Council Democrats Seal the Deal with Philly's 1%

Yesterday, Council repealed the wage tax rebate for the working poor. This landmark legislation, one of the signature achievements of the late Councilman David Cohen, was repealed by a 10-6 vote, with 8 of those repealing votes coming from Democrats. Voting in favor of repeal were the following:

Clarke D-5th District
Green D-At Large
Greenlee D-At Large
Henon D-6th District
Jones D-4th District
Kenney D-At Large
O’Neill R-10th District
Oh R-At Large
Reynolds-Brown D-At-Large
Tasco D-9th District

Voting against repeal were the following, including only 5 Democrats:

Bass D-8th District
Blackwell D-3rd District
Goode D-At Large
Johnson D-2nd District
O’Brien R-At Large
Squilla D-1st District

Generally I try not to engage in single-issue rating of politicians. But this is going to be a hard pill to swallow when it’s time to vote for the repealers again. The wage tax credit is the kind of tax provision that generally marks the divide between Democrats and Republicans. It’s targeted toward the working poor so only those that need it get it. Credit recipients recycle the money to the economy by spending it locally, rather than on overseas vacations, or by depositing it in offshore accounts. The City gains by enabling economically marginal families to pay their rent and utilities, thus keeping families intact and lowering pressure on local services.

So Democrats, the alleged Party of the working class should like this kind of tax break. It follows the same policy guidelines that the President articulates when he argues against continuation of the Bush tax cuts for the rich. It provides some slight progressivity to the local wage tax that is otherwise structured about as regressively as one can imagine. The wage tax looks like a flat tax but is really heavily skewed to benefit the rich, even more so than the federal tax code after the Bush tax cuts. The U.S. income tax is still progressive in that higher income people pay at a higher rate. The wage tax, on the other hand is levied at higher rates on poor people because it only applies to wages; capital gain and dividend income is excluded entirely. In addition, higher income people deduct it against their federal income tax, enabling them to write off as much as 35% of it. In sum it is the kind of tax that Democrats should be rushing to fix. But not most Democrats on this City Council.

This is going to get even harder to take next year when the supposedly Democratic Mayor of our town will be proposing, and this same Council will probably be enacting, an across the board cut to the wage tax. That approach mirrors the exact approach of George Bush in cutting taxes in 2001. On the surface you can say it’s fair, because it’s cutting everyone’s taxes by the same percentage. But in reality it will grossly favor the rich. Comcast execs taking down half a million will get 20 times the tax break of a janitor in the Comcast building earning $25,000. Even Warren Buffett wouldn’t excuse that. But it seems that a majority of Council like it.

Of course millionaires can give campaign contributions to Democrats and Republicans alike. The only price is one’s soul. 8 Democrats seem to be working hard on that deal right now.

In an email, I asked Councilman Green to explain his position

Unfortunately, I got no response.

Green's answer . . . the 1% need more money

He didn't answer your email, but he did give an interview to Philly Clout which published a great post-mortem on the repeal. Green concluded that we just can't afford to both help the poor and sufficiently bribe the rich to stay in Philly. Well, he didn't put it exactly that way. This is what he really said, in his nicest neoliberal voice: "I would like resources available to address taxes that prevent us from growing the city as opposed to small amounts of money that go to a lot of people. We need to use money to create jobs.”

And the only way Wall Street Democrats like Green think we can "grow the city" is by flooding the top 1% and their businesses with more cash. Those folks -- real and fictional "people" alike -- also happen to be the ones who give large to campaigns, especially important ones like mayoral campaigns. They're not interested in alternative, proven economic theories to the effect that if you give poor people money they will spend it in the communities in which they live, thus: a) directly relieving the suffering of their families, and b) supporting local businesses and the local economy.

This has been a revealing moment in the history of our City, and in the history of the Democratic Party in our City.

Green's Answer--People unemployed need JOBS

There is evidence (data not emotion) that when we lower the wage tax the city retains jobs and creates jobs (not more jobs than lost but net job loss is better than it would have been). That is why City Council wants to lower the wage tax across the board. People who have jobs can keep them and new ones will be created.

There is no evidence that a targeted tax break will result in job retention, etc. in the City.

It's really that simple.

Re: the above nonsense. Democrats want employment, at a fair wage, with benefits (including every Democrat who voted for job retention and creation). People who pay wage taxes have employment, the wage tax is deductible, many get the EITC from the feds that exceed what they pay in. Democrats agree with Congress on this stuff. Council is not Congress. As I have said many times on this site, Council can't apply national Democratic policy at the local level with respect to taxation BECAUSE it is much easier to leave a city than a country. It is why there are glass towers and good manufacturing jobs on the other side of city line avenue today.

Stan testified in favor of tax reform that levels the playing field for local businesses and ELIMINATES the DE loophole in Philadelphia. This will create job growth and retain jobs. If we can't agree on wage taxes, let's focus on where we agree and accomplish something.

Re: The "above nonsense"

This is from Marc Stier's comment on this blog in which he summarized the findings of the Keystone Research Center, a highly respected Pennsylvania think tank:

(1) only about 63% of an across the board tax cut would go to city residents. The rest would go to commuters; (2) 20% of that 63% would go to the federal government in the form of higher income taxes because high income Philadelphians lose some of their wage tax deduction; (3) only 70% of the remaining amount would be spent because Philadelphians on average save 30% of their marginal income. Add it all up and only 25 cents per dollar of any across the board tax break is spent in the city.

On the other hand, as Marc summarized the Keystone report:

(1) 84% of a wage tax rebate to low income residents goes to city residents rather than commuters; (2) almost none of it is lost to higher federal taxes; and (3) low income residents Philadelphians save only 5% of their marginal income. Thus 60 cents of a dollar of a wage tax cut targeted at low income residents is spent in the city. Local businesses, especially in the neighborhoods, benefit as a result.

So we know neoliberal economists try to take on the aura of being the only adults in the room, that the rest of us are hopeless idealists. In other words, we need to forget about tax justice, cities just have to keep giving up huge amounts of resources to the rich and hope they trickle down. Well, it's not true. We can be just AND smart. Keeping the Cohen tax credit would have been right, and it would have created jobs in the neighborhoods. It's just that simple

Ah, such negativity

Stan, you always want to focus on what divides us. Unfortunately, it's with information that is "truthy". But the above is not the truth.

In fact, our most vulnerable citizens are not those that have jobs (only people with jobs pay wage tax), they are those that don't have jobs. Council simply prioritized the jobless. There is no significant multiplier effect of adding $30 million in liquidity city wide--there will not be enough customers at any one store to add staff. Most of these stores are owned by big companies and if not they are owned by people as likely to live in the suburbs as the city. The money will not be spent in the city (and we agree that it will be spent in the city) in a meaningful enough way to create jobs. That is, if with a big company it will go to Bentonville or some other place and if a corner store maybe owners live here and maybe not. In other words, to be clear, the assumptions underlying the conclusion are clearly not correct.

For example, the one "statistic" I find shocking is statement that savings are not spent in Philadelphia: Savings equal investment in any economy (assuming the marginal income savings statistics above are correct the conclusion is way wrong, some will go to local banks and create jobs through increased liquidity--some will go to savings and investment outside the city also). However, the multiplier effect from a business getting investment or debt is far greater than the multiplier effect related to consumer spending.

GDP = Consumption + Savings/Investment + Government Spending + (exports - minus imports). The less of one the more of the other. At a local level, we can't deficit spend (print money) so increasing taxes decreases in a direct way the other two variables. The best way to create jobs is to promote investment in companies in the city. First, we have to create an environment companies will want to be in. That is, we need to change the mix of taxation by leveling the playing field for businesses competing in our market place. The more businesses here the more we will export (increasing local GDP). We have fewer levels to pull to change the size of our GDP which is directly correlated to job growth (we can't deflate our currency to increase exports for example). The major impediments to growing the local economy and creating jobs are the Net Income portion of the business privilege tax and the wage tax. Reducing those two taxes, on a revenue neutral basis, should be what we can agree on and work on together.

The fact is the exemption from the first $100k in all business taxes for businesses that Maria and I worked hard to make the law, adding single sales factor for manufacturers based in Philly, will do more to retain and create jobs than $30 million spent on the Cohen tax credit. So will broad based wage tax reductions. We can disagree that broad based wage tax reductions will result in job retention and growth, but please don't tell me or other council members you know our intent is otherwise--that would be quite a skill (one that might allow you to solve all of our problems on your own rather than having to work with people to accomplish things).

As an aside, the assumption that we won't target wage tax relief on Philadelphia wage tax payers to level the playing field is also not correct.

That's 165,000 people you hurt with your vote, Councilman . . .

You argue that "our most vulnerable citizens are not those that have jobs (only people with jobs pay wage tax), they are those that don't have jobs." I don't know who you're arguing with there because I certainly didn't say anything to the contrary. But in any event, it's irrelevant to what happened in Council which was solely about a group of 165,000 people who would benefit from a significant tax break that you just voted to repeal.

The heart of your argument is the same as you've made before; these people ultimately will be helped by making them pay more taxes because the job creators -- although you don't use that loaded term -- need "leveling of the playing field." But the reality is that whether you cut the wage tax across the board, or target it as Councilman Cohen did, employers will have to pay less wage tax. The likelihood that such diminished payment will actually affect their locational decisions is minimal. Indeed, in another part of your argument you belittle the total amount of tax relief that is involved, stating that:

There is no significant multiplier effect of adding $30 million in liquidity city wide--there will not be enough customers at any one store to add staff.

You really can't have it both ways. Either $30 million is significant or it's not. I tend to believe that it's not significant -- except to the 165,000 people who would benefit from having some of it to spend. That should fit into your equation somewhere, just because those particular folks, and their children, would suffer less. A family could afford a new pair of shoes for the kids when they go back to school. A cheap computer. Heat all winter, instead of just one or two months. You know, things some of us take for granted.

It's not true, btw, that I only focus on things that divide us. I spent a lot of personal, organizational capital trying to convince people that your planned revision of the Business Privilege Tax to shift the weight of the tax to the gross receipts side - a reform that you now seem to have abandoned -- was a good thing. I have certainly expressed agreement with the idea of exempting small businesses from the tax, as long as doing that would be revenue neutral. But what happened on Thursday was none of the above. It was the senseless, heartless, unnecessary taking of money out of the pockets of poor folks, based on the theory that you can only help them by hurting them. That politicians these days do that over and over and over again, and get away with it is simply appalling.

I have edited the above comment . . .

to make it a bit more grammatical and clear . . . I hope.

Bill - interesting discussion

Is there a systematic way that you make your stances on these kinds of issues easily available for your constituents to look at prior to votes?

It is why there are glass towers and good manufacturing jobs on the other side of city line avenue today.

I grew up in East Mt. Airy in the 1960s/early 70s. In that neighborhood, I watched a very dramatic demographic shift take place in a very short period of time. I saw many people who lived in East Mt. Airy, and many businesses that catered to those residents, move out of the city and across city lines for reasons that were entirely unrelated to wage taxes.

I'm dubious of simplistic comparisons such as the one that you made. As far as I know, there is no solid empirical basis for saying that wage taxes, as a particularly causal variable, drive business location decisions in the way that you suggest. My sense is that there's some fairly ambiguous evidence either way - which leads me to wonder why you'd make a statement like that. Yes - you didn't exactly say that wage taxes are the reason why those glass towers are outside the city (you said that it being easier to leave a city than a country is the reason), but you sure seem to be implying that.

Because what I saw when growing up, when I see that kind of argument it's like a red flag to me.

The larger reality of our economy being skewed towards incredibly disproportionate benefit growth for those at the top of the scale is undeniable. I think that reality should be a baseline consideration when looking at these kinds of policy decisions.

I think that if you're going to vote as you did on the Cohen tax cut, you can't just walk in as if there's a level playing field. I think that it is incumbent on you, if you're going to vote as you did, to make convincing argument as to how your vote doesn't, in the end, basically perpetuate the status quo. Maybe in the big picture voting the other way would also effectively be perpetuating the status quo, but in the meantime more people who are the most vulnerable will have a harder time.

From what I've seen in this thread, Stan makes some good arguments that you haven't really addressed effectively. And there are some pieces that don't add up in what you argued (in particular, that a vote to discontinue a wage tax cut for low income workers was done to prioritize the homeless).

Until/unless you can effectively not only refute those arguments but establish very convincingly that the wage tax cut would have been demonstrably harmful in the end, I do not think that you were voting - as my representative - in the way I would have liked. I think that you have the burden of proof in these situations.

On a slightly different tack. You are elected by the voting public to make vote on these kinds of policies. There is nothing implicit in that arrangement that would require you to go back to your constituents and poll them on each and every issue and subvert your own judgement to vote in a manner consistent with that kind of polling.

On the other hand, at least as far as I'm concerned, you are elected to help educate your constituents as objectively as possible on issues, and to give deep consideration for how pluralities of your constituents are likely to view various issues.

It is my guess that a strong majority of your constituents would have preferred to see that wage tax cut go to low income workers. It stands to reason that a minority of your constituents - those at the upper end of the income ladder - would be aligned in a way consistent with your vote. It also stands to reason that those constituents have outsized influence in our political process. In my view, the vast majority of your constituents are highly skeptical of the influence of your wealthier constituents - and I think that addressing that skepticism should necessarily be something you consider as a responsibility of your office. I have no proof that you weighed the wishes of your wealthier constituents disproportionately, but I think it's naive for you not to understand that there's a logic to making such an assumption.

Labeling that skepticism as "negativity" or a desire for "truthiness" doesn't serve you well, IMO.

Btw, Bill

I don't mean to imply that I don't appreciate your willingness to engage in discussions on this forum. I do. Even if I don't always agree with your opinions, showing up here to explain them says to me that you take your role as a constituent representative seriously.

Putting the Cohen Wage Tax Rebate in Context

Since my name has come up in this discussion, let me clarify my position which is not the same as that of either Stan or Councilman Green.

1. I believe that when it comes to taxes in the city, we have to balance progressivity with economic growth. I agree with Stan that we should make taxes more progressive. I agree with Councilman Green that we have to be concerned about economic growth, especially growth in jobs, and that cities are limited in how progressive their taxes can be because businesses can move across the border of a city in a way they can’t when it comes to national borders. This is not a conservative argument, by the way. There is a huge left / liberal literature on this including James O’Connor’s Fiscal Crisis of the State (which is mostly about national governments but points to the special problems of cities) and Paul Peterson’s City Limits. I’ve argued for years that there is a problem with high wage and business taxes in the city for this reason. And I don’t think my saying this is going to lead anyone to conclude that I’m a neo-conservative or neo-liberal or anything else than a progressive Democrat.

2. The point of my blog post was that we should put off a decision about the Cohen wage tax rebate until next year when we will have a discussion of the property tax and figure out whether we can institute AVI in a way that rights the unfairness of property taxes in the city---which has harmed low income residents, both employed and unemployed for decades. As I pointed out previously, a reform in property taxes is probably a more effective way of making our tax system marginally more progressive than the wage tax rebate, because it helps the employed and the unemployed, because the amounts it provides people with low incomes is likely to be larger than that provided by the wage tax rebate, and because it has less effect on economic growth and job growth.

Or, to put the point another way, I’m might be to give up on the wage tax rebate for an alternative that makes taxes more progressive. But we don’t know what the property tax is going to look like so my preference was to wait until next year to make any decision on the wage tax rebate

3. In making the case that we should wait, I also pointed out that there is some reason to think that a targeted wage tax cut is more effective in creating jobs and economic growth than a across the board wage tax cut.

It’s true, as Councilman Green says, that we don’t have the same kind of evidence of this as we do for an across the board wage tax cut, but that is because no one has done an econometric study of this. The Econsult study that provides some of the evidence in support of an across the board wage tax cut points out that we really don’t have the data to do such an analysis. http://www.econsult.com/files/final_tax.pdf p. 63. However, that same study says that Steve Herzenberg’s paper in support of targeted tax cuts, which is the basis of my own arguments “makes some compelling arguments for his third point.” Herzenberg’s third point is that “We know that Philadelphia consumer demand stimulation would be much greater with targeted tax relief than with across-the-board wage tax relief of the same dollar amount.” The Econsult paper, then seems to find Herzenberg’s reasoning plausible. It’s only criticism of his argument is to say that “Lowering city taxes for low earners necessarily implies raising taxes for high earners.” But that criticism is not on point right now, when it appears that the Mayor and Council believe that there will be room to reduce wage taxes in the next years. Thus the question is whether to reduce them across the board or in a targeted way. (All other quotes from p. 62 of the report.)

Herzenberg’s rationale for the claim that targeted cuts wage tax cuts are more effective than across the board cuts in generating economic growth, with the Econsult report says is “compelling” is that far more of a targeted wage tax cut remains in the city than an across the board cut.

I don’t find Councilman Green’s criticisms of this claim entirely convincing—although the first point he makes is certainly worth thinking about more and may be correct.

He says, first, that that, that “there is no significant effect of adding 30 million in liquidity in the city.” But that claim is true for both an across the board wage tax cut and a targeted wage tax cut. That must mean that the positive economic impact that Robert Inman and Econsult have found of a cut in wage taxes comes mainly from its impact on or comes from its impact on business location, not additional spending in the city. That is conceivably true, although I’m not aware that either the Econsult or the Inman reports do (or can) tease out the different ways in which a wage tax cut has an impact on job growth. The argument may be correct, so it is worth thinking more about this and looking for more evidence.

I would add, however that if our main focus is on business location, I think the econometric studies suggest that business taxes have a greater impact on that than the wage does, so if we can cut taxes perhaps we should be focusing not on wage tax cuts but business tax cuts. (And, by the way, if I am not mistaken, both the Inman and the Econsult studies were done at a time when the wage tax disparity between the city and the suburbs was great than it is today. So the benefit of the wage tax cut may be less than they predicted. This is something that requires further study.)

So Councilman Green’s first point may be well taken. But I don’t think his second point is correct. He’s absolutely right that saving also contributes to economic growth. But I can’t see any reason to think that if Philadelphian’s save more money, those saving are invested in the city. Higher income Philadelphians save in all sorts of ways besides putting their money in community banks that primarily invest in the city. And at any rate, capital is fungible and interest rates are pretty much equal throughout an economic region.

4. Creating a good tax system for Philadelphia requires balancing a number of considerations, especially progressivity and economic growth. Taxes in Philadelphia have, for years, placed an unnecessary burden on both or poorest citizens and on economic growth. Taxing smarter, should allow us to make some progress on both fronts, I believe. But that requires us to look more comprehensively at taxes. That’s why I wanted us to wait until next year to reconsider the wage tax rebate. Unfortunately, that wage tax rebate got caught up in the AVI issue. But it can be reconsidered next year in the context of a broad overview of our taxes. So we will revisit all these issues again. There is much to be done, especially in figuring out how to deal with the many thorny issues of the AVI which have to be addressed before we can get to business and the wage tax. I’m sure Councilman Green will be taking the lead in these discussions and that Stan and I and others will be putting in our two cents as well. I hope we can continue these discussions with as much light and as little unnecessary heat as possible.

But one thing we know . . .

with or without econometric studies: the wage tax credit would have provided real help to real people who really need it. In the case of doubt whether, in a cosmic sense, a particular program will help or hurt "the economy" of the City, it seems to me the benefit of that doubt should be given to programs that we know for a fact will help people and families that need and deserve help. That's another reason why you're absolutely correct, Marc, that it was wrong to repeal the credit this year. And I would add that it would be wrong in any year to repeal it, unless there is clear and convincing proof, if not proof beyond a reasonable doubt, that the credit does more future harm than present good.

I can agree with the obvious

Whenever a group of people does not receive cash they would otherwise receive it hurts them. I understand the need completely. It is completely appropriate for national standards to be set regarding fair wages and benefits for all working Americans. National standards do not put a city at a disadvantage. I understand you are addressing one tax benefit for Philadelphia's working poor. The argument you make misses a simple point. Governing is choosing between competing ideas for good with limited resources. The competing ideas for good will be fleshed out. I am open to data that says my assumptions are wrong. None has been provided in this entire thread (in my view).

There would be no benefit for the next four years. Not one of the 165,000 people you believe will benefit will be harmed or helped in between now and then. Delay repeal or repeal, the same result for the next four years. Let's be productive in that time.

On a point you make below, Maria and I have not abandoned the shift you supported, we are trying to get to twelve as the Mayor is opposed. Let's agree on a premise for tax reform. Each reform should result in a LIKELY ultimate increase in the city's take of revenue as a result of the change. We can argue about reducing taxes with the increase or spending it on services later.

Growing the city's GDP, the City has few levers that have an immediate impact. Taxes is one of those levers. The material Marc cites above I have referred to you in the past.

Yes, people who never had a benefit are not going to get that benefit. Let's get their neighbors jobs. As Marc points out, perhaps that $30 million is best used cutting business taxes (or at least reforming them on a revenue neutral basis). How about targeting the $30 million as a cut to the City side wage tax rate only? I'm sorry you lost this battle you feel passionately about. I feel as strongly that different tax changes will help the city grow.

Some times the obvious is also right.

I don't read the expert reports on this issue as you do, but I'm not going to parse through them. The references are adequately laid out above and anyone interested can read them. I will only say here that you haven't really responded to my last "obvious" point.

The fact that the 165,000 wouldn't get the benefit for four years doesn't mean it's not an important benefit, unless, as you suggest, we're going to come up with some other way of curing their poverty before then. Count me dubious that the reigning neoliberal regime, corrupt as it is to its core as shown just the other day by Barclay's bank, will be doing anything in the next four years except intensifying the suffering of the working poor. That same regime is in place in Philly and will also, in my view, do little to alleviate the suffering of the poor.

But even assuming that there is some local initiative that would improve the lot of the bottom 50%, the Cohen wage tax credit would have, at worst, served as a safety net. That alternative now needs 12 votes to be reinstated, in the event we can't come up with alternative. Indeed, you acknowledge that one of them, your recent proposed tax reform, also needs 12 votes. There was just no reason in good conscience to put that albatross on the Cohen credit as well.

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