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
Yes. Out of9 100 percent, how much are we increasing10 the gross receipts tax?11
Oh, you're going16 from 1.415 mills to, depending on which17 rate you use, anywhere from 0.53 to18 0.577.19
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
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
So we're20 talking about increasing the tax on21 businesses in the City of Philadelphia on22 their gross three-tenths of one percent,23 roughly?24
We're talking about25 588 12/1/10 - WHOLE - BILL 1006351 increasing it by $170 million and2 increasing their net profits by another3 70 million.4
So of 1005 percent, the tax we're talking about6 taxing everybody who does business in our7 market on gross is just slightly over one8 half of one percent?9
Well, it's a16 little bit of money from every business17 rather than a lot of money from a few18 businesses. Would you agree with that?19
No. I would say20 for some businesses it's a substantial21 amount of money. So the four HMOs, for22 example --23
Well, it's24 the same amount of money -- would you25 589 12/1/10 - WHOLE - BILL 1006351 agree with this statement: It's the same2 amount of money from --3
Yes/no.6 It's the same amount of money7 from every -- it's the same exact tax on8 the gross receipts from every business no9 matter what their receipts are. So if10 you make 100 million, you pay 500,000.11 If you make 1,000, you'd pay 5 bucks.12
It's the same rate13 for everybody? Yeah, that's the same14 rate for everybody.15
So it's16 exactly proportional. Every business17 accessing our market will pay the same18 exact tax.19
Will pay the22 same rate, with no distortion for23 apportionment or ability to charge24 outside management fees or anything else.25 590 12/1/10 - WHOLE - BILL 1006351 Is that fair?2
Well, it depends7 how you define "fair." If one of the8 ways you look at fair is whether a firm9 has an ability to pay, I think you want10 to look at what their income is.11
You12 mentioned in your testimony the benefits13 principle and how most cities are able to14 differentially tax commercial real15 estate. Would you --16
I'm not sure I17 mentioned that. I think that might have18 been Steve's testimony.19
You20 mentioned it in the answers to one of21 your questions.22
I did, but the23 whole benefits thing was Steve's. That24 wasn't mine.25 591 12/1/10 - WHOLE - BILL 1006351
I'm sorry.2 But you mentioned in your answer, I3 think, to Councilman Greenlee that --4
Right. Other5 cities can differentiate property tax6 because of -- and we can't do that7 because --8
And so what12 is the best replacement for that? Is it13 an above-the-line tax? If you were14 starting our tax policy from scratch, is15 another above-the-line tax, like property16 tax, a better replacement for that which17 we can't do or is it a net income tax?18
I mean, I think the19 theory behind going to the property tax20 and the theory that the last Tax21 Commission espoused was, you want to tax22 things that can't move out.23
Property can't move2 out. Sales can.3 I don't think there's a perfect4 substitute for property. I think that's5 one of the big problems we have.6
That's7 right. So let's talk about that.8 Yesterday during the testimony of the9 Chamber, Stewart Weintraub talked about10 actually during the Green Administration11 the -- talked about the fact that the12 revenue neutral shift that would have had13 to occur in 1983 or '84 to have no gross14 receipts tax and a net income tax was six15 and a half percent, and the Chamber of16 Commerce rejected a six and a half17 percent only net income tax and instead18 said that is way too high, that will19 drive businesses out of the City, and so20 what they ended up with was a compromise21 of 3.05 mills gross receipts and 3.4, I22 think, percent net income, and that is23 the proposal they went to Harrisburg with24 at the recommendation of the Chamber,25 593 12/1/10 - WHOLE - BILL 1006351 because a six and a half percent net2 income tax is easy to avoid by crossing3 the county line.4 We now have a tax structure5 where we have 1.45 mills, which is an6 extremely low gross receipts rate, and7 basically six and a half percent net8 income tax.9 With those two tax rates where10 they are, which tax do you think has the11 more negative impact on attracting12 businesses to the City of Philadelphia,13 so job creation and business retention?14
Well, the only real15 analysis that I've seen on either one of16 those is on the gross receipts side. So17 I know that that has a very negative18 impact on jobs in Philadelphia. I assume19 that the net income does, too. In a20 perfect world, we'd get rid of both of21 them, and we would like to keep reducing22 both of them.23
Well, I24 don't understand that, because I think we25 594 12/1/10 - WHOLE - BILL 1006351 can agree that a 1.45 mills tax -- tell2 me, is it possible -- let's answer the3 question another way. Is it possible4 that 6.45 percent net income tax has a5 far worse impact on job creation,6 business attraction, business retention7 than the 1.45 mills gross receipts tax?8
Can I finish?12 I think one of the -- what13 we've said all along is, we assume that14 reducing the net income side would have a15 benefit, but what we don't know is the16 tradeoff between the two. So we're17 taking a gamble. One side we know --18
I'm not19 asking about the tradeoff. I'm just20 asking about those two rates. And if you21 had to choose today which to lower in22 order to leave -- if you had to choose to23 leave the net income the same and lower24 gross receipts or leave gross receipts25 595 12/1/10 - WHOLE - BILL 1006351 the same and lower net income, which2 would you choose to do today?3
Well, what we've4 proposed and we've chosen to do is to5 lower both.6
But I can't really9 answer that question because I don't10 really know what that tradeoff is.11
There's no12 tradeoff. We're either lowering the net13 income or we're lowering the gross14 receipts. Which would you lower today?15
What I'm saying is,16 I don't know which one has a bigger17 impact on jobs.18
So it's your19 testimony that you don't believe the 6.4520 percent net income tax, after everything21 we heard yesterday, the commercial22 property owners in Center City saying23 that they are losing deals because of the24 6.45 percent net income tax, after25 596 12/1/10 - WHOLE - BILL 1006351 everything we've learned going through2 this process, you don't think that the3 net income tax is more damaging to the4 City's economy than a 1.45 gross receipts5 tax?6
I think that both10 taxes are damaging, that reducing the net11 income tax is a good thing. So, I mean,12 I would agree with that -- I agree with13 that theory, that you should reduce the14 net income side.15
There hasn't been17 any good analysis that would let me18 answer your question.19
Rob, you sat20 next to Steve Mullin and heard his belief21 about what's going to happen. You guys22 know each other very well. We have23 limited dollars to reduce business taxes,24 and if we were just going to forget this25 597 12/1/10 - WHOLE - BILL 1006351 bill and say which tax should we reduce,2 what would you recommend to the Mayor3 today?4
Well, I mean, we5 have made recommendations to the Mayor6 and it's on both. I mean, I don't --7
But assuming8 you couldn't lower both under state law,9 you can only lower one.10
Which one couldn't11 we reduce under state law? That will12 make it easy to answer.13
I really would16 probably -- I mean, the path that we have17 taken over time was reducing the gross18 receipts tax, because every analysis we19 saw of it said that it was a job killer.20 I think we should keep reducing it.21
I'm sorry we22 can't reach agreement on what I think was23 a point made extraordinarily obvious24 through all the testimony and25 598 12/1/10 - WHOLE - BILL 1006351 Mr. Mullin's testimony.2 Mr. Mullin, would you please3 answer that question? If you had to4 today reduce one tax, net income or gross5 receipts, with the limited dollars we6 have available for tax reduction, which7 would you pick and why?8
I think that the9 corporate income tax, the net income tax,10 is a worse tax than the gross receipts at11 the level. So I would channel whatever12 efforts -- whatever dollars were13 available into that.14
Thank you,20 Madam Chair.21 I think it's an excellent22 question. I just wish we would go a bit23 further and actually quantify and talk24 specifically about how much we have to25 599 12/1/10 - WHOLE - BILL 1006351 invest in tax reduction and what the2 rates would actually be, because the3 truth of the matter is, 6.45 percent is4 much too high, but the question is, if5 you're only taking it down to 6.4 or 6.356 or 6.3, does it really have any impact on7 a business's decision?8 And so to take the question9 where it really needs to go, there has to10 be actual rates on both sides, and11 investment, in particular, tax rate12 reduction on both sides in order to13 answer the question.14 So I think the question is a15 good question if we actually pinpoint16 what we're trying to get from the answer,17 which is the specific amount of18 investment if you have $10 million to19 spend or $50 million to spend and it took20 you down to this on gross receipts and21 took you down to this on net income,22 which would be better. Because other23 than that, it's just philosophical.24
Well, I25 600 12/1/10 - WHOLE - BILL 1006351 completely agree with you, Councilman.2 It is -- that is a discussion we're3 having, what's better for the City of4 Philadelphia, and I think the answers5 were clear.6 How much --7
The answer10 is reducing the net income tax, and the11 net income tax is the job-killing tax in12 the City of Philadelphia because it's so13 high compared to the other rate, which is14 one-tenth of one percent compared to 6.4515 percent.16 At any rate, Mr. Breslin --17
Point of18 information.19 May I comment, Councilman? May20 I comment?21
I mean, I22 don't mind if you do. I purposefully did23 not do that to you while you were24 questioning.25 601 12/1/10 - WHOLE - BILL 1006351
I don't want2 to debate. I actually just want to3 comment.4 I actually agree with you that5 6.45 percent is too high. I actually6 agree that it is so high that it is the7 most dangerous of the two. I also agree8 that we can't afford to lower it to a9 point where it actually makes a10 difference without jacking up the gross11 receipts to a point where it makes a12 difference. And so all is not equal,13 because the issue is this: The reason14 why we targeted gross receipts in the15 past was because the rate was so low, it16 was easier to get rid of. And that was17 the thought. The other thought is, how18 much do you really have to spend to lower19 the net income to the point where it20 makes a difference, and that's the21 question that I'm interested in, if22 that's helpful to the discussion.23
I appreciate24 that.25 602 12/1/10 - WHOLE - BILL 1006351 Mr. Mullin, I might get you to2 talk about studies of just lowering3 marginal tax rates, corporate tax rates,4 in the United States and states and what5 impact that has had on business expansion6 and business activity, creating demand7 with more money in the economy in a8 second, but, Mr. Dubow, what is the gross9 receipts rate in Lower Merion and10 Cheltenham and in the municipalities11 surrounding Philadelphia that have gross12 receipts taxes?13
It's about15 1.5 mills, about the same as ours.16 We compete in a region for17 businesses. Would you agree that the18 City of Philadelphia would be a far more19 attractive business location when people20 are making choices within the region if21 our tax structure was the same as the22 surrounding counties?23
I think, first, let24 me say I think we compete in the region25 603 12/1/10 - WHOLE - BILL 1006351 but also with other regions, but we2 definitely do compete in the region. I3 think --4
I should go8 with yes/no questions like Councilman9 Goode.10
And I think the11 problem with our taxes are that they're12 higher. So I don't think it's13 necessarily our structure, but that in14 part because we're a city county, for a15 whole number of reasons, our taxes are16 higher.17
Actually,18 our property taxes are lower19 significantly.20
Right, but our21 overall tax burdens both on businesses22 and on individuals are higher than in23 the -- both in the counties and in other24 cities.25 604 12/1/10 - WHOLE - BILL 1006351
Sure it is.4 According to a comparative study that5 Inman did, I think there are only 186 jurisdictions of the hundred and7 something in the surrounding counties8 that have higher tax burdens than we do.9 We just have a higher tax burden.10
And what11 skews the higher tax burden on the local12 economy more, the 6.45 percent net income13 tax or the 1.45 mill gross receipts tax?14
I haven't really15 seen any good analysis that would tell me16 which one skews it more.17
I mean, that's19 really been the discussion we've been20 having ever since we started.21
No. I22 appreciate that. I mean, I don't think23 the questions I'm asking are24 sufficiently -- I don't know what the25 605 12/1/10 - WHOLE - BILL 1006351 word -- is to have us not being able to2 get sort of yes/no answers on them,3 but --4
Well, your9 time is a little up. Let me go to10 someone else and come back to you,11 please.12 Councilman Clarke.13
Thank you,14 Madam Chair. I was going to recommend15 the introduction of the time clock very16 soon, because it takes quite some time to17 get around. Thank you.18 I actually just had a couple of19 quick questions. With respect to the20 $100,000 exemption, which seems to be21 something that most people can get a22 grasp of and feel comfortable that that's23 a program or a policy that we should24 implement, and I understand the number25 606 12/1/10 - WHOLE - BILL 1006351 associated with that is around anywhere2 between 23, 25?3
No. That just4 $100,000 exemption outside the bill by5 itself would be about $8 million.6
So in terms13 of that, the fact that the Administration14 is comfortable with, at a minimum, having15 that discussion and possibly implementing16 something like that, is there a way or17 was there any thought given to18 implementing such a policy that would not19 include increases on gross receipts to20 offset that loss of revenue?21
I'm not sure how22 you get there. We'd have to look at that23 and look at how you'd want to phase it24 in. If you phased it in so that it25 607 12/1/10 - WHOLE - BILL 1006351 actually took effect in the out years of2 the Plan, you could kind of maybe3 substitute it for the reductions that we4 have in the out years of the Plan.5
Phase it6 in, phase in the $8 million loss in7 revenue?8
Yeah. Right.9 Because we already have some tax10 reduction in the last couple years of the11 Plan. So there's some money for tax12 reduction.13
So would it14 be in addition to the other --15 maintaining the existing proposal for tax16 reduction, it would be in addition to?17
So you may20 have to change something. So that21 wouldn't necessarily benefit -- if you're22 going to possibly increase taxes that you23 had projected to reduce and then you give24 an exemption to those businesses, that25 608 12/1/10 - WHOLE - BILL 1006351 may not necessarily have -- I mean, right2 now it's a relatively small impact as it3 is. So I would be concerned about doing4 something like that that's not5 legitimately helping a business if we're6 going to --7
Right. I mean, the8 other thing you'd have to look at is9 whether -- if you did it later in the10 Plan, whether there are other ways the11 Plan balanced.12
So it13 sounds like to me to say that in fact in14 spite of the fact that you said that's15 something within the existing bill, a16 portion of which something that you all17 may be comfortable with, but not at this18 time.19
Well, and one of20 the things too is you want to look at the21 level. So we might want to play around22 with the level. It might not be 100,000.23 It might be a different level that would24 cost less.25 609 12/1/10 - WHOLE - BILL 1006351
Okay.5 Mr. Mullin, I want to ask you a question6 about the construction industry, and7 there remains this concern about the8 impact, and I can't find it in the9 testimony. There's so much that we have,10 but I know that there was possible even11 after the -- it was suggested that even12 after the proposed amendment, that there13 would still be a tax liability increase.14 Can you kind of walk me through15 that whole issue right now, this whole16 issue of pyramiding?17
Yeah,19 pyramiding, telescoping, whatever term20 you want to use, because there remains21 some uncertainties, particularly from22 members in the construction industry. I23 understand that the BIA, if they had not24 already spoken in favor of it, but they25 610 12/1/10 - WHOLE - BILL 1006351 tend to be more from the development arm2 of this whole construction industry, but3 as we move down through the general4 contractor and then the subcontractor and5 then ultimately the worker, you may6 have -- can you kind of walk me through7 how you think --8
Yeah, and11 how you think it would impact them both12 before and after the amendment.13
Yeah. I do14 think -- by the way, I don't think that's15 unique to the contracting industry, but16 it is a function of both subcontracting17 and purchasing of another vendor inside.18 You basically, you take gross receipts --19 you pay a tax on your gross receipts.20 You pay somebody, and they have to pay a21 tax on the gross receipts that you paid22 either a sub or somebody else in23 Philadelphia who is subject to the tax.24 They build that into their price, so25 611 12/1/10 - WHOLE - BILL 1006351 you're sort of paying a double price, and2 that's something that I think is a3 general problem with that kind of --4 those kind of taxes.5 In the big picture where we've6 heard of like consumption taxes or7 value-added taxes, they're specifically8 set to take that double and triple9 counting out. So I think --10
In terms of15 the steps, where would the elimination --16
I think the idea17 of the way the people look at this -- and18 I'm not completely familiar with the19 amendment here, but I think the20 fundamental idea is to say we pay gross21 receipts, we have a gross receipts22 liability of X. We paid something --23 part of our gross receipts was used to24 pay Rob for services that he provided.25 612 12/1/10 - WHOLE - BILL 1006351 He is paying gross receipts on that.2 Once we see that he's paying gross3 receipts, we take -- Steve Mullin can4 take the credit, my company, can take the5 credit for his gross receipts that had6 been paid against what I -- so there's7 not the double counting of that8 component.9
So who10 actually -- who does not get the credit11 in that chain?12
Well, you're not20 getting a credit -- if it's the bottom21 person, then you're not paying -- you're22 not paying the gross receipts tax that23 somebody else is paying. If you're the24 bottom person or the bottom entity, then25 613 12/1/10 - WHOLE - BILL 1006351 you're not double paying for something2 else. The problem is, everybody above is3 paying for not only the services, but the4 charge for the tax.5
So in terms6 of the liability, you're suggesting --7 and I want to make sure I'm clear with8 this. In terms of the increased tax9 liability, none of those people have an10 additional tax liability above that?11
No. They're12 paying what they're already paying. The13 question is whether or not --14
Well, the20 amendment would say that you get to take21 a credit, so you would not have to pay22 that same amount. You would definitely23 not be increasing it from that.24
Your voice25 614 12/1/10 - WHOLE - BILL 1006351 is fading out. I want to make sure I'm2 hearing you.3
Say that8 again. The question is that there's an9 existing tax liability under the current10 structure. If this new tax is imposed,11 the thought is that it will be burdensome12 to the construction industry. So,13 therefore, this amendment, if14 implemented, will bring that tax15 liability back to the existing number?16
Yeah. I think in17 the aggregate, that's true. The one18 question is what portion of your gross19 receipts -- what portion of the money you20 take in are you paying out to subs and21 things like that. And that could differ22 across different businesses there, but23 basically you wouldn't have to --24
Different25 615 12/1/10 - WHOLE - BILL 1006351 businesses within the construction2 industry?3
Yeah. I mean --4 yeah. I think even within the5 construction industry. Some might say we6 sub out 60 percent of our work. Some7 might say we sub out 80 percent of our8 work. I'd say we sub out 20 percent of9 our work, that kind of thing.10
Is there a11 written analysis? Because there seems --12 and I keep bringing this up, because13 that's one of the industries that, from14 my perspective given the district that I15 represent, which is development heavy,16 I'm very concerned about that, because as17 most people know, it's already difficult18 to build in the City of Philadelphia and19 a lot of that is based on cost.20 Has there been an analysis done21 in very specific terms as to how --22
I'm looking at the23 amendment, the proposed amendment. The24 amendment was developed based on -- if I25 616 12/1/10 - WHOLE - BILL 1006351 recall this correctly, this was -- these2 were standard numbers given by industry3 members here in stepping through that4 would end up having the tax basically5 be -- the increase basically be reduced6 through the credits.7
Going from the 1.410 mills to the 5.4, 5.7, 5.3 mills. That11 increase would be eliminated by the12 credit, and the credits were designed to13 do that.14
Mr. Dubow,15 is that your -- you have a similar16 analysis?17
I think this is --18 if I understand, if I remember this19 correctly -- I don't think I've quite20 seen this before. I saw something like21 it. And I think that by giving the22 credits, depending on the credit, there23 is a benefit. I'd have to kind of go24 back and look through this analysis to25 617 12/1/10 - WHOLE - BILL 1006351 make sure that I understood it. But I2 think this was one firm giving kind of3 what they thought was typical. So I4 don't know how widely applicable this is.5 That's what they represented, but I'm6 not --7
See, that's8 one of the, speaking for myself, one of9 the concerns I had, when you can identify10 one firm, and I think pretty much in any11 category, as we've witnessed over the12 last day and a half, one person comes in13 that has a restaurant, says, You know14 what? This works for me. Another one15 might come in and says it doesn't. It's16 like --17
Yes.22 The Chair recognizes Councilman Green for23 a point of information.24
Thank you.25 618 12/1/10 - WHOLE - BILL 1006351 I just wanted to not get2 involved in this discussion, but point3 out that this was provided by the General4 Building Contractors Association as a5 typical project representing industry6 numbers, and it was essentially revenue7 neutral to the general contractor on a8 $30 million project, and that was with9 only a 0.83 percent profit margin, when10 the testimony was that the normal profit11 margin is above one percent.12 COUNCIL PRESIDENT VERNA:13 Councilman, I hate to interrupt you, but14 the stenographer is asking for a15 five-minute break.16
Thank19 you.20 (Short recess for court21 stenographer.)22 COUNCIL PRESIDENT VERNA:23 Councilman Green, I think we're in the24 process of asking questions. Are you25 619 12/1/10 - WHOLE - BILL 1006351 finished?2
Yes. Given7 the course that we're taking, Madam8 President, I will save my questions.9
Thank10 you.11 Does anybody else have any12 questions?13 (No response.)14
Do we15 have anyone else to testify?16 (No response.)17 COUNCIL PRESIDENT VERNA:18 Seeing no one, this Committee will stand19 in recess until December 15th at 2:0020 p.m.21 Thank you.22 (Committee of the Whole23 adjourned at 5:15 p.m.)24 - - -25 620 1 CERTIFICATE2 I HEREBY CERTIFY that the3 proceedings, evidence and objections are4 contained fully and accurately in the5 stenographic notes taken by me upon the6 foregoing matter on December 1, 2010, and that7 this is a true and correct transcript of same.8 9 10 11 12 --------------------13 MICHELE L. MURPHY14 RPR-Notary Public15 16 17 18 (The foregoing certification of this19 transcript does not apply to any reproduction20 of the same by any means, unless under the21 direct control and/or supervision of the22 certifying reporter.)23 24 25