot program is for24 businesses engaged in research and25 473 12/1/10 - WHOLE - BILL 1006351 development in the physical engineering2 and life sciences, also for the tax year3 beginning January 1, 2010. 12 It's critically important that13 we continue to improve the City's14 business tax structure. Taxpayers15 deserve a system that's clear and easy to16 comply with. 10

Thank11 you very much.12 Mr. Mullin, please present your13 testimony.14

Thank you very15 much, Madam Chair and Councilmembers and16 guests. Thank you for the opportunity to17 participate in this hearing today. 23 It is my strong opinion that24 this proposed reform would have a very25 475 12/1/10 - WHOLE - BILL 1006351 positive effect on the City's economic2 competitiveness and fiscal health. The3 primary goal of this proposal is to4 increase Philadelphia's economic5 competitiveness by addressing the way the6 current BPT makes the City a less7 desirable location for business and8 investment and growth. 12 Some have referred to this as a grand13 experiment, but I have to note that I14 don't think that shifting basically to15 what everybody else is already doing is16 that much of a daring experiment. 20 Eliminating Philadelphia's21 corporate income tax, the BPT's net22 income, one of the very few local income23 taxes in the country -- and that, I24 believe, is for a reason. 15 Philadelphia has a chance to16 come out of the current recession in a17 stronger relative economic position than18 it has in past recessions. 23 Our firm examined the proposal24 and estimated the required replacement25 478 12/1/10 - WHOLE - BILL 1006351 gross receipts tax rate necessary to2 achieve, after phase-in, a revenue3 neutral BPT based on 2008 data. 19 Ultimately the basic issue is whether the20 overall positive effect of reducing the21 net income tax rate would outweigh the22 negative effect of increasing the gross23 receipts rate. We've heard a lot of24 comments about the positive supply25 479 12/1/10 - WHOLE - BILL 1006351 effects, in particular on employment, of2 the past reductions in the gross receipts3 rate. People who don't necessarily4 understand the econometric methods used5 to estimate the supply side effects or6 the reasons for such effect interpret the7 results very precisely. Econsult too has8 estimated regression equations to9 estimate both the direct tax elasticities10 and cross tax elasticities of the past11 gross receipt rate reductions. 20 The fact that no rate changes21 makes it impossible to make similar22 estimates for the net income tax23 elasticities is not a sufficient argument24 to drop it from consideration, which is,25 480 12/1/10 - WHOLE - BILL 1006351 in effect, what has happened. 12 First, local tax policy should13 reflect an understanding of how city and14 metropolitan economies work, the15 fundamentals of urban economics. In16 particular, it must recognize the key17 distinction between businesses that sell18 to outside markets -- they are called19 exporters -- and hence bring money into20 the local economy, and businesses, both21 local and outside, that sell into the22 market, which is driven by the desire to23 service the demand of citizens and24 businesses located in that market. The25 481 12/1/10 - WHOLE - BILL 1006351 exporting businesses generate economic2 growth, which generates income for the3 City and, in turn, generates demand for4 the local service businesses. 6 Demand drives local business delivery,7 not supply side factors. 17 These firms are disproportionately18 impacted by the net income tax. 2 No. 2, business taxes have less3 distortionary impacts when the rates are4 lower and the base is higher. The gross5 receipts tax is on the order of $606 billion and the net income tax base is on7 the order -- gross receipts tax base is8 on the order of $60 billion and the net9 income tax base is on the order of $410 billion, and the tax rate differentials11 are significant, as we know. 4514 percent net income. 22 No. 3 These are, in a sense, the measure of the4 distortionary effects on business5 activities, including location. The6 corporate income tax is a hot topic7 across countries and states. 17 Many state tax reform findings18 have noted a preference for gross or net19 receipts over corporate income taxes. 8 The magnitude of these9 elasticities is much higher for cities10 than states and regions.

The reason is11 simple, it is much easier to avoid local12 corporate taxes by moving out or not13 moving in or not expanding in than it is14 to avoid state or federal corporate15 taxes. This avoidance isn't an illegal16 activity. It's profit-maximizing17 activity. Professor Wasylenko's review18 of various studies led him to estimate19 that the local elasticities can be as20 much as four times higher than regional21 or state elasticities. 25 485 12/1/10 - WHOLE - BILL 1006351 And No. 5, we should be clear2 about the concepts of equity and fairness3 by understanding that there are really4 two basic tax principles when dealing5 with equity. We have the benefit6 principle and the ability to pay7 principles of taxation. One hallmark of8 state and local taxation -- and this is9 something I learned from my advisor,10 Professor Bob Inman years ago -- is that11 the benefit taxation is much likely to be12 less distortionary; that is, causing13 businesses to relocate or other activity14 to reduce the tax, while the ability to15 pay is likely to lead to significant16 reduction in local tax bases. While17 we've read recently that some might think18 that the tax system is -- that any tax19 system not based on income defies common20 sense, such taxes are in fact the most21 appropriate and, by far, the most common22 types of local taxes in the United23 States. Most local governments impose24 taxes on businesses and people that do25 486 12/1/10 - WHOLE - BILL 1006351 not reflect income or ability to pay. In2 fact, one question we've heard here is3 what other cities do. By far, other4 cities tax businesses via property taxes,5 typically using a system that6 differentially assesses business property7 at higher rates than residential8 properties and, two, via retail or gross9 sales taxes. Both of these are10 essentially above-the-line taxes, as is11 the gross receipts tax, and do not12 account for income capacity. 3 The differences between our4 estimates and the Administration's are5 statistically small, but important, and6 basically reflect two different forecasts7 of two behavioral adjustments that are8 simply impossible to estimate with any9 precision here. 17 We have incorporated a18 conservative assumption in our19 calculations that the supply side effects20 of the two tax rate changes are exactly21 equal and, therefore, cancel out. 7 No. 11 Accordingly, City tax policy should12 encourage the profitable group to grow in13 the City, thereby increasing employment14 and laying the foundation for the growth15 and demand that will help the lower16 margin local service group. 4 Furthermore, these taxes can be deducted5 from the business's state and federal6 taxes and the overall impact is even7 smaller than the stated amounts. 10 First, the revenue shortfall of11 23 million is a straw argument, in my12 opinion. The proposal was always to be13 revenue neutral, and it's phased in five14 years to provide flexibility to guarantee15 that. The real key is revenue neutral16 compared to what year or what level, and17 obviously the most current numbers would18 be used. 25 492 12/1/10 - WHOLE - BILL 1006351 No. 2, concentration, studying2 this, on static winners and losers3 reflects a not carefully defined and4 zero-sum and I think a highly inaccurate5 view of the urban economy. I'll post a6 definition of winners and losers here. I7 say winners are those whose net benefits8 would be greater. So winners are firms9 who would be more likely to be more10 profitable, which is a function of both11 revenues and expenditures, not just the12 cost side. I don't think that anyone13 here on Council or the Administration or,14 for that matter, myself would ever say15 that the recent property and sales tax16 increases led to all City property owners17 and all consumers in Philadelphia as18 being losers. 4 We have 350,000 businesses in the5 metropolitan area in a $370 billion6 economy, and thousands, literally7 thousands, of decisions are made every8 year. 3 No.

3, the effect of a4 corporate income tax, especially at such5 a high rate, does differ across6 industries. 14 No. 4, the original business15 privilege tax was designed to hit16 businesses that did not already pay the17 mercantile tax. It was a way to deal18 with state requirements that prohibited19 taxing certain industries already20 licensed by the state. We think of it as21 broadening the base, but that is slightly22 inaccurate. The bases at issue here are23 not the number of firms, but rather the24 aggregate gross receipts as defined by25 495 12/1/10 - WHOLE - BILL 1006351 the tax and the aggregate net income as2 defined by the tax. 5 This is why the argument about the6 100,000k exemption reducing the base is7 only partially valid. 12 No. 5, the estimates of job13 impacts, even with the caveat that they14 aren't real estimates of job impacts,15 carries an implied message the little guy16 is getting clobbered by the rich guy17 here. Once again, this suggestion18 doesn't take into account the mobility of19 firms and employment, nor does it take20 into account the likely profit-maximizing21 behavior by all firms, all firms, in22 response to the change in business tax23 regime. The identified winner industries24 are exactly those that have seen the25 496 12/1/10 - WHOLE - BILL 1006351 biggest growth outside of the City in the2 past two to three decades. 6 No. 6, the net profits tax7 shift does not eliminate the8 profitability penalty, as it is not a9 business tax, but it's really the wage10 tax for the individuals that have set up11 their businesses here for unincorporated12 businesses and partnerships and sole13 proprietorships. This proposal14 eliminates the partial double taxation15 these businesses face today. So it is --16 even with the 60 percent credit. 19 No. 7, the competitive20 advantage argument is simple. Due to the21 current income apportionment formula,22 firms with employees and property outside23 of Philadelphia pay a tax on a lower24 percentage of their income than25 497 12/1/10 - WHOLE - BILL 1006351 businesses with all of their property and2 employment in the City. 6 No. 8, firms already have to7 calculate their NPT payments and even8 when -- sorry; then they apply the BPT9 net income 60 percent credit. 18 No. 10, the proposal impacts19 far more than the 90,000 businesses now20 filing in Philadelphia. 25 498 12/1/10 - WHOLE - BILL 1006351 No. 7 No. 14 Number one, am I refuting the econometric15 work of our firm, Econsult, we did for16 Mayor Street's Tax Reform Commission? My17 answer is not at all. We still believe18 reducing the gross receipts tax rate, all19 else equal, is good for the business20 environment. But reducing the net income21 portion, our city's onerous corporate22 income tax, would help even more. We23 didn't examine this proposed swap, nor24 has Professor Inman. 2 Second, and I recall being3 asked this directly here, if this is such4 a good policy, why didn't I advocate for5 it when I was sitting in my friend's6 shoes here in the 1990s? And I asked7 myself that. My answer to that is, I ask8 myself that same question every day, and9 all I can say is that I may have10 mistakenly concentrated on wage tax11 reductions in those days. 22

Thank23 you very much.24 Mr. Dubow, do you agree with25 500 12/1/10 - WHOLE - BILL 1006351 the assumption that by eliminating and/or2 reducing the gross receipts portion of3 the BPT that non-Philadelphia firms have4 a competitive advantage over Philadelphia5 firms?6

Well, I think7 eliminating the gross receipts portion8 helps kind of all firms that do business9 in the City. I think that there are10 portions of the net income tax, the net11 income portion of the BPT, that provide a12 disincentive to be in the City, and13 that's in part because we base part of14 the tax on property and payroll. And one15 of the things we think we should look at16 is getting rid of those two parts of the17 tax and doing single-factor apportionment18 so that you're just looking at sales,19 which we think would help get rid of that20 disincentive and the disadvantage to21 being inside the City.22

Also,23 Mr. Dubow, on of your testimony,24 you mention your concern for the25 501 12/1/10 - WHOLE - BILL 1006351 hospitality industry and you state,2 quote, "Additional tax burdens through3 the proposed BPT shift would presumably4 inhibit growth for our city's hospitality5 sector," end of quote.6 Why do you believe it would7 inhibit growth with the opening of the8 Convention Center expansion?9

In part, it's10 because of what people in the hospitality11 industry have been telling us, that this12 increase in cost would make it harder for13 them to grow in Philadelphia and would14 make it less likely that other hotels15 would want to open here.16

And17 do you believe, as Councilman Green said18 yesterday, it would cost approximately19 $78 more -- 78 cents, I'm sorry, more per20 day?21

Well, it looks more22 like what the hotel industry is looking23 at is their total increase in costs, and24 according to their testimony and things25 502 12/1/10 - WHOLE - BILL 1006351 they said, they are worried that they're2 already not competitive and that anything3 they did to their cost would make them4 less competitive, in that they would5 probably look at it in other ways.6 COUNCIL PRESIDENT VERNA:7 Mr. Mullin, Mr. Dubow on of his8 testimony identifies what he believes to9 be an unintended consequence that the10 total net profits liability would11 increase from $12 million to $80 million12 and would impact roughly 40,00013 businesses.14 Do you agree with his15 assessment, and, if so, wouldn't this16 adversely impact Philadelphia firms and17 impact their operations?18

First part of19 that, yes, I do agree, and, in fact, this20 is one of the areas where we disagreed in21 our estimates here. We actually thought22 that that would be going up to 90 million23 instead of 80 million. So we actually24 thought it would be more.25 503 12/1/10 - WHOLE - BILL 1006351 I don't see -- that's really2 somebody paying -- instead of paying two3 taxes this way where you credit one4 against that, now you just pay the5 original. So it would still be a6 reduction in the taxes for these7 businesses here. And one of the things8 that we had to do was take that into9 account in estimating what the10 replacement gross receipts tax would be.11 So, in a sense, more individuals, whether12 they're partners or sole proprietors,13 would be paying what's essentially the14 City's wage tax, which they have to pay15 now but they're allowed to credit a16 portion of their net income tax against17 it.18 So I think the numbers are19 right. I draw a different conclusion,20 and I do not see that as a bad thing for21 Philadelphia businesses.22

Rob,23 do you agree with Mr. Mullin's -- it24 seems like we're shifting back and forth.25 504 12/1/10 - WHOLE - BILL 1006351

Well, I think the2 issue is really what it does for firms'3 costs, and we're concerned about the4 businesses for which there are cost5 increases, whether it's because of what's6 going on with the gross receipts or7 because of they no longer have the8 ability to do the offset against net9 profits.10 So we're really looking at kind11 of total cost and how that changes, and12 clearly there are some firms that see13 their tax liability go down, and that's14 good for them, others that see it go up,15 and that's what has created our concern.16

Okay.17 Mr. Dubow, if this bill were to become18 law, do you have any indication as to19 what the millage rate for the gross20 receipts tax for each year of phase-in21 period to be in order to be revenue22 neutral?23

I can give you the24 rate for 2015, but I'd have to get back25 505 12/1/10 - WHOLE - BILL 1006351 to you on the rates in the interceding2 years. So for 2015 to match the amount3 that's in the Five-Year Plan, you would4 need a rate of 5.44.5 COUNCIL PRESIDENT VERNA:6 Mr. Mullin, on of Mr. Dubow's7 testimony, Item No. 6 concludes that,8 quote, "Based on this data, it does not9 appear that the proposal significantly10 reduces the competitive disadvantage of11 Philadelphia companies as intended," end12 of quote.13 Do you agree with Mr. Dubow,14 and, if not, why?15

I think his answer16 is going to be no. I'm just guessing.17

No. I don't agree18 with the conclusion. I agree with the19 numbers there. I don't agree with the20 conclusion. I think that the competitive21 disadvantage -- this is one of the things22 that I think looking at a static position23 and saying here these businesses -- this24 is looking at 100 businesses. There are25 506 12/1/10 - WHOLE - BILL 1006351 30,000, 40,000, 50,000 businesses out2 there in Philadelphia, and potentially3 more, potentially growing. This4 proposal, I think, will lead to greater5 business growth in Philadelphia, because6 it will reduce the disadvantage of7 locating in Philadelphia.8 So I wouldn't -- I don't look9 at that based on just these. I do agree10 with those numbers there, but I don't11 look at this. The proposal here is much12 more far reaching. So that's why I don't13 agree that that doesn't reduce the14 competitive disadvantage.15

Thank16 you.17 At this time, the Chair18 recognizes Councilman Green.19

I yield to20 Councilwoman Sanchez.21

Very22 well.23 Councilwoman Sanchez.24

Thank25 507 12/1/10 - WHOLE - BILL 1006351 you.2 Thank you, both of you, and I3 have to say for the record I've enjoyed4 tremendously the work that we've been5 doing over the last two years and I have6 learned a lot from both perspectives,7 from Steve and Rob, and really do8 appreciate the spirit in which we've been9 discussing and debating.10 I wanted to ask a couple of11 questions to Rob. Some of my colleagues12 missed yesterday's testimony as it13 relates to both taxes and who pays what,14 so I just want to put that kind of on the15 record.16 What types of business17 activities do you need to owe gross18 receipts to the City, Rob?19

I'm sorry?20

What21 kind of business activity do you need to22 owe gross receipts to the City?23

You have to -- are24 you asking about what's exempt from gross25 508 12/1/10 - WHOLE - BILL 1006351 receipts?2

No, no,3 no. What type of business activity do4 you have to have to pay gross receipts?5

Just sales in the6 City.7

Just8 sales in the City. So a company based in9 New Jersey, Texas or China, they pay City10 gross receipts?11

Right.12

In our13 discussions, have we looked at the trend14 of the level of how many businesses pay15 gross receipts but don't pay net income?16 Do you know what that number is?17 COMMISSIONER RICHARDSON: I18 couldn't tell you that number right now,19 but we're looking at an analysis of that.20

Under21 current law, if gross receipts is22 eliminated and the net income remains,23 would out-of-town companies with no24 workers in Philadelphia owe any business25 509 12/1/10 - WHOLE - BILL 1006351 tax?2 COMMISSIONER RICHARDSON:3 Repeat your question again, please.4

Under5 our current law, if gross receipts is6 eliminated and net income tax remains,7 would most out-of-town companies with no8 workers in Philadelphia owe any business9 taxes? And I'm talking about the Coors,10 I'm talking about the Buds, I'm talking11 about multi-national companies who have12 sales in the region and don't pay net13 income.14 (Witness approached witness15 table.)16 DEPUTY COMMISSIONER BRESLIN:17 I'm Frank Breslin, Deputy Revenue18 Commissioner.19 A business would be subject to20 the net income portion of the tax if they21 had some physical presence in22 Philadelphia.23

So to24 clarify that point, so if you are a25 510 12/1/10 - WHOLE - BILL 1006351 business and we eliminate the gross2 receipts and you don't have a physical3 location in the City or an employee, you4 would essentially pay no tax to the City5 of Philadelphia?6 DEPUTY COMMISSIONER BRESLIN:7 Yes. If you don't have any presence at8 all in Philadelphia, you would not pay9 the tax.10

Well,11 you have presence because you have12 activity.13 DEPUTY COMMISSIONER BRESLIN:14 If the only activity is the sale of goods15 coming in and no other activity, then16 there would be no business privilege tax.17

Okay.18 And do you know about approximately how19 many businesses like that exist, how many20 different products and stuff we have in21 the market that have no physical nexus to22 Philadelphia?23 DEPUTY COMMISSIONER BRESLIN: I24 don't know that number, no.25 511 12/1/10 - WHOLE - BILL 1006351

But you2 would agree with me that Coors and Bud3 and all those folks most likely will not4 pay any tax?5 DEPUTY COMMISSIONER BRESLIN: I6 don't know their physical presence. If7 they have employees or property in8 Philadelphia, then they would pay the9 tax.10

And11 that's an important point, because I12 think a lot of this discussion has been13 about what happens when you're a business14 and you decide to have a physical and an15 employee presence in the City of16 Philadelphia. I mean, that's the genesis17 of this discussion, outside of the18 numbers.19 So if you're a20 Philadelphia-based company and you sell21 to the City of Philadelphia, what is your22 net income liability?23 DEPUTY COMMISSIONER BRESLIN:24 I'm sorry. Could you repeat that?25 512 12/1/10 - WHOLE - BILL 1006351

If2 you're a Philadelphia-based company and3 you're selling to the City of4 Philadelphia, what's your net income5 liability? What's your percentage of6 your net income liability?7 DEPUTY COMMISSIONER BRESLIN:8 If you're a Philadelphia-based business9 and you're selling only in Philadelphia?10

Right.11 DEPUTY COMMISSIONER BRESLIN:12 No sales outside of Philadelphia?13

Right.14 DEPUTY COMMISSIONER BRESLIN:15 Then you pay on all of your net income,16 presuming that your property is all here,17 your payroll is all here and your sales18 are all here.19

And if20 you're a Philadelphia-based business and21 you're selling to Texas, what is your net22 income liability?23 DEPUTY COMMISSIONER BRESLIN:24 You pay on your net income, but somewhere25 513 12/1/10 - WHOLE - BILL 1006351 less than 100 percent because of the2 apportionment factors.3

Because4 of the apportionment factor.5 Let's talk a little bit -- we6 had an accountant yesterday talk a little7 bit about the types of activities that we8 see particularly with these9 non-Philadelphia-based businesses. In10 your estimation, because you work at11 Revenue, how many of those businesses who12 have no base in Philadelphia report out13 their income? When they're doing the14 apportionment piece, how many of the15 outside businesses do we have apportion a16 large percentage of their sales outside17 the City?18 DEPUTY COMMISSIONER BRESLIN:19 It'd really be impossible to answer that.20 Most outside-of-Philadelphia businesses,21 presumably all outside-of-Philadelphia22 businesses apportion their net income, as23 long as they're not selling 100 percent24 into Philly and they'd still have25 514 12/1/10 - WHOLE - BILL 1006351 property outside.2

So it3 would be fair to say that a large4 percentage, maybe 90 percent, of the5 businesses apportion most of their income6 outside the City?7 DEPUTY COMMISSIONER BRESLIN:8 No. That's the part that I can't answer.9 I don't know -- they would apportion10 their net income, but I couldn't estimate11 what percentage they would apportion12 outside. There could be13 outside-of-Philadelphia businesses who14 sell a significant amount of product or15 perform a significant amount of services16 within the City.17

We've18 talked a little bit about yesterday with19 the accountant how people can set up an20 office outside of the City and apportion21 a fee to that, to the outside. So they22 could potentially have all their activity23 here, but then they have this office that24 they apportion a fee out.25 515 12/1/10 - WHOLE - BILL 1006351 In your discovery work, as you2 guys seek out folks, do you see this3 regularly?4 DEPUTY COMMISSIONER BRESLIN:5 We do see that. I mean, it's not -- I6 wouldn't say it's regularly, because of7 the number of audits that we do, but we8 do see that, yes.9

Of the10 people that you audit, when you make a11 decision to audit someone, to investigate12 that, how many of the cases that you13 audit, using that factor, end up being14 true, that people are not apportioning15 correctly?16 DEPUTY COMMISSIONER BRESLIN: I17 couldn't answer that, because it is -- as18 I think was testified to yesterday, it19 can be a legitimate tax planning. So20 when we see it, if it's legitimate, it's21 allowable.22

So we've23 talked about people doing licensing fee.24 One of the presentations yesterday was25 516 12/1/10 - WHOLE - BILL 1006351 from the Starr Restaurants, who have a2 $128 million business, but they only make3 a million dollars in the City. Is that4 normal?5 DEPUTY COMMISSIONER BRESLIN:6 Say that again. I'm trying to run those7 numbers in my --8

Starr9 Restaurants makes $128 million a year in10 gross, but they only attribute or pay --11

So it would be12 their revenues, you mean?13

Yes. So14 they're saying that their profitability15 is about one percent. Is that normal?16 DEPUTY COMMISSIONER BRESLIN: I17 don't know if that's normal. I mean, we18 usually as part of an audit, we look to19 industry standards, and the profit20 percentages are going to vary from21 industry to industry. And, honestly, I22 don't know those off the top of my head,23 but we would go to a manual and look at24 those.25 517 12/1/10 - WHOLE - BILL 1006351

Okay.2 Rob, I want to ask you a little bit about3 the small businesses, because I think4 that's one area of agreement that we have5 in this proposal --6

I think so.7

--8 around helping the small businesses.9 Based on your analysis, what10 effect would this proposal have on11 businesses with a million dollars in12 receipts or less?13

The analysis that14 I've seen on it actually, I think, was15 not ours but was an Econsult analysis,16 but it showed a benefit under the bill of17 about $20 million, and I think a large18 part of that benefit comes from the19 $100,000 exemption, which is one of the20 reasons that we think that's something21 that should be examined and maybe we22 should pursue that, because we think that23 provides a benefit to small businesses.24

So in25 518 12/1/10 - WHOLE - BILL 1006351 your estimation, because we keep talking2 about winners and losers, since you3 haven't done your own analysis on that,4 you're relying on the numbers that5 Econsult got from your office?6

Got from analysis7 they did based on data they got from us.8

Right.9 So you would say for the most part10 that -- would you say that most11 businesses under a million dollars will12 receive some sort of relief with this?13

Let me find that14 analysis again. I think that's what the15 analysis showed, and, again, I think16 that's -- if you look at the numbers, we17 think that a lot of that is because of18 the $100,000 exemption, which is, again,19 attractive to us.20

Of our21 reliance of the, I think it's, $35822 million in BPT, what number makes up the23 net income side?24

One second.25 519 12/1/10 - WHOLE - BILL 1006351 The net income side is most of2 the total, but we don't have the exact3 numbers.4

When we5 talk about "most," is that --6

Maybe around7 two-thirds.8

So9 two-thirds of our business privilege tax10 is net income?11

You know, I12 actually, if you give me a minute, I13 think I can be more precise.14 In the numbers that -- under15 existing law, for 2008 it's about 27016 million net income and about 90 million17 gross receipts.18

And I19 think it's fair to say that we've20 established that most of the companies,21 you have to be a Philadelphia company to22 have a net income liability, right?23

I don't think we've24 established -- her question was whether25 520 12/1/10 - WHOLE - BILL 1006351 you have to be a Philadelphia company --2

What3 type of business activity do you need to4 have in Philadelphia to have a net income5 liability?6 DEPUTY COMMISSIONER BRESLIN:7 What would cause -- I'm sorry.8

What9 type of business activity would you have10 to have to have a net income liability?11 DEPUTY COMMISSIONER BRESLIN:12 You would have to have "nexus," is the13 official term. So you have to have a14 connection to Philadelphia.15

Okay.16 So our dependency -- two-thirds of our17 dependency on business privilege tax is18 net income. In order for you to pay net19 income, you have to have a physical nexus20 in the City? That's the point I wanted21 to make.22 DEPUTY COMMISSIONER BRESLIN:23 Yes.24

Thank25 521 12/1/10 - WHOLE - BILL 1006351 you very much.2 I'll pass it on, because I'm3 sure I'll come back. Thank you.4 Thank you, Madam Chair.5

The Chair6 recognizes Councilman Goode.7

Thank you,8 Madam Chair.9 My question is for Mr. Mullin10 first.11

Yes.12

Good13 afternoon, Mr. Mullin.14

Good afternoon.15

As you state16 in your testimony, you were Commerce17 Director in the mid '90s when the wage18 tax cuts and gross receipts tax cuts19 strategy was created; is that correct?20

Correct.21

And I know22 that because I was actually your favorite23 employee; is that correct?24

That is correct,25 522 12/1/10 - WHOLE - BILL 1006351 too.2

Good answer.3

Excuse me.4 Point of information.5

Didn't I have that6 in my testimony?7

You had two8 good employees. Point of information.9

The simple10 question is, has that tax cut strategy11 been successful? And please describe in12 detail your analysis of it.13

Please describe in14 detail your analysis?15

The analysis16 of how the wage tax cuts and gross17 receipts tax cuts have worked since the18 mid '90s.19

Yes, I believe20 they have been successful and --21

Can you22 please describe in detail how you23 think --24

It's the -- I25 523 12/1/10 - WHOLE - BILL 1006351 would say two things. One on an2 anecdotal side, I think it's been3 popularly noted that the tax rate4 reductions, I think, has been a factor in5 business decision-making and location6 here. I also can think in the last ten7 years, several -- takes place where we're8 looking at econometric models to look at9 what's happened to employment, what's10 happened to aggregate activity, economic11 activity, and tried to tie those -- not12 just we at Econsult, but Bob Inman and13 others -- tie those into causality from14 the tax rate reductions.15

So16 notwithstanding the economic recession17 and downturn, the strategy has worked?18

I think so far19 that I would say yes, and I think that we20 have been structurally -- it's improved21 the structure, the structural position of22 Philadelphia.23

Okay. Let's24 talk economic development shop. When you25 524 12/1/10 - WHOLE - BILL 1006351 were Commerce Director, what did2 non-Philadelphia-based businesses think3 of the gross receipts cuts?4

I'm sorry?5

When you6 were Commerce Director, what did7 non-Philadelphia-based businesses think8 of the gross receipts cuts?9

I don't remember10 too many -- I don't really remember too11 much in terms of discussion by12 non-Philadelphia-based businesses.13

In terms of14 business attraction, as the Commerce15 Department attempted to attract16 non-Philadelphia-based businesses, you17 tried to sell the gross receipts tax18 cuts; is that correct?19

Yes.20

And how did21 they respond?22

I think in general23 favorably, but we were still on the sort24 of, What else? But I think -- I don't25 525 12/1/10 - WHOLE - BILL 1006351 think -- let me put it this way: I don't2 think anybody thought it was a bad thing.3 I thought people thought it was a good4 thing and continuing on that that was a5 good thing, too.6

But it was7 attractive to them in terms of expanding8 their business activity into9 Philadelphia?10

I can't recall11 people specifically saying that, but it's12 my impression that that was a positive.13

Elimination14 of the gross receipts portion of the BPT,15 would that encourage national or16 multi-national corporations to expand17 their business activity within18 Philadelphia?19

Elimination -- I'm20 sorry; elimination of the gross receipts?21

Of the gross22 receipts portion of the BPT, would that23 encourage national or multi-national24 corporations to expand their business25 526 12/1/10 - WHOLE - BILL 1006351 activity within Philadelphia?2

On two fronts. I3 think the answer is not very much, on one4 front. If it's business activity,5 meaning they want to locate operations6 here, that --7

I'm not8 talking about locating operations here.9 I said expanding business activity.10

Business activity?11

If you12 eliminate the gross receipts portion of13 the business privilege tax, would14 national or multi-national corporations15 be encouraged to conduct more business16 activity in Philadelphia?17

If you're18 referring to the part that's selling more19 into Philadelphia, I don't -- I think20 maybe a slight bit, but I don't think21 that that would have much of a -- that22 would move --23

I'm not just24 talking about selling. I'm talking about25 527 12/1/10 - WHOLE - BILL 1006351 business activity in general. If you2 have national or multi-national3 corporations that are already4 headquartered where they're5 headquartered, it is not a wise6 investment for them to necessarily change7 their headquarters, particularly in this8 economic climate. If you move to9 eliminate gross receipts tax, knowing10 that they do business not just in11 Philadelphia, not just in the region,12 nationally, in some cases across the13 world, I'm asking you what is the effect14 of eliminating the gross receipts portion15 of the BPT and would it not expand16 business activity for national or17 multi-national corporations?18

I think it would19 not have much of a positive impact on20 multi-national corporations or large21 corporations expanding their business22 activity.23

That wasn't24 exactly the question.25 528 12/1/10 - WHOLE - BILL 1006351

It's --2

And I'm not3 just looking for a yes or no.4

Okay. I would5 think it would have a minimal impact.6

Can you7 quantify that?8

No.9

Okay.10 Conversely, will this proposal compel11 companies to relocate to Philadelphia?12

Will this13 proposal?14

Yes.15

To relocate or16 locate?17

Will it18 compel companies to relocate to19 Philadelphia?20

Meaning move back21 if they were out?22

Yes.23

I think some, yes.24

The question25 529 12/1/10 - WHOLE - BILL 1006351 was, will it compel, is it an automatic2 decision that you're going to move back3 to Philadelphia because of this proposal?4

I think --5

I'm about to6 move to the yes or no question.7

We moved off of8 the yes/no now?9

I'm about to10 move into it. The question was, does11 this proposal compel people to relocate12 their businesses to Philadelphia?13

I think that there14 would be some businesses that moved out15 because of taxes that would seriously16 consider moving back in.17

That's not18 what I asked, but I'm going to move19 forward.20 If it removes a disincentive,21 does it actually create an incentive and22 what is the incentive to create here?23 What incentive is actually contained24 within this proposal to relocate your25 530 12/1/10 - WHOLE - BILL 1006351 business to Philadelphia?2

I think the3 incentive is that you will not -- that if4 you're profitable, you will not pay a5 tax, differential tax, compared to being6 profitable outside, and I think that's a7 huge incentive.8

Okay. And9 that incentive does not exist by10 eliminating the gross receipts portion?11

Far less. I think12 it's far less. Gross receipts is far13 less.14

Could this15 proposal cause companies or entire16 industries negatively impacted by this to17 halt their expansion of business activity18 here?19

I would find it20 very hard to picture any businesses with21 this proposal here or any industries that22 would halt or cease their operations in23 Philadelphia.24

I said halt25 531 12/1/10 - WHOLE - BILL 1006351 their expansion.2

Yeah. I think --3 I would find it very hard to believe that4 a case could be made for that.5

Okay. I'm6 actually allowing you to go without yes7 or no questions and allowing you to give8 answers that are clearly opinion, if not9 rosy opinion, because the questions I10 will ask now are really a bit more11 specific in terms of what this is really12 about.13

Right.14

This is15 really about whether this is possible.16 Is it possible that we might not attract17 new businesses into Philly under this18 proposal and we might actually lose19 business activity at the same time by20 raising taxes and negatively impacting21 those people impacted by this proposal?22

Okay. I think in23 the first half, I would say, yes, it is24 possible, because there's no guarantee in25 532 12/1/10 - WHOLE - BILL 1006351 the future. On the second part, I think2 that the probability of that happening is3 very low.4

We're moving5 away from --6

Is it possible?7

This is one8 question I want to know. Is it possible9 under this proposal that we actually will10 not attract new businesses into11 Philadelphia and that we actually might12 lose business activity because we're13 raising taxes on certain industries?14 The answer is, yes, it is15 possible.16

Yes. If you're17 talking about probability above zero,18 yes.19

What is the20 probability based upon?21

Well, there's22 always stuff that can happen. I think23 that my view is that the first -- there24 are a lot of factors that would lead to25 533 12/1/10 - WHOLE - BILL 1006351 the growth of the City here. So I think2 the first one has a higher probability.3 The think the latter part, losing4 businesses, has an extremely low5 probability. Possible? Yes. Extremely6 low.7

So it's8 possible that we might not be able to9 attract businesses or we might not have a10 net gain in terms of business attraction11 because we're raising taxes and choosing12 to raise taxes on certain business13 industries and that we might actually14 lose business activity for the same15 reason? It is possible?16

I think it's17 always possible, but I think it's highly18 improbable given this proposal, if you're19 tying it to this proposal.20

So,21 honestly, aside from the fact that you22 actually like this proposal, is it a23 gamble?24

Actually, that's25 534 12/1/10 - WHOLE - BILL 1006351 part of my -- I'll answer that by saying2 I think everything is a gamble. I think3 it's less of a gamble than not doing it.4

But is it a5 gamble?6

Yes.7

Should we be8 gambling in this economic environment?9

Philadelphia is10 one of the places I think on this planet11 that should be gambling and should be12 very, very, very bold.13

So we should14 be gambling in this economic environment?15

We should be16 gambling, with good odds.17

Okay. So18 you obviously believe in this proposal,19 but even if you believe in this proposal20 and you talked about probability, even if21 you think the proposal is right on paper22 in terms of modeling, doesn't the timing23 still suck?24

Does the timing?25 535 12/1/10 - WHOLE - BILL 1006351

Doesn't the2 timing still suck?3

Actually, I think4 the timing for this may well be an ideal5 time, because we've heard a lot of people6 saying let's start reducing taxes,7 reducing taxes. Everybody in this8 building knows that that's going to be9 very, very hard in this bad times now.10 So looking at something where you can11 phase something in where it could be12 revenue neutral but still have a net13 positive effect, this is exactly the time14 that I would recommend a proposal like15 this.16

So it's a17 good time to raise taxes?18

It's a good time19 to make the tax system more advantageous.20

But it's a21 good time to raise the gross receipts22 tax; is that your testimony?23

If that's just it,24 I would say no, but if you're asking25 536 12/1/10 - WHOLE - BILL 1006351 about this proposal, I would say it's a2 good time to make this swap, yes.3

Let's go4 back and let me ask this question: Would5 the strategy created in the mid '90s6 continue to create economic progress when7 the tax cuts are restored?8

I think minimally9 positive, yes.10

Versus this11 proposal.12

Far less.13

How do you14 know?15

Because of the16 nature of the taxes.17

How do you18 know?19

Nature of the20 taxes and my 20, 30 years of being21 involved in this, studying it, teaching22 it, hanging out in it. I don't know --23 none of us, by the way, can say exactly24 what the numbers are, but --25 537 12/1/10 - WHOLE - BILL 1006351

But we know2 the strategy has worked. The first3 question you answered was the strategy4 has worked. We know that the strategy5 would continue to work to whatever extent6 it would.7

Right.8

We actually9 don't know how the tax shift would work.10

Right.11

Isn't that12 true?13

Well, we don't14 know for certain.15

But we do16 know for certain that the existing17 strategy has worked?18

Correct.19

Okay. Let's20 talk about revenue neutrality. This is21 my last question, because this is the22 most troubling part of the testimony.23 In your testimony, I think you24 were right to say that we cannot25 538 12/1/10 - WHOLE - BILL 1006351 determine whether this proposal is2 revenue neutral or not, because it has to3 be budget based. But also in your4 proposal you actually go as far as to say5 that in order to maintain the revenue6 neutrality, all we have to do is keep7 adjusting the rates. Did you actually8 mean that?9

Yes.10

You're11 suggesting that we should change the12 rates from year to year?13

Yeah. I actually14 think that the rate changes will be15 reductions, because as I noted in my16 testimony, I think the net supply side17 effect will be positive.18

You believe19 there will be reductions, but you don't20 know?21

Don't know, no.22

So they23 could fluctuate up and down? Yes.24

Yes. I mean, I25 539 12/1/10 - WHOLE - BILL 1006351 don't know about up and down, but after2 the first year, I don't think there would3 be much changes.4

If we focus5 on revenue neutrality and it's budget6 based, it has been adjusted on a7 year-by-year basis, then the rates could8 go up and down, and that's ridiculous.9

I didn't hear the10 last part.11

That's12 ridiculous to suggest that. It's good13 business tax reform policy. Now, if you14 want to say that it doesn't have to be15 revenue neutral, fine, but if we're going16 to sell this as revenue neutral and17 accept the fact that revenue neutrality18 is budget based, it means you have to19 tinker with the rates, and it literally20 means the rates could go up and down.21

Right.22

And that is23 bad tax reform policy.24

All else equal, if25 540 12/1/10 - WHOLE - BILL 1006351 you put the constraint on that you want2 it revenue neutral, I think you suffer3 with that, that's true.4

And I think5 we agree that that's not a smart6 constraint to put on it --7

Well --8

-- if it9 leads to rates going up and down?10 See, you can't have it both11 ways. You can't sell it as being revenue12 neutral without saying that the rates13 might go up and down, which is bad14 business tax reform policy.15

My two comments16 there is, I'm not necessarily arguing for17 this for revenue neutrality on this. I18 know it's part of the story here, but I19 think the tax -- the proposed swap,20 revenue neutral or not, is a very --21 would be a very, very good thing for22 Philadelphia. I also think that the23 changes after -- if you're phasing this24 in, the changes each year would be25 541 12/1/10 - WHOLE - BILL 1006351 really, really, really small.2

But that's3 the point I want to raise, is that either4 the aim is for it to be revenue neutral5 or it is not, and both are bad.6

Well --7

Because if8 you want it to be revenue neutral, that9 means the rates potentially go up and10 down. And if you don't want it to be11 revenue neutral, this is the wrong time12 to do it.13

Well, I don't know14 if -- I understand what you're saying,15 but I'm not sure that the --16

You can't17 have it both ways.18

I'm not sure that19 I weigh the rates going up and down as20 much, because I think the rates going up21 and down would be very small, and as I22 noted before, I actually think that the23 rate shifting will be reducing the rates24 because the base will be growing faster25 542 12/1/10 - WHOLE - BILL 1006351 than we had anticipated.2

"Could" be3 growing faster.4

Absolutely. I5 said "I think."6

But if7 there's a commitment to revenue8 neutrality, the rates could go up and9 down. If there's not a commitment to10 revenue neutrality, then it's fiscally11 irresponsible. It's one or the other.12

I hear what you're13 saying, but I don't agree with that being14 fiscally irresponsible. It's not15 fiscally ideal, but I don't call it16 irresponsible.17

It's not18 ideal.19 Am I still your favorite former20 employee?21

Absolutely.22 Somebody is shaking their head. The23 story, of course, is absolutely.24

Thank you,25 543 12/1/10 - WHOLE - BILL 1006351 Mr. Mullin.2 I have questions for Mr. Dubow.3

Thanks.4

Mr. Dubow,5 does the Administration still support6 elimination of the gross receipts portion7 of the BPT?8

Yes. Is this yes9 and no?10

This is yes11 and no. It's more helpful.12 So does the Administration, as13 it stated, support the $100,000 exemption14 which would create elimination of the15 gross receipts for a majority of16 Philadelphia businesses?17

Can I do a little18 more than yes or no on this?19

Absolutely.20

We support an21 exemption. A hundred thousand might be22 the right number. We'd like to kind of23 try to figure out what the right level24 is, but we support an exemption.25 544 12/1/10 - WHOLE - BILL 1006351

So will the2 Administration adopt a policy of gross3 receipts exemption as part of its4 business tax reform strategy for the5 future?6

Yes.7

Now, let me8 get to the questions -- one more question9 about that. How much does the $100,00010 exemption on gross receipts cost?11

By itself, without12 anything else in the bill, it's about $813 million.14

About $815 million. And so that's actually a16 decision we may be able to make sooner17 than later?18

Correct.19

Now, despite20 the $100,000 exemption on gross receipts,21 which I said before is the only reason22 why I co-sponsored the bill, does this23 bill raise taxes on any small businesses?24

I would say that25 545 12/1/10 - WHOLE - BILL 1006351 there are likely businesses, small2 businesses, that if they have -- and it3 depends how you define small businesses,4 but I think --5

I define6 small businesses as annual gross receipts7 of less than $1 million.8

Yeah. There would9 be some firms that's under a million10 dollars, depending on where their income11 was and where their level of receipts12 were, that could be losers under this13 bill.14

So the15 benefit to small businesses will not be16 only borne by large businesses; the17 benefit to small businesses will also18 become the burden of other small19 businesses?20

That's correct.21

Despite the22 $100,000 exemption on gross receipts,23 does this bill raise taxes on any24 Philadelphia businesses?25 546 12/1/10 - WHOLE - BILL 1006351

Yes.2

So this tax3 shift is not really about business size4 or geography. This is not really about5 small businesses versus large businesses6 or Philadelphia businesses versus7 non-Philadelphia businesses. The truth8 of the matter is, the winners will9 benefit on the backs of some small10 businesses and the winners will benefit11 on the backs of some Philadelphia12 businesses based upon their industry type13 and their profit margin; is that correct?14

And their level of15 receipts, yes.16

Thank you.17 So does this bill raise taxes on18 labor-intensive industries?19

Yes.20

And for the21 record, how many jobs do you think will22 be lost?23

There's no good24 analysis of how many jobs would be gained25 547 12/1/10 - WHOLE - BILL 1006351 or lost through the bill. There is an2 analysis by Professor Inman that said3 that the gross receipts change would cost4 75,000 jobs, and that's obviously an5 approximation. So I think the kind of6 underlying, if you want to call it,7 gamble in the discussion that you had8 before is that the net income reduction9 will create more than 75,000 jobs, and we10 haven't seen any evidence of that.11

Okay. Is12 this bill currently revenue neutral?13

It is not currently14 revenue neutral.15

And we've16 redefined revenue neutral as being budget17 based. So in terms of your current18 estimate on the best information you have19 right now, what does the bill cost?20

Compared to the21 numbers in our Five-Year Plan --22

What does it23 cost if implemented next year?24

So next year you'd25 548 12/1/10 - WHOLE - BILL 1006351 have about a fifth of the reduction.2 You'd still be going against the current3 rates. So against the current rates, the4 full implementation would be about $235 million. So a fifth of that would6 probably be roughly about $4 million.7

So to the8 best of your knowledge and with the best9 information you have right now, this10 proposal costs $23 million in lost11 revenue to the City and 75,000 jobs to12 the City?13

It would be $2314 million by the fifth year if we weren't15 changing rates. The Five-Year Plan16 assumes some rate change, which already17 had some loss. So against the Five-Year18 Plan, it would be about 8 million in last19 year, but you'd be losing money each year20 as you got there, too.21

So it loses22 money, it loses jobs, to the best of your23 knowledge?24

Correct.25 549 12/1/10 - WHOLE - BILL 1006351

Thank you.2 Thank you, Madam President.3 COUNCIL PRESIDENT VERNA:4 You're welcome.5 The Chair recognizes Councilman6 Jones.7

Point of8 information.9

Yes.10 Excuse me, sir.11

Could12 Mr. Mullin state whether he agrees or13 disagrees with Mr. Dubow on those14 questions?15 COUNCIL PRESIDENT VERNA:16 Mr. Mullin?17

I'm sorry?18

The19 questions that Councilman Goode asked20 about the jobs and the cost, what's your21 position on that?22

Well, I would say23 that on the terms of the cost, I think --24

Point of25 550 12/1/10 - WHOLE - BILL 1006351 information.2

We got3 lights.4

There's5 a point of information.6

Point of7 information. I actually just wanted to8 clarify my question since you want him to9 respond to the question. So I want to10 clarify the question and ask the same11 question I asked Mr. Dubow.12

Would you13 do that?14

And so the15 question is, in terms of the best16 information you have now, the most17 up-to-date information, in terms of how18 the bill is currently constructed now,19 without amendments, is the bill revenue20 neutral or does it cost money, and is21 there any projection for job loss?22

How do I feel?23 What do I think of that based on the24 latest? I think that it is25 551 12/1/10 - WHOLE - BILL 1006351 effectively --2

We are3 actually asking what data do you have and4 what does the data say about actual --5 not interpretation of data, but actual6 data. What does the data say in terms of7 whether this -- actually, I'm going to8 use your word now -- possibly, whether9 this bill possibly loses money and jobs?10

I think it's11 possible, yes. I think it's highly12 unlikely. Our estimates are that it's13 revenue neutral based on 2008 there, but14 there's possible swing. And I think the15 estimates that we've both done, I think,16 are reasonable and I think that the17 Administration's numbers are reasonable.18 That $4 million a year phasing in, I19 agree wholeheartedly with Rob that that's20 a number there. My view, though, is that21 the net, as I said before, that the net22 supply side effect will be positive. I23 do not believe --24

But you have25 552 12/1/10 - WHOLE - BILL 1006351 no proof of that.2

No.3

So the4 actual cost -- there is an actual cost --5

Right, in that6 particular case.7

-- without8 any growth?9 You can estimate that there10 might be growth. You can project there11 might be growth. You can assume there12 might be growth, but without growth and13 without immediate growth, there's a cost.14

Right. And what15 I'm saying is, assuming no growth and16 without any growth at all, our estimates17 were that it would be revenue neutral18 based on 2008. I, though, can see that19 it's very possible and I think the20 estimates that -- the lower estimates of21 the $20 million is very reasonable too22 looking out forward there, because our23 estimates that it's revenue neutral is24 not based on positive supply -- net25 553 12/1/10 - WHOLE - BILL 1006351 supply side effect there. It's based2 on -- the difference with our two -- it's3 roughly $10 million difference. We think4 that the net profits tax will be $105 million higher than the Administration,6 and we also think the impact of the7 alternatives for manufacturing, retailers8 and wholesalers will be slightly less --9 $10 million less than the Administration10 thinks. Both, I think, are very11 reasonable.12 I do not buy at all the $75,00013 number for gross receipts alone. I think14 that the number would be positive, but I15 have great concerns about that. And Bob16 Inman was my thesis advisor. He's one of17 the two people that got me in this world,18 and I love him forever on that. I19 disagree with his estimates on that20 there, but as was noted yesterday, those21 numbers assume no positive effect22 whatsoever.23 So is it possible there would24 be job loss? Yes, it is possible. I25 554 12/1/10 - WHOLE - BILL 1006351 think highly unlikely.2

Okay. I'm3 going to quickly concede that there's no4 need to debate anymore, at least from my5 part. Even if the numbers were close6 enough, which they're not, they still7 would be interpreted differently. And so8 clearly the question is whether we want9 to take a gamble or not from moving from10 a proven strategy to something that is11 not proven yet in times of economic12 downturn.13 I think that there's some good14 things that we can do that the15 Administration has committed to in terms16 of $100,000 exemption. I think we should17 continue discussion on this, but, of18 course, as I said before, I'm not19 prepared to vote for this as is, because20 I've done my own analysis of it, weighed21 both sides of it, and obviously am22 somewhere in the middle, but closer to23 the projection that I'm pretty certain24 the bill costs money and the bill costs25 555 12/1/10 - WHOLE - BILL 1006351 jobs in the short term, and I'd be2 willing to bet anything on that.3 Thank you, Madam President.4

Thank5 you.6 The Chair recognizes Councilman7 Jones.8

Thank you,9 Madam President.10 Steve, without a doubt, I am11 your favorite employee after these12 comments today.13

I've listed you as14 a former colleague.15

Well, I have16 a couple of questions. And I truly17 respect the people at this table. I want18 everyone to know that. I believe19 sometimes we can disagree, but I think20 this kind of discourse has proven one21 thing for sure for me, that tax reform22 and the debate about it is here to stay,23 no matter what the outcome, and I want to24 see if I can get both of you to agree on25 556 12/1/10 - WHOLE - BILL 1006351 one thing. Is there a need for tax2 reform?3

I would clearly4 agree on that.5

Yes. We6 agree on that?7

Yes.8

And do we9 agree at least on the $100,000 exemption10 is good for Philadelphia?11

We agree an12 exemption is good.13

You agree on14 that?15

Yeah. I think it's16 just the dollar amount. It may be17 $100,000. It may be the right amount, it18 may not, but we agree that an19 exemption --20

Is that a21 nod from all parties at the table or are22 some people --23 COMMISSIONER RICHARDSON: We24 agree.25 557 12/1/10 - WHOLE - BILL 1006351

You do?2 COMMISSIONER RICHARDSON: Yeah.3

So we4 have -- is that Commerce Department as5 well?6

Yes.7

So we have8 agreement on that.9 Is that enough for, no matter10 what the outcome of this legislation,11 that we will be at the table to kind of12 bring this forward or are our heels dug13 in to our original positions to the point14 where we're just not going to acknowledge15 that good ideas germinate from all kinds16 of places?17

I think that's a18 really good idea that did not come from19 the Administration and that we support.20

That's21 agreed across the board? Because all of22 you have a role in this, particularly the23 small business portion, because they're24 projected, some of them, as winners and25 558 12/1/10 - WHOLE - BILL 1006351 losers no matter how we do that.2 So we agree that that will3 happen no matter what? I'm4 specifically --5

I'm not sure why it6 wouldn't.7

-- looking8 at you, Mr. Dow. I see three yes's. Is9 that a yes?10

(Shakes head in the11 affirmative.)12

So that's13 unanimous. Okay.14 Can we go to the winners and15 losers list? Which I hate. I really16 hate the idea of winners and losers even17 if a shift does impact you one way or18 another. I think once we started19 labeling that, I mean, we were going down20 a bad course.21 But do you agree at least on22 who is affected one way or another? Do23 both of my experts both agree on that24 list or is there some deviation? You had25 559 12/1/10 - WHOLE - BILL 1006351 a list of analysis of winners and losers.2

You're talking3 about this list that shows by industry4 who would pay more taxes and who would5 pay less taxes?6

Yes. Is7 that an agreed list or is there some8 deviation there?9

I think the only10 place where there may be deviation is11 because of the -- I think the only place12 where there may be disagreement -- or13 it's actually not even disagreement, it's14 just not understanding yet -- is if the15 amendment on the construction industry16 goes in, what impact --17

I think18 that's a given by the sponsors of the19 bill that that would be something that's20 going to be amended.21

Right. So we're22 not sure exactly what impact --23

Point of24 information.25 560 12/1/10 - WHOLE - BILL 1006351

The2 Chair recognizes Councilwoman Sanchez for3 a point of information.4

I just5 want to clarify with or without this6 bill, it's a pyramid problem that I think7 the Administration recognizes needs to be8 corrected anyway, and it's an important9 piece.10

Is that11 unanimous agreement on that?12

There is a pyramid13 problem. We do need to figure out how to14 address it.15

Well, we're16 getting somewhere today.17

You know, I should18 comment on that, and I think the sponsors19 agree. I think we've actually agreed on20 a lot of things over time and kind of21 worked well together.22

You couldn't23 tell by me. I mean, really, I've been24 sitting through this for quite some time.25 561 12/1/10 - WHOLE - BILL 1006351 The agreement part is about this long in2 the testimony and then the disagreement3 is probably --4

Well, the5 disagreement part is about the impact on6 the economy, so that's pretty important.7

Okay. We'll8 agree on that.9 You stated in your testimony10 that there was no reliable data that11 could project job impact one way or12 another by this bill; is that correct?13

The net impact of14 the two changes, that's right.15

Do you agree16 with that, Mr. Mullin?17

Yes.18

So we agree19 we don't know if it's going to have a20 negative or a positive job impact. And21 so the uncertainties, if I understood my22 colleague, is what is in question.23

Can I put a little24 more beef to that?25 562 12/1/10 - WHOLE - BILL 1006351

I don't mind2 yes and no's and you elaborate with me.3

And I think that4 Mr. Mullin would agree with this. I5 think that we probably both agree that6 reducing the net income side will have a7 positive effect -- would have a positive8 effect on the economy and on jobs, and9 that increasing the gross receipts side10 would have a negative impact on the11 economy and on jobs, and where the12 disagreement is is what the netting of13 that is.14

All right.15 That's fair. Can you elaborate --16

We are both about17 to lawyer up for our answers.18

Okay. No19 problem.20 If I understood your testimony21 correctly, that of the top 20 cities,22 we're still one of the only ones who uses23 a gross receipt tax method?24

I think that both25 563 12/1/10 - WHOLE - BILL 1006351 forms of tax, gross receipts and net2 income, are rare for large cities.3

Why is that?4 Elaborate on that.5

What typically6 happens is, large cities get at7 businesses through the property tax, and8 they can differentiate their tax rates9 for businesses and residents. Because of10 the Uniformity Clause and the state11 Constitution, we can't do that. So12 that's one of the problems with our tax13 structure that we would need help from14 the state to correct. And I think if you15 look at what every group that studied16 taxes over time has said is that over17 time we should move more towards property18 tax, but because of the way the state19 system is set up, it's very hard to do20 that.21

So the22 75,000 job losses are nebulous. Somebody23 pulled that -- although they are the24 professorship, that might not be as25 564 12/1/10 - WHOLE - BILL 1006351 accurate or predictable? You gentlemen2 agree that that's not as predictable as3 one might --4

I think even5 Professor Inman would say he wouldn't6 want you to use that as an exact number,7 but I think he would also say that it's a8 good indicator of kind of the scale of9 what you would see, that there would be10 significant job loss from increasing the11 gross receipts and that that's a big12 problem.13

Let me ask14 this, and, again, I want to preempt this15 with all jobs are important to the people16 who have them, and I'm going to say that.17 If you are in that job, it is very18 important to you and your family and19 important to us as a city who derives tax20 revenues from it. But under economic21 theory, in almost an animal farm fashion,22 are some jobs more equal than others by23 way of -- manufacturing jobs actually24 create service sector jobs; is that true?25 565 12/1/10 - WHOLE - BILL 1006351 Both of you have been professors.2

I think it's3 manufacturing activities, service4 activities, different types of activities5 generate demand for other businesses6 there, but one of the big things to7 remember too is that paying people8 wherever they're working generates demand9 for a lot of the stuff that we've heard10 people talk about too, grocery shopping11 and neighborhood services.12

So if I13 manufacture product in China, that's14 going to generate other services where?15 In China. Or do you say --16

If you're taking a17 profit back and you live where you live18 and you're taking a profit, that will19 actually generate some demand for20 services from you spending.21

So to some22 degree, it is better to create those23 kinds of opportunities in Philadelphia or24 in the region at least so that some of25 566 12/1/10 - WHOLE - BILL 1006351 that synergy gets generated local?2

I agree3 wholeheartedly.4

I guess I kind of5 would say that I'm not here to argue in6 favor of the net income tax, but my7 concern is what happens when you8 quadruple the gross receipts tax. So I'm9 not going to try to defend the net income10 tax.11

I just want12 on the record -- some things are on the13 record because they need to be on the14 record, and I just want to establish that15 we agree that Philadelphia first, not to16 violate any interstate commerce laws or17 anything like that, but it is truly18 better to get a business that is19 employing people here, creating synergy20 and other jobs and other sectors here21 than to do it somewhere else, and I think22 those are important goals as we start to23 bring forth the issue of tax reform.24 And then, finally, my comment25 567 12/1/10 - WHOLE - BILL 1006351 is that the only real loser is the people2 paying the wage tax here at the rate that3 they're paying it, and we're not4 really -- and I said this before and I'm5 saying it again today, is that I do need6 more analysis of what the job creation7 impacts are. And that's the most8 important single thing to me, because9 with that, everything else takes care of10 itself. And so I don't know who we need11 to try to figure that out, but as this12 debate goes on for reform, I'd like a13 little more impact analysis on that.14 All right? I love all of the15 jobs. I'm going to say it again. I love16 every job that we ever created from17 whatever sector, but I do think Philly18 first is where I'm going to always come19 down on on job creation. I spent my20 adult life generating jobs, tax ratables21 for this city, and I think that no matter22 what happens today, this is something23 that needs to be progressed further than24 just some of the attitudes and hardened25 568 12/1/10 - WHOLE - BILL 1006351 positions that have been developed, and2 I'm looking for all of us to come3 together and kind of do what's right for4 the region and the City.5

And I think another6 thing we agree on, that one of the7 difficulties in looking at the impact to8 this bill, at the jobs impact of the9 bill, is the lack of kind of good data on10 what changing the net income rate would11 mean. We would, I think, both love to be12 able to tell you that's what it means or13 here's kind of an indication of what it14 means, but that data is just not there.15

And I just16 want to say, Steve, the only reason17 Wilson went on the line of questioning he18 did is, all of those staff meetings we19 sat in together where you asked our20 opinion and really didn't want it, well,21 the reverse happened.22 Thank you, Madam Chair.23

The Chair24 recognizes Councilwoman Sanchez.25 569 12/1/10 - WHOLE - BILL 1006351

I just2 want to take this opportunity to make3 this point. It is going to be very4 subjective to come up with an employment5 analysis as requested because of what6 both Rob and Steve have said, the lack of7 jurisdictions comparable to ours that8 have both of these taxes.9 So I don't want to set up a10 false expectation about our ability to11 create a matrix that doesn't exist or may12 not exist because there's not apples to13 apples, and that that will be pretty14 subjective. And I think both -- as we've15 gone back and forth, it will always weigh16 in on what we believe the market shift17 and the behavior would be. But I don't18 want to set up a false expectation,19 because no matter how long we have this20 conversation, it's going to be almost21 impossible to gather.22

That's actually23 what I was trying to say, but you said it24 much better. Thank you.25 570 12/1/10 - WHOLE - BILL 1006351

See, we2 all can agree.3

It's a great thing.4

I just5 have a question in terms of who benefits6 and who might not benefit instead of7 saying winners and losers. The whole8 field of technology, would they be9 winners or would they be losers in terms10 of -- we're talking about this bill11 benefiting manufacturing and retailers.12 Where does the field of technology, which13 is now the going employment market in14 this country, where do they fall?15

Councilwoman, my16 response to that is if we are talking17 about sort of growing firms, technology18 firms, in either start-ups or ones that19 are in sort of the earliest phases, it's20 my belief that this bill would be21 extremely helpful to them, because they22 are exactly the businesses that you lose23 money early on and you gain -- and you24 always forecast that you're going to be25 571 12/1/10 - WHOLE - BILL 1006351 earning profits afterwards or else you2 wouldn't be in the business there, and3 those are the ones that will be looking4 and saying, When we get up on our feet,5 start making money, that's oftentimes6 when they say, Okay, now it's time to7 exit the City, and I think this would8 decrease the reason to do that.9

The Revenue10 Department analysis shows that the11 computer services would see their tax12 liability increase by roughly $600,000.13 Telecommunications would see their14 liability go up by about 1.3 million. So15 those two portions of the industry would16 see their liability going up. Management17 and technical consulting, which may also18 include similar types of technology, you19 would see their liability go down by20 about 1.3. So it's kind of mixed. And,21 again, within those industries, that will22 vary by business too, by firm.23

Okay. The24 Chair recognizes Councilman Greenlee.25 572 12/1/10 - WHOLE - BILL 1006351

Thank2 you, Madam Chair.3 Just two quick things. First,4 Mr. Dubow, just generally, I know towards5 the end of your testimony you talk about6 additional concerns, and I know through7 your testimony you talked about some of8 the specific concerns you have about the9 bill, but you say another major concern10 for the Administration is the businesses11 will see the tax structures unpredictable12 and subject to change. I guess in13 fairness, is that really a reason to be14 against the bill, though, that it's a15 change? Because we heard a lot of people16 yesterday say they don't like the way17 things are going now.18

Right. And I'm19 actually not -- I'm glad you asked that,20 because the fact that changing the21 business structure, business tax22 structure, in itself is not a bad thing.23 It could be a really good thing. What24 worries us about it is that so many25 573 12/1/10 - WHOLE - BILL 1006351 people we contacted last week didn't know2 this was happening, and having the tax3 change happen at a time when people4 aren't really aware of the debate is5 something that we think is a concern.6 So we think changing the tax7 structure makes sense. There just needs8 to be kind of a process that we make sure9 is inclusive.10

So your11 concern is more the awareness than just12 the change in and of itself?13

Yes.14

All15 right. Thanks.16 And, Mr. Mullin, just on -- I17 know we've kicked around the whole job18 impact thing, and Councilwoman Sanchez is19 right, we'll probably never necessarily20 get exactly what numbers we're at or who21 will be impacted exactly, but I know it22 was talked about a lot yesterday -- I23 know you were here -- about that some of24 the companies, corporations that will be,25 574 12/1/10 - WHOLE - BILL 1006351 quote/unquote, losers -- and I don't like2 that term either -- but employ a lot of3 blue-collar, maybe just high school4 educated people, that they will -- they5 could really be negatively impacted, that6 type of -- and they're Philadelphians.7 Example, the hotels, and I'm not saying8 their numbers are right, but they threw9 out 85 percent of their employees are10 Philadelphians. A lot of them are lower11 educated, that kind of thing.12 Have you looked at that13 specifically? Do you have a comment on14 that?15

With the latter,16 yeah, I do have a comment. Looking at it17 specifically, those are the types of18 firms that I was mentioning. The19 industries that we've been talking about,20 the types of firms we've been talking21 about, their fortunes are going to be22 determined by demand, not by a very small23 increase in their cost. They've got all24 kinds of cost factors, all these25 575 12/1/10 - WHOLE - BILL 1006351 businesses are in. They're trying their2 darnedest to compete and compete3 aggressively here in this market. By the4 way, that's a good thing for Philadelphia5 citizens, that they're doing that, both6 inside and outside here. But the7 salvation for these businesses or their8 growth is going to ultimately be9 determined by demand. And you'll hear10 all these industries say, We need jobs,11 jobs, jobs. We need businesses,12 businesses, businesses. That's the13 reason why I think this proposal stands14 the best possible -- the best possible15 thing that will lead to -- given --16 there's a lot of other things you could17 do, but the best possible thing, given18 the constraints and everything like that,19 to generate demand. I would really find20 it very hard to believe that you would21 find any type of significant employment22 reduction, any type of -- Councilman23 Goode was talking about expansions, the24 hotel industry with expansions and things25 576 12/1/10 - WHOLE - BILL 1006351 like that. What's going to drive the2 hotel industry expansion is demand3 based --4

Point of5 information.6

Councilman7 Goode.8

What drives9 demand?10

Income.11

And income12 comes from a combination of cost and13 competitiveness?14

Correct.15

So if you16 raise costs through taxes and compromise17 competitiveness, that impacts demand as18 well; is that not true?19

Yes.20

Okay. The21 demand is not some isolated thing in22 terms of whether people still want to23 come to hotels and book conventions,24 things of that sort. It's based upon25 577 12/1/10 - WHOLE - BILL 1006351 pricing and competitiveness and by taxing2 industry, and by deciding to quadruple3 the tax on an industry affects demand.4

Right. And my5 point is, the tax rates that we're6 talking about here are extremely small7 and would not influence the supply curve8 at all.9

Whether an10 industry loses jobs is based upon demand,11 but demand is affected by costs and12 competitiveness and impacted by13 quadrupling of the gross receipts tax.14

Actually, they're15 both -- those are two independent --16 supply and demand are completely17 independent. Where they meet is what18 happens, and I'm talking about shifting19 the demand curve to the right.20

But the21 competitiveness -- what it comes down to22 is, the income is based upon whether23 people want to come here to conventions,24 whether people think this is a good place25 578 12/1/10 - WHOLE - BILL 1006351 to come to conventions, whether we can2 build the hotel rooms, and3 competitiveness has a lot to do with a4 decision to quadruple the gross receipts5 tax and actually raise taxes on that6 industry. Demand is not completely7 separate and isolated from that.8

I'll agree with9 one thing. I'll note, I do agree that10 that is a factor. I think it's an11 extremely small factor. I think the big12 picture here factor for hotel expansion13 will be the state of the financing14 industry. When everybody is ready to15 pour money back into the hotel world, I16 think the Convention Center expansion, I17 think the efforts of the City, the18 Administration and Council here will be19 very, very positive in that, and I20 think -- I see a very positive outlook21 for the hotel and tourism industry.22

And I23 just used hotel as an example. I think24 there's other -- the bigger companies25 579 12/1/10 - WHOLE - BILL 1006351 that would have their -- be affected by2 the increase in gross receipts. I was3 just using the hotels because they gave4 an example of their type of employee.5 So you -- not trying to put6 words in your mouth, but you think that7 that impact is exaggerated? Would that8 be a fair way to say it?9

Well, it was said10 about one percent. I think that the11 impact, which is effectively less than12 three-tenths or four-tenths of a percent13 of revenues, is a very, very small factor14 and would be swamped by the demand impact15 of greater income.16 COUNCILMAN GREENLEE:17 Mr. Dubow, could I just ask your opinion18 on that?19

Sure. What we've20 heard from businesses is that they look21 at how much their costs will go up. So22 even if $300,000 winds up being a small23 percent of their overall revenue, they24 still have that cost and they'll still25 580 12/1/10 - WHOLE - BILL 1006351 look for ways to offset it, and one of2 the ways they may offset it is by hiring3 fewer people.4

So as5 Councilman Jones was looking for6 agreement, this is certainly one place7 where you disagree, right?8

Right. This is the9 impact on the economy part where we don't10 agree.11

All12 right. Thank you.13 Thank you, Madam Chair.14

Thank you.15 The Chair recognizes Councilman16 Green.17

Thank you,18 Madam Chair.19 Good afternoon. I've enjoyed20 listening to you both and am enjoying the21 very respectful dialogue that we're22 having here today. I wonder if I could23 just ask -- change the tone of this24 discussion. I was wondering if you could25 581 12/1/10 - WHOLE - BILL 1006351 tell us how much businesses under a2 $100,000 pay in gross receipts today and3 how much they pay in net income today and4 how many of those businesses exist?5 COMMISSIONER RICHARDSON: We6 don't have the information with us today,7 but we can provide it to you.8

Well, I9 fortunately have it right here. I10 believe this is information that Econsult11 has shared with Revenue. It's 200812 actual gross receipts tax under $100,000,13 filers, is million 8. Net income from14 these same filers is 20 million 95,000.15 So when we are looking at16 creating an exemption for the first17 100,000 for new business -- or for up to18 and including 100k, it really doesn't19 address most of their tax liability. It20 addresses about three and a half percent21 of their tax liability. So just by22 reducing the first 100,000 -- by23 exempting the first $100,000 for people24 in that category, does it make any sense25 582 12/1/10 - WHOLE - BILL 1006351 to do that in the context of leaving in2 place a net income tax?3

Yes. I mean,4 because they still get a benefit from it5 of $1.8 million. That liability would go6 away.7

In the8 aggregate, they would have a tax9 reduction of three and a half percent.10

I think if you ask11 the firms --12

Whereas we13 would give them --14

I think if you ask15 the firms whether they would like to have16 that reduction, I think they would say17 yes.18

If you ask19 them if they'd rather have that reduction20 or have no tax, so if you said, Okay, you21 have two choices, is it possible that if22 they said -- Okay. You have two choices.23 One, we're going to change the tax24 structure so you pay 96 percent of what25 583 12/1/10 - WHOLE - BILL 1006351 you used to pay, and the other is, we're2 going to change the tax structure so you3 pay nothing, which do you think the4 businesses would choose?5

I think any firm6 would say, I'd rather not pay any taxes,7 but we need actually to collect taxes for8 a whole variety of reasons.9

I understand10 that, but we're not really giving any11 kind of serious benefit to anybody12 eliminating gross receipts and leaving in13 place net income. If you look at the14 next level of category, it's 100,000 to15 250,000, another very small segment,16 you'd only be giving people -- you'd be17 giving people an aggregate, maybe six,18 seven, eight percent tax reduction,19 instead of an aggregate -- excuse me for20 a second -- almost 50 percent tax21 reduction.22 So the impact on small23 businesses -- would you agree with this24 statement: The impact on small25 584 12/1/10 - WHOLE - BILL 1006351 businesses of a $100,000 exemption for2 gross receipts, because you can't exempt3 it for net income, exemption for gross4 receipts for businesses under 250,000 is5 negligible compared to the relief that6 would be provided under our current7 proposal?8

I would agree based9 on these numbers if they're accurate that10 it's smaller. I wouldn't agree that it's11 negligible.12

Would you13 agree that it's 20 percent less benefit14 at least, that it's 20 percent of the15 benefit we're providing to small16 businesses?17

I mean, if this is18 right -- and I'd have to actually see19 what the benefit is for the firms above20 100,000 -- it's clearly a smaller21 percent.22

Right.23 Okay. So small businesses will not be24 greatly impacted. The relief that they25 585 12/1/10 - WHOLE - BILL 1006351 are getting under our bill that was on2 the chart over there yesterday would not3 be -- it's apples and oranges in terms of4 the relief that small businesses get5 under our proposal.6

They would still be7 getting millions of dollars of relief,8 which is significant.9

I10 understand, but it's a 50 percent tax cut11 or an eight percent tax cut, and we're12 talking about helping small businesses.13 So when you don't have a net income tax,14 that is the biggest bang -- that is the15 biggest help -- would you agree that if16 we eliminated the net income tax, that17 would be the biggest help we could18 provide to businesses under $250,000?19

I would agree based20 on this number it's a bigger impact than21 the gross receipts tax, but I also have22 to say I think getting rid of the net23 income tax then forces us to quadruple24 the gross receipts tax rates.25 586 12/1/10 - WHOLE - BILL 1006351

I'm glad you2 mentioned the word "quadruple." Could3 you tell me how much of one percent the4 increase is in the gross receipts tax5 that we're proposing?6

How much of one7 percent?8

Yes. Out of9 100 percent, how much are we increasing10 the gross receipts tax?11

Gross receipts tax12 now is 91 million.13

No, no, no.14 In the millage.15

Oh, you're going16 from 1.415 mills to, depending on which17 rate you use, anywhere from 0.53 to18 0.577.19

Actually, I20 think we agree it's 0.544, right?21

In the fifth year,22 but not in the first few years. The23 first few years we didn't have reduction24 yet, so you'd have to --25 587 12/1/10 - WHOLE - BILL 1006351

Well, we're2 never at --3

Can I finish?4 You'd have to go to the 5.77 to5 be revenue neutral until the tax6 reductions kick in, right? Because the7 first few years we don't have any tax8 reduction. That's what reduces the rate.9

I don't want10 to get distracted between the difference11 in the millage it would have to be.12

Well, you're asking13 the question about millage, so that's why14 I'm answering it.15

Okay. So16 it's basically three-tenths of one17 percent increase? Under your analysis --18

Oh, from -- right.19