I'm generally familiar 17 with the job-creation statistics over the last 20 18 to 30 years. 19
When was the last 20 time we raised the wage tax? (No immediate response.)
Are you familiar with the City's experience in terms of net job creation 167 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS in the next three to five years after that? (No immediate response.)
Over the next -- a few years after we raised the wage tax to from 4.31 percent to 4.96 percent -- under the Green Administration, not the Goode Administration -- the Goode Administration, over its first two years, created a net job total of about 33,000 jobs, and over the first five years, created a net gain of about 50,000 jobs. Can you explain how we raised the wage tax in 1983, yet had the largest period of economic job expansion in the last three decades? (No immediate response.)
That's a question I will save for the economists as well. I'm going to ask Thornburg and Mr. Pizzi that, but the last time we raised the wage tax, we actually had the largest period of job creation in the history of Philadelphia. 168 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
I think -- I mean, I'll give you my perspective, Councilman, and perhaps the Finance Director of the Budget Director would have an answer as well. My perspective is that there are other factors involved in job creation, not simply just the wage tax, and a lot of it has to do with the national economy, a lot of it has to do with the perception that people have of doing business in the City, and those factors, I would assume, came into play at that time.
Okay, I will save that question for Mr. Thornburg and Mr. Pizzi. Thank you again for your support of 116.
Thank you, Madam Chair. Did we did lose population in the last two years?
Yeah. Based on the census numbers during that ten-year period, we did lose population. 169 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
In the last year two years, in the last year? Have we lost jobs in the last year?
Yes, we have lost jobs for about the last year. When the national economy started to turn down, we started to lose jobs.
Not an explanation, yes or no. 12 And we have had a negative job loss really over the last ten-year period and a negative population loss. Of Philadelphia, I'm talking about.
Philadelphia had population loss; it also, though, had a period of job gain during the second half of the '90s.
And how many jobs were those, and how many of those jobs really went to Philadelphians? I'm talking about Philadelphians right now, people who live in Philadelphia.
I don't know. I'd have to get back to you with that number. 170 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
'Cause we do create a lot of jobs; we have a lot of job creation in the construction industry, for example, but many of those jobs are not held by people who live in Philadelphia. Is that true?
There are many people who work in Philadelphia who don't live in Philadelphia, that's correct.
All right. And over the years, we have seen federal programs that have been aimed at creating jobs for Philadelphians; is that correct? Model Cities is one , right, going back? The Empowerment Zone is another one, the latest one.
The latest incarnation of that is the Empowerment Zone?
Really, these have been jobs and money, millions of dollars, that have been put forward to transform blighted neighborhoods in a sense by creating entrepreneurs from those communities and jobs within those communities. Has that been the philosophical 171 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS background and theoretical background of those monies?
And we haven't seen the transformation of those neighborhoods, have we? I mean, North Fifth Street, Fifth and Cambria, Sixth and Indiana, Fourth and Allegheny, the biggest employment that find on those corners are drugs; is that true, right? Do we still have a 60 percent unemployment rate in those areas?
Well, you should, you should. You should you know what the unemployment rate in those areas is, because this is what we're talking about here. What we have done every time we have increased that, and I've seen it, is that we have created a poverty of bureaucracy. We have social programs because we have created more needy, but we haven't created the jobs that are necessarily for those individuals. 172 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS (Applause.)
And the thing is that unless we change, unless we change, what we're going to have in this city is the very poor and the very rich and nothing in between. And the very rich are going to be living in enclaves that are going to be walled. And unless we change -- and you haven't presented yet a comprehensive and cohesive plan of job creation by maintaining the status quo. And if you maintain the status quo, as we have shown and has been shown by history, is that we're not going to create any more jobs, and the middle class will disappear in Philadelphia. And what we need for blacks and Puerto Ricans and other Latinos and so on is to create a brand-new middle class in this city, because they have already left. We're the ones that are still here. And unless we create an economic base for that -- like my niece the other day and her husband, he's a teacher, she's an accountant. They just got married. Like Jimmy Kenney said, they cannot afford the housing that they want, and they may be leaving Philadelphia because they can't 173 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS afford the other aspects in order to be able to maintain the quality of life that they expect to have, after going through college and becoming professionals. So what I want to hear is not in opposition of doom and gloom, but tell me, if you maintain the status quo, how we're going to begin bringing in population and how we're going to begin putting Puerto Ricans, blacks, and the people who live in this city to work, the people who live in the City mand create businesses that put our people to work? (Applause.)
Our acceleration of the cuts in the gross-receipts portion of the tax is intended to generate increased businesses. As Dr. Inman said in one of his reports, it's the only tax that if we cut it, our revenues would grow. If we could eliminate it, the revenues would grow because it would see the generation of jobs. It is not status quo. We have shifted more into the tax that we felt would be the greatest incentive to development -- economic development. 174 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS That, paired with what we're doing with TIFs and tax abatements, with Councilmember Goode's bill, and with NTI, we feel very strongly we'll see the generation of jobs in neighborhoods that you envision for all of the people in Philadelphia.
NTI does not even speak about job development, NTI doesn't even speak about that
We are not talking about seeing a city deteriorate or become another Detroit; we're talking about turning it around. And so far, we haven't heard that. (Applause.)
Thank you, Madam Chair. Good morning, Miss Davis and --
-- Mr. Cuorato and Mr. Dubow. Mr. Cuorato, let me just ask you a 175 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS couple questions, and then I'd like to move to Miss Davis. On the first page of your testimony, you say, "Although I will be the first to admit that this is not an easy task, I can tell you conclusively from my experience that reducing the wage tax along the lines of what has been proposed will not appreciably help this cause." Can you tell me what that experience is.
The experience, Councilman, is dealing with businesses who are interested in a number of issues, not just -- not just taxes. They are concerned about access to their customer base, they're concerned about available labor pool, they're concerned about how they get their workforce to and from work, they're concerned about putting their employees in an environment where the employees feel as though they have recreational and cultural and other commercial amenities, putting their employees in a good environment. That is the one set of factors that I hear. The other set of factors that I hear is reducing the cost of business. 176 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
Let's stay with your factors. Now, what are we doing to address the factors that you've just mentioned?
Well, I mean, we're supporting the economic-development projects that will be attractions that will further the climate in Center City, Philadelphia. We just had the Kimmel Center opening, the Independence Visitor Center opening; we're making developments in our historic area, making developments to our airport, making developments to our waterfront. Those are all projects that we're supporting that will improve the attractiveness of living and working in Philadelphia.
So now, how many people have told you that they have moved, or plan to move, to Philadelphia because of the Kimmel Center? (Laughter.)
There have been a number of businesses that have cited the attractiveness of being in a Center City location because of attractions like the Kimmel Center. I deal with businesses every day, 177 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS Councilman. Not a day goes by that I'm not talking to business about either staying and growing in Philadelphia, or trying to bring them in. And the subject of taxes come up; I'm not trying to deny that it doesn't. But we have just as much of a discussion about the various advantages of being in Philadelphia, and in many cases, when I'm talking about large corporations in Center City, Philadelphia, and every one of these businesses either cites, or won't deny when I bring up the fact, that being in Center City, Philadelphia has many, many advantages, such as the Kimmel Center, such as the great restaurants, such as the great shopping, such as the great museums, such as the great cultural attractions.
Well, what do those attractions do for their bottom line?
That gets to the other side of the equation: The reducing-the-cost-of- business side. I'm talking about --
So those issues have nothing to do with what their primary business is about; those are just nice things to have.
I'm saying that when a 178 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS business looks to either relocate into Philadelphia or stay and grow in Philadelphia, they look at a variety of factors: Taxes and the cost of doing business is one.
Having their employees and their workforce in a very liveable, high-quality environment, where they have a lot of different options on things to do and places to go is another.
Well, the comments that we hear about taxes are that the cost of doing business in Philadelphia is too high. That is the general comment that we hear.
The results of the survey that we did last year, I think, pretty much bear out what I hear on a day-to-day basis. Yes, I hear complaints about the wage tax. Equally as often, I hear complaints about the gross-receipts tax. The point that I have tried to make here 179 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS today is that we need to take a responsible approach and address both of those factors, which is to say, keep the quality of services that the City provides at a level where these businesses feel comfortable in and growing, but take steps to reduce the cost of business.
And the proposal by the Administration to continue cuts in the gross-receipts tax, stop the cuts in the wage tax, your position as the Commerce Director is that that proposal helps to reduce the cost of business to those businesses versus any other combination of reductions?
Reducing the gross- receipts tax will reduce the cost of doing business in Philadelphia and will be a positive step for us.
And what does not reducing the rate of the wage tax do?
It -- it maintains the -- it enables the City to maintain the level of services that I believe we need -- 180 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
I didn't ask you that question. What does not reducing the wage tax do for the business person and their costs? That's my question.
It -- it means that their employees will still have to pay the wage-tax rate after the '03 cut.
That portion -- not reducing that portion of the tax does nothing to reduce their costs, that's correct.
But we're addressing it in other way: We're addressing it by reducing the gross-receipts tax. The issue for me, Councilman, and for this administration, is reducing the cost of doing business. If we reduce the gross-receipts tax, we are reducing the cost of doing business in Philadelphia.
The impact of reducing the 181 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS gross-receipts tax?
It depends on the type of business. There are certain businesses with small profit margins who are severely impacted.
Councilman, the largest payers of the gross-receipts portion of the business-privilege tax were wholesale trade and durable goods, real estate, security and commodity brokers, health services, legal services, special- trade contractors, businesses such as those. I mean, I have a list of ten here that we could give you if you'd like.
Yeah, I'd be intrigued by the list, and I appreciate that additional information, but that wasn't my question. My question was: What will it mean to this average business that you're talking about? What will it mean in real-dollar terms?
Well, it will mean that many small businesses, and ever large businesses 182 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS who operate on small margins, will have the cost of doing business in Philadelphia greatly reduced.
I understand that. I'm asking you, what businesses? Give me an example.
Councilman, the Finance Director, in her testimony, cited three very compelling examples, and we will repeat those for you.
Are you talking about the ones that didn't make money and owe tax, right?
These are actual tax returns. A wholesale company that lost over $300,000 still had to pay nearly $20,000 in the gross-receipts tax.
A business-services company -- COUNCILMAN NUTTER; And what will this cut do for them?
It will reduce that -- it will directly reduce the amount of gross-receipts tax that they have to pay. 183 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
30 percent of, that nearly $20,000. So it will directly shave approximately $7,000 off their bill, a direct reduction.
By Bill 30 that's in front of us today, they're going to automatically lose 30 percent?
Over the life of the plan, over the life of the Five-Year Plan.
We don't have a five-year schedule in front of us. We have one bill, Bill 30; it has one deduction. (Applause.)
You don't have a five-year schedule; you have a one-year schedule, correct?
Okay, the only five-year concept is in the Five-Year Plan; the Five-Year Plan doesn't outrank a bill, right?
So you don't have a five-year list of scheduled reductions; you have 184 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS one year of reduction, correct?
Okay. Now let's talk about Table in the survey. 6 Table 10 in the survey on , you 7 asked the number-one most important tax to reduce 8 on a percentage basis. The results were: Gross 9 receipts, 33; wage tax, 33. It's a tie, correct? 10
And on Table 11, you said, the top 3 most important taxes to reduce on a percentage basis: Wage tax was 77 percent; gross receipts was 69; use-and-occupancy, 39; and onward. So tell me what from Table 10 and Table 11 propelled you to think that it should be one versus the other?
Councilman, I am looking at Table 10, which asked people the number-one most important tax to reduce in the City, where we got an equal 33 percent response on gross-receipts and wage tax.
Right. And out of that -- and, I guess, Table 11 and other materials that you received, a decision was made to reduce 185 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS one, stop the reductions in the other. I'm asking you, based on your survey conducted by an outside party, what compelled you, based on this information, to make a decision to continue reductions in one and stop the reductions in the other, when your own survey indicates that's the number-one issue is one and one between those two, and in an asked question of, give the top three, wage outranked everything else -- (Applause.)
And in the six sectors of the business type that you asked in your survey, consistently between Table 10 and Table 11, four of the six sectors, the number-one response was the wage tax. So I want to understand the methodology of how you decided, based on that survey data, that you would stop one, continue the other. Tell me what led to that decision.
Mr. Dubow, hold on for one second. This is a Commerce Department survey, right? 186 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
Councilman, it is the position of this administration that the gross- receipts portion of the business-privilege tax is more onerous, the most onerous tax that businesses face in Philadelphia.
This survey says that they are equal, they are equally onerous.
On one question, what's your number one, they're equal. On a second question of top three, it's second. And across sectors, four out of six say it's the wage tax, not the gross-receipts tax. So I'm going to ask you again: Based on that information in Tables 10 and 11, how do you come to the conclusion that you should do one in a reduction and not the other?
Councilman, this is not a decision that is made or a position that is taken based solely on this business survey. 187 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
The other information that is used has to d with the level of services that the City can provide. As the Finance Director has testified in great detail, drastic reductions in the wage tax will reduce the level of City services. In my opinion --
Well, let me ask you a question, let me ask this question: What's your definition of "drastic reduction in taxes"?
Reductions in the wage tax which will cause the level of City services to be reduced to an unacceptable level for businesses and residents.
And do you believe that Bill 92 does that? What are the -- I need your definition and a rate that better defines "drastic reductions." Do you think restoring the cuts that we approved in the current fiscal year, in the Five-Year Plan that we're currently operating under, that those are drastic reduction? Is that 188 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS your testimony?
My testimony is that we can afford one more year of wage-tax cuts. The position of this administration is that beyond that, we cannot afford further cuts in the wage tax without affecting the level of services that this city provides.
Mr. Cuorato, I appreciate your response; it's not an answer. I asked: The restoration of the proposed level of cuts that are in the current Five-Year Plan, is it your definition and your testimony that those represent drastic cuts?
Based on this administration's projections that we will not be able to maintain the level of City services that are an acceptable level for businesses and residents.
And so what do you propose we do with the wage tax going forward?
Councilman, I'm going to 189 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS defer to the Finance Director. If you still want to hear from me on that, I'll be glad to give you my answer
I want to hear from you as the Commerce Director as to what the Commerce Director's position is, and in the Commerce Department's position, you are the agency statutorily responsible for promoting the City as the City representative in being involved intimately with commercial activity in the City. (Applause.)
I want to know what the Commerce Department and the Commerce Director plans to do about the City's over-reliance on the wage tax and the impact that it has on your ability to do your job. (Applause.)
The first time that you asked the question, I believe you asked, what will happen to the wage tax in the future in accordance with this administration's plans? That's the question that I wanted the Finance Director to answer. And then if it's acceptable to you, I will answer your second question. 190 4/8/02 WHOLE COMMITTEE - TAX-REDUCTION BILLS
Fine. - - - (At this point in the testimony, stenographer Josephine Cardillo relieved by stenographer Lisa Bradley.) - - - 191 4/8/02 - WHOLE - TAX REDUCTION BILLS (Proceedings now reported by Lisa C. Bradley, RPR.) - - -
The Administration is committed to reevaluating the wage tax and all tax reduction plan as our economy moves forward we see what our ability to cut them are. We are committed to doing all that we can to make Philadelphia more competitive.
Thank you, Ms. Davis. The model that you're pursuing, do you have a report or an analysis of the proposal to stop the reduction in the wage tax and accelerate the reduction of the gross receipts tax even though there's no proposal in front of us today that does that?
We did in fact -- we did substantial analysis to determine which way to go.
Maybe on a 192 4/8/02 - WHOLE - TAX REDUCTION BILLS going-forward basis it would nice to share that before we get to the hearing so that all of us can participate in these discussionis as it is ultimately our responsibility to actually vote on these matters. What does the analysis show?
Our analysis and our discussions with economists show that if we had to choose a tax, the gross receipts portion of the tax was the way to go, that the small cuts that we were making in the wage tax were not focused enough to really serve as an economic development tool, that the debt to which we would have to cut that wage tax for it to actually spur economic development we could not afford. And I think the PEL studies also shows that.
We could afford to do it one more year. We wanted to give people a chance to get used to the idea of it not being there as we face into a tax that for us meant a greater likelihood of seeing the supply side effect that everybody talks about. 193 4/8/02 - WHOLE - TAX REDUCTION BILLS
Our contour of economic advisors. We've looked at Dr. Inman's --
They do not issue formal reports. We've looked at Dr. Inman's studies where he goes into great detail about the gross receipts portion of the net profits tax.
Did you not read the portion of his studies about the wage tax?
He does recognize that there is a benefit to be derived by cutting the wage tax. However, the size of the cut required to have an economic development benefit, we are not able to sustain.
Was it a wrong policy for the City to follow Dr. Inman's recommendations back in 1995 to start this process in the first place?
Those cuts were symbolic. They were symbolic of a government that was struggling with the fiscal stability and they gave 194 4/8/02 - WHOLE - TAX REDUCTION BILLS people hope, but at that point you weren't looking to tax reduction --
Stopping the cuts will prevent the City from revisiting what it visited in the early '90s, and that is what we're trying to prevent.
So your testimony now is that the incremental cuts will send the City into a fiscal spiral, is that your testimony?
If we have to make $120 million in cuts, we will impact services. And it is a quality-of-life issue.
Are you saying just 120 million or are we back to the 290 discussion.
We have 170 million in the plan already. It would be an additional $120 million.
So tell me about -- so you position is if you can't make enough cuts to have this big boom effect; you should not do them at all; is that the position now?
Our position is not to make 195 4/8/02 - WHOLE - TAX REDUCTION BILLS the incremental cuts in a tax that we can't significantly impact but to focus those on a tax that we can impact where the economists and their studies show if we could eliminate the gross receipts portion of the tax, we would in fact see an increase in revenue. Our decision was to focus what dollars we did have, and that's $170 million, on those cuts that we felt would generate the most to the economy in Philadelphia.
Well, let me ask you this question. Dr. Inman has done a tremendous amount of work in this regard, and most recently is quoted as saying "Small or large, the wage tax cuts yield results. Clearly a big cut is likely to have a beneficial effect on jobs and the economy, but a small cut will be beneficial. This notion that we shouldn't do anything unless it's a whopping big cut I think is misplaced." Now is he right or is he wrong? Is that inconsistent with anything that has gone on in the slightly mysterious world of the Council of Economic Advisors?
When we discussed our tax proposal with our advisors, we were told that cuts 196 4/8/02 - WHOLE - TAX REDUCTION BILLS in the gross receipts portion of the tax were the way to go. Now, what's being said today --
Now, did the Council of Economic Advisors give you this idea or did you develop the idea and ask them to review it? How did that actually happen?
We just talked to them about taxes in general and a tax reform program in particular and it developed. I don't know whether we initiated it --
I understand. I'm asking you did the Council of Economic Advisors develop the proposal to accelerate --
Let me finish my question. Did the Council of Economic Advisors develop the proposal to accelerate the gross receipts tax cuts and stop the wage tax cuts? Is that their proposal?
The Council told us that that was the tax that had the biggest impact. Using that information, we developed the proposal.
And then what did you do with it? Did you just notify them of the 197 4/8/02 - WHOLE - TAX REDUCTION BILLS final position of the Administration? Did they take the plan and go over it? Did they have an opportunity to do an independent assessment of the City's finances? Tell us about the process.
Well, we spend months with them going through the City's finances and talking about tax policy questions. This came at the end of that process. And we did meet with them after we developed our proposal and talked to them about what we were doing.
You didn't leave me much there, Mr. Dubow. You had a lot of conversations, you talked about these ideas. Let me make sure I understand. You came up with this proposal within the Administration?
And then you told them what you planned to do, is that correct?
So the Council of Economic Advisors did not develop this idea; you talked to them about taxes, you came up with the idea, you told them what the idea was, and it was then left for them to say what? 198 4/8/02 - WHOLE - TAX REDUCTION BILLS
They liked the idea. They thought that it was the right way to do.
So what do you attribute Professor Inman's comments that small or large, wage tax cuts are beneficial and that you should have a wage tax cut even if it small rather than try to wait for the day when you can do a big one?
What professor Inman has told us is that in his ranking of taxes to cut, the first tax you should cut is the gross receipts tax. He also said --
I think he's also said that non-resident wage tax you actually should cut, but everyone understands that you're not going to have a non-resident wage tax without a resident wage tax; isn't that true?
Well, what he said is gross receipts in the non-residential wage tax are about even but that the residential wage tax does not have 199 4/8/02 - WHOLE - TAX REDUCTION BILLS as big an impact as those two taxes and that you cannot reduce one -- or he didn't think it would be politically feasible to reduce one portion of the wage tax without the other. That's correct. He's also said and what he's said in today's paper was he doesn't believe that you should make those -- let me take a step back. He believes that any reduction in the gross receipts tax, any reduction in the wage tax is a good thing so long as it's coupled with keeping your budget balanced. And that's what the Administration believes, too.
And your position is there is nothing else to be done in this government over the next five years to make it more productive and more efficient? We have maxed out on all efficiencies in the government of the City of Philadelphia; is that your testimony today?
No, that is definitely not our testimony today. Our testimony today is that the plan includes cuts already. It includes about a quarter of a billion dollars in cuts that we will continue to look for other reductions in cost but that we don't believe it's responsible to base balancing our budgets on those cuts. 200 4/8/02 - WHOLE - TAX REDUCTION BILLS
I'm sorry. The total of two is about 15.7 million. It's 11.3 in wage tax, 4.4 in business privilege tax.
And what's the value over the balance of the plan the next four years on a year-by-year basis of the proposed accelerated gross receipts tax cut?
In '04 there's about an additional 10 million. So it's 4 plus another 10. 201 4/8/02 - WHOLE - TAX REDUCTION BILLS And then it's another 10.3 in '05, about another 9.3 in '06, and about another in '07. So that it goes 4 4 -- from the base of this year it would go 4.4 in 5 '03, 14 in '04, 24.3 in '05, 33.7 in '06, and 42.6 6 in '07. It would probably be simpler just for me to 7 get you this table. 8
It always is. 9 So tell me, how do you get the 170 number.
The 170 is a combination of that -- if you added up those numbers, that's $119 million. And then the wage tax reduction, we lose that 11 million each year. So over the life of the plan, it would cost us about $50 million.
What would the gross receipts tax cost have been in accordance with the present five-year plan?
Over the life of the plan they would have been about 49 million instead of 119 million.
And did you explore any array or combination of the tax cuts that would still allow you to do both.
When we were building our budget model, we played around with shifts between the two taxes. But any reduction in the wage tax that was coupled with an acceleration of the business privilege tax left us with cuts that were so small in the wage tax that they really didn't have any meaning.