Recurrent Crises: Budgets

A new day, and a new way and an old crisis. I am sure we've all noticed that Philadelphia's budget problems reoccur every 10 years or so, no matter who is at the helm. A rethink of what should be taxed and how taxed must be at the heart of any and future current debates and policy.

Every crisis puts the most vulnerable programs and people at risk. Why them? Well, they don't have a constituency and advocates with ideas that move beyond traditional nostrums.

How about this idea. Just for thought then action?

Philadelphia's Budget: Everyone's Right

Mayor Nutter’s announcement of today is understandable, yet also avoidable. Understandable because the traditional reaction to an economic downturn in government is to cut services, lay off workers and rethink taxes. Avoidable because all options should be on the table, but are clearly not.
The Mayor is courageous in getting the city and its citizens to face hard facts: in a recession tax revenues, especially business tax revenues start to decline. These revenues are based on the taxation of choices: renting a car, staying in a Philly hotel, buying something nice. The slackening of tax receipts are the small holes below the waterline of the ship of state.

Many disagree on the basics of what a city faced by hard times should do. Advocates for safer streets, clean streets, libraries, culture and public health stand for stable revenue streams to service vital – at times lifesaving – programs. Tax reform advocates, such the our own Inquirer editorialize against freezing the tax cuts in the name of inter-city competitiveness. Both positions are correct, but the false dichotomy of "either/or" prevents true common ground, and a solution to this apparent budget mess.

The Henry George Foundation agrees with the danger of budget cuts, but cannot agree that the only sources of revenue for these essentials are business taxes. Why? Who says?
The assumption that all business owners are 'rich' and ready to be plucked is a myth refuted through any newspaper's business bankruptcies listing. Why must business always be the "go to" source of city revenue? Isn't it time to look for new alternatives? Most employers in Philadelphia are small business owners. Again, look at the city’s tax receipts. Times are hard for them as well. Freezing their tax rate reduction is, we believe, more reflexive than reflective.
The arguments that general tax cuts are not effective in attracting families and business are questionable yet, if valid, cities and states are incredibly committed to the concept, on both sides of the aisle. For example, the new head of the Chamber of Commerce is all for slowing down general tax reduction, but I am confident he still supports tax breaks for the "big dogs" while telling a neighborhood dry cleaner or bodega to pay its fair share.

From Comcast to BlackRock, we suspect the goodies will still flow.

On the other hand, it seems to us that the Mayor is not minimizing the real cash crisis facing the city. About 6% of the budget a year is a lot of money, especially when a budget scalpel is wielded. The voiceless and the powerless are the first to be ignored, and their concerns shelved. Those members of Council who are trying for cost savings on the expense side are probably leading the first wave of effective action, sort of like battening down the hatches at the first sign of an approaching storm.

In a recession - especially in a city with lagging indicators on all sides – business and wage tax revenues are particularly liable to drop dramatically as businesses retrench and job losses mount. Revenue can slip even with rate reductions and a rate freeze can only exacerbate the problem.
The fact is Philadelphia relies on tax revenue from two things – labor and capital - that can be hidden, can vanish, or can flee. Both are being whipsawed. There are few places to hide, especially from high tax rates on those two things.

If all options are indeed on the table, then we'd suggest that the city can come together and ask that revenues be raised from the one resource that is barely nicked by taxation: land values.

Through reforming the property tax, a tax on land value is a stable, efficient and progressive. No economist of any repute denies that a tax on land value makes the most economic sense. Professor Robert Inman has, for years, asked the city institute this simple, efficient and just tax.
By removing the tax on buildings and improvements, the tax penalty for construction is removed without blowing holes in the budget.

Our data indicates that a land value tax, applied even with the current assessments would provide tax relief for homeowners in the most at-risk parts of the city. Notorious stretches of valuable vacant land: the "Grassy Knoll" at 20th and Market, the "Disney Hole" at 8th and Market (so notorious it has its own website), the wide open spaces of upper and lower Broad Streets, and the parking lots that make our Center City blocks look like mouths of smashed teeth, would finally see their owners pay their genuine fair share and contribute to the common good.
To fill our budget hole, and then some, we have to realize that there is community-created value, and privately-created value. Land values are the textbook case of community-created value. The more desirable we think a site is, the higher its value. We, the community need to keep that value for the services we need. Land values can pay for what the community needs and wants.

When we primarily collect privately created value, we have Philadelphia at a clear disadvantage because all other surrounding areas take less of it. It's that simple.
So, let's agree that everyone is right: advocates for city services, the Mayor and the tax reformers. We have to cut taxes on workers and production. We have to provide revenue so that essential programs are not cut; indeed many ought to be increased. The old dueling assumptions that our choices are either high taxes or low services are untenable as our society faces what is likely to be a long twilight period of no or reduced economic activity.

If all options are indeed on the table, then the land value tax idea deserves a seat at that table.
The gulf between "either/or" has to be bridged. We suggest a land bridge.

The Law and Land Value Taxation

Since Philadelphia is a Home Rule city, it's eligible to use any type of taxation offered by the Commonwealth to its subsidiaries (boroughs, cities, counties, etc.). Land value tax legislation is available to Philadelphia via that route.

Cities of the 2nd Class. In 1913 the Pennsylvania Legislature passed, and the Governor signed, Act 147 for the two 2nd class cities, Pittsburgh and Scranton, to reduce property taxes to a half-mill rate on buildings, to be phased in over a 10-year period. The two cities operated under a 2 mills on land to 1 mill on buildings until 1976 when Pittsburgh voters adopted a Home Rule Charter. Scranton followed in adoption.

Cities of the 3rd Class. In 1951 Act. No. 299, incorporated into Senate Bill 357, dealt with taxation and assessment of land and improvements. Thereafter, Public Law 37531 (Purdon) allowed 3rd class cities to adopt the two-rate property tax structure. About 40% of eligible third-Class cities tax land higher than buildings.

Boroughs. Senator Terry Punt's 1997 SB 211, to extend the two-rate property tax option to nearly 1,000 boroughs in Pennsylvania, passed both the House and Senate and was signed into law by Pa. Gov. Thomas Ridge in Nov. 1998 as Act 108. This legislation was strongly supported by the Pennsylvania State Association of Boroughs.

Pennsylvania School Districts. In 1993 the Pennsylvania Governor signed Act 16 allowing school districts, which are coterminous with 3rd class cities, to levy higher rates of taxation on assessed land values than on building values. Eight cities qualify under this law. Three School Districts has thus far adopted the higher tax rate on land assessments.

Pennsylvania is a Dillon's Rule State.

Phree Philly

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