***For Immediate Release***
COUNCIL COMMITTEE SETS COURSE TO A BUSINESS-TAX-FREE CITY
Eliminates “net income” portion of BIRT, switches to gross receipts-based scheme
Levels playing field for Philadelphia businesses Encourages job growth
Philadelphia would see the job-killing net income portion of its Business Income and Receipts
Tax (BIRT) eliminated in five years and could see the bulk of its business tax structure eventually sunset under terms of a bill approved by City Council’s Finance Committee Wednesday.
Council Bill 130530, approved 6-2 by the Finance Committee after four hours of testimony, would switch the primary business tax in the City from a combination of Net Income (currently 6.45%) and Gross Receipts (currently .001415%) to a Gross Receipts-only tax scheme over a period of five years.
The measure was introduced in June, 2013 by Councilmember María Quiñones-Sánchez (D – 7th) with Councilmembers Bill Green (D – At Large) and Bobby Henon (D – 6th) as primary co-sponsors. Councilmembers Curtis Jones, Jr. (D – 4th), Kenyatta Johnson (D – 2nd), Mark Squilla (D – 1st) and Dennis O’Brien (R – At Large) also co-sponsored.
“We need to give local small businesses a level playing field since they are the largest job-creating sector in our economy,” Councilmember Quiñones-Sánchez said.
“It’s past time for Philadelphia to take the big steps necessary to really change the way this
City is perceived as a business location,” Committee Chairman Bill Green said. “Eliminating the net income portion of BIRT is a critical first step, but laying out a long-term, coherent tax policy will give businesses the tax certainty they look for when deciding to open, relocate or grow.”
“This is the sweet spot for recruiting businesses in Philadelphia,” Councilmember Henon said. “We have a very high rate taxing a relatively small number of businesses, which winds up encouraging them to move to avoid paying the tax because their suburban competition doesn’t face the same tax burden.”
The proposal is designed to be revenue neutral, with an estimated top gross receipts rate of .0052723% in 2019. Under the terms of an amendment offered and passed at the hearing, the gross receipts rate could then drop on an annual basis should overall City revenue to the general fund see an increase year over year. City Director of Finance Rob Dubow testified that the Administration is working with Council to make a final determination on the rates.
A study undertaken by Councilmember Green’s office shows that Philadelphia businesses pay a premium of multiple times the tax burden of their suburban competition. A hypothetical manufacturing example revealed that a Philadelphia-based company would pay 23 times their suburban competition. A “real world” example from the hospitality sector, using data provided by the Greater Philadelphia Hotel Association, showed that City-based hotels pay seven times their non-local competitors.
“I’ve tried to frame client conversations from the point of view that current city leaders are not the ones who’ve made a conscious choice to create and maintain a high tax environment,” Glen Shinners, a member of the Pennsylvania Institute of CPA’s Greater Philadelphia Chapter’s Local Tax Committee testified. “Even when clients comprehend the dilemma and some may even sympathize with your (current leadership) budgetary constraints, everything else being equal, the cost of doing business or the cost of living usually become the ultimate deciding factors as to where clients are willing to locate their business or residence.”
Evidence of this migration is visibly apparent in Bala Cynwyd, located just across City Line Avenue, and on Montgomery County’s Route 202 corridor – among the many beneficiaries of Philadelphia’s dysfunctional tax policy.
“We know that this policy can work because we’ve got what are essentially two pilot programs which have already shown it can be effective in retaining and attracting businesses,” Councilman Green said.
“Philadelphia’s technology renaissance could never have happened without the legislation, and it is one of the key reasons our company continues to thrive within Philadelphia, and not across City Line Ave,” Michael Maher, Founder and CEO of Benjamin’s Desk said in written testimony. “I personally know of several technology and software firms, as well as venture capital firms, which have stayed in Philadelphia, and several other firms that are considering moving to Philadelphia as a direct result of last spring’s change in tax policy.”
The net income portion of BIRT provided approximately 75% of the City’s $388M in 2012 business tax revenue – down from a pre-recession high of $438M in 2007 but up from a low of $356M in 2010. Much of the volatility was related to the reliance on the net income portion, as businesses saw profits dwindle during the recession. The switch to gross receipts should provide a more stable and predictable revenue stream for the City.
“We know that there are accounting methods to help businesses legally avoid their net income portion of BIRT,” Councilman Henon said. “One of the primary strengths of a gross receipts tax is that you can’t easily avoid paying it.”
“It is much easier for companies to avoid paying taxes on profits than on sales,” economist Mark Zandi wrote in a letter of support. “Some businesses set up operations in Delaware, where taxes are low, booking profits there while selling their products and services in the city. Moreover, profits are harder to accurately measure and easier to manipulate than are sales.
Anything that simplifies the tax code is likely therefore to produce greater compliance and more tax revenue.”
The bill also provides:
* tax credits for fresh food retailers – acknowledging the low profit margin typical of such sales
* an end to the “cascade” effect on contractors and sub-contractors – taxing gross receipts only on revenue not “passed through” by contractors to sub-contractors
* a small reduction in the City’s parking tax rate
The legislation will now go before the full Council, with first reading of the bill expected on Thursday in City Council and final passage potentially as soon as the first session in January (Jan. 23).