There's this Chart that Councilwoman Sanchez obtained from the Department of Revenue last year about who pays the Business Privilege Tax.

So I've been looking at these numbers a lot over the last few weeks while trying to figure out reasonably painless ways for the City to raise revenue. And just around Valentine's Day here's what I realized. The gross receipts tax is downright loveable (for a tax. I know -- no one can really love a tax, progressive or otherwise, and be a real American. Taxes are hateful; only the things that taxes pay for can be loved.)

Here's the main reason to love the Gross Receipts Tax (see qualifications above): It brings in lots of money from companies that aren't located in Philadelphia. The Department of Revenue won't tell anyone which out-of-City companies actually pay the tax, but companies like Coors, Proctor and Gamble and Dell Computer should all be paying, and clearly many distant companies do. These companies, located as they are far out of the City of Philadelphia don't pay a nickel of net income tax. If the Gross Receipts Tax is abolished as it has been scheduled to do, this very nice revenue source will also go away.

Out of town companies make lots of money in Philadelphia. They should be taxed on every penny that they make from sales into the City, just like our local companies are. For constitutional reasons they cannot be made to pay net income tax to the City without a physical presence here. But, they can be made to pay a tax on their sales. And that's what they do under the gross receipts tax. In fact, in another little known secret, the GRT regulations were amended in 1998 for the precise purpose of bringing in this revenue.

So here's the thing: the GRT will never persuade Coors, Proctor and Gamble or Dell Computer to leave Philadelphia; they're already not here. And it won't dissuade them from moving to Philadelphia, because their GRT will be the same as it is now, measured entirely by what they sell here, not how much space they occupy here or how many employees they have here.

Amidst all the frenzy that has been generated about the "job-killing" nature of this tax by the Chamber of Commerce and its pitchmen in the City, nary a word has been said about the non-Philadelphia source of so much of what the GRT generates. Could it be in part because the Chamber doesn't just represent Philadelphia businesses but all those in "Greater Philadelphia?" With a few exceptions, every business in Bucks, Chester, Montgomery and Delaware County is also supposed to pay the tax on whatever they sell to Philadelphians. This also includes lawyers, doctors and accountants selling services to Philadelphians who sell us services. If they have clients here, drive in and provide services here for money and then drive out again, they pay tax here. And the Chamber doesn't like their members paying taxes, period. Whether it's good for Philadelphia or not.

Here's another little known secret about the GRT. It is not just imposed on gross receipts regardless of profits. Wholesalers, retailers and manufacturers are permitted to use an "alternative computation" in figuring the tax. See the Philadelphia Code at Section 19-2604(3). Manufacturers can deduct the "cost of goods sold", while retailers and wholesalers can deduct "the cost of goods and the applicable cost of labor." Those who use these alternatives pay at different rates, but for many payers, it is not a pure tax on gross receipts but much more like a tax on gross profits.

But the most important secret about the tax is that the vast bulk of it comes from companies with receipts of more than $500,000. Those with less than half a million of sales paid only about $9.7 million in tax in 2005 and they constituted about 84% of all taxpayers. (There are a number of companies whose sales amounts the Revenue Department can't seem to classify. Absent other information, I'm assigning them to payment categories in the same proportion as other businesses.) If we could reform the tax to exclude the first $500,000 from tax we would exclude about 69,000 current GRT taxpayers, who are essentially all the mom and pop businesses in the City operating in our neighborhood business districts. Businesses with higher amounts of sales would also save from the exemption, about $9 million at the current rate of .001415. Businesses bringing in up to $1 million would now be paying tax on only half of their receipts or less. Even if rates doubled, a business with receipts of $1 million would pay no more tax than now.

So here's the best part: if the City provided that much relief to small businesses, it could then roll back the rate of the tax just a few years and pick up a lot of additional revenue. If it rolled back the rate to 2003 of .0023, for instance, -- yes, that's right, barely 1/5 of one percent -- it would pick up an additional net amount of $36 million. If the City rolled back the rate to its 1998 level of .002875, still less than 1/3 of one percent, it would pick up $69 million. It would pick up these amounts even while exempting completely the vast bulk of current taxpayers. And another 4,000 companies would pay the same that they pay now, or less. Only 9,000 companies or fewer would pay more, depending on how far back we rolled the rate.

These wouldn't be tax increases; they would merely represent a rollback to previous rates which would still be sharply lower than the maximum rate of the tax charged in 1988. Back then the rate was .0039 almost 3 times the current rate.

Now there are caveats to these estimates. First there is the alternative computation, as mentioned above. That involves a separate table of rates that would also have to be rolled back proportionally, and we have no statistics on how many companies use those computations or exactly how much they pay. But we do know bottom line that, whatever computation they use, it's primarily large companies that pay this tax. So if we exclude small ones and roll back the rates on the larger ones, we're going to lose only a small amount from the exclusion and raise a substantial sum from the rollback.

And here's an alternative idea on how the GRT could be used creatively. Councilman Goode has already had the overall Business Privilege Tax amended to provide credits for employers who hire certain numbers of Philadelphia residents, and who contribute to community development corporations. Let's give the $500,000 exemption to all companies whose workforce is composed of at least 50% City residents. That would still qualify almost all Philadelphia businesses for the break, give an incentive to businesses in surrounding counties with sales into Philadelphia to recruit Philadelphians, and leave ample room to raise the rate on other companies sufficient to bring substantially higher revenues to the City.

So let's use this time of fiscal crisis to re-examine the usefulness of this tax and how we can make it more fair and productive. And let's also think creatively about how we can reform some of our other taxes to make them more fair and productive. But that's for another post another day.