Progressives in Philadelphia should embrace real tax reform as a major demand in the 2007 election. Morally, it is the right thing to do. Practically, such a demand enables us to move out of the “just say no” box that we’ve been maneuvered into.

Let’s face it: the City’s tax system is broken. But it is not broken for the reasons that the supply-siders have argued. It is in shambles because it is massively regressive.

Fair taxation has always been a central element in the progressive vision of a just society. It is reprehensible that right wing supply-siders, and the ridiculously named organization Philadelphia Forward, have gotten away with labeling themselves as the champions of tax reform in Philadelphia. My dictionary defines “reform” as: “correction of evils, abuses, or errors.” Philadelphia Forward’s idea of tax reform is to compound the present system’s “evils, abuses [and] errors” by making the tax system both less fair and less capable of funding the government. In contrast, this is what Neighborhood Networks’ platform calls for relating to tax reform:

Both business and personal taxes, and the relative burden between them, should be based on the ability to pay. The distinction between small business and large corporations should be taken into account in developing fair tax laws. Those who most benefit from society's opportunities should bear a correspondingly greater responsibility to fund the government and support the welfare of all citizens, thereby reducing the gap between rich and poor. Tax laws should provide sufficient funds to carry out the necessary and desirable tasks of government. In Philadelphia, the tax burden should be shared among citizens of the entire region.

These are traditional progressive principles applied to taxation; they can easily be used to frame our demands to candidates running for Mayor and Council in 2007. Here is a specific program consistent with those principles that we should propose (not yet reviewed by NN):

1) eliminate the gross receipts portion of the Business Privilege Tax for businesses with 20 or fewer employees;

2) exempt such businesses from the Net Profits Tax (currently levied at the same rate as the Wage Tax and applicable to unincorporated businesses);

3) make banks, insurance companies, utilities and security firms subject to the Business Privilege Tax at the same rates as other businesses;

4) graduate the Net Income portion of the Business Privilege Tax;

5) increase the Parking Tax for cars parked 7 hours or more to 25% from the current rate of 15%;

6) replace the wage tax with a graduated income tax which would tax unearned, as well as, earned income. Include exemptions from this tax identical to the State low income tax exemption program;

7) exempt homeowners from real estate tax on the first $30,000 of assessed value;

8) abolish the business tax abatement program except for those businesses providing social benefits in exchange therefore (i.e., daycare for workers, a guaranteed living wage for all workers, minimum health benefits, a carbon-neutral environment, etc.);

9) Impose an arts and entertainment fee on all tickets sold to non-Philadelphians, except to residents of localities or counties which agree to pay the City an appropriate fee for the cost of maintaining the arts and entertainment infrastructure;

10) Collect a substantial fee in lieu of taxes from major non-profit educational, health care and governmental entities with real estate in Philadelphia

This program will be opposed because, among other things, it can’t be entirely implemented without changing state law, perhaps even the state constitution. So why waste time on it? Instead let’s just repeal the Business Privilege Tax. Forget that across the board repeal would be both unfair and harmful to the financial stability of the City.

Here specifically is what Philadelphia Forward will not tell you about the consequences of BPT repeal. Last Fiscal Year the BPT brought in $388 million out of the City’s total tax take of $2.292 billion. In other words, the BPT accounted for 16.5% of all City tax revenue. That amount is almost precisely equal to the combined FY ’06 budgets of the Fire Department, ($154.6 million), the Free Library ($13.6 million), the City Court system ($110 million) the Fairmount Park Commission ($12.6 million) and the Human Services Department ($85.8 million). And there would still be $12 million to spare.

Eliminating the BPT is crackpot realism at its best. It brings to mind how a person without aspirin in the house might react to a crushing headache. One option would be to get in the car, go to the drugstore and buy the aspirin. The individual might even have to go out several different times to several different stores to find the remedy that really works. But all of that would take time and analysis and the headache would still hurt. Why shouldn’t he just bash his head into the wall? It’s something he could do quickly, and it would deal with the pain, but unfortunately, once he woke up -- if ever -- he would undoubtedly wish he had thought it through a bit more.

We have to take the time to get tax reform right. There is, in fact, no emergency. But if there were, bashing our head against the wall by reducing the City’s budget 16.5% would not leave us with a solution once we woke up.

As opposed to the guaranteed losses BPT repeal would cause, the reforms I suggested above may or may not bring in the same revenue as the City currently collects. Although the new tax policy would bring in less business tax revenue from small business, that might be offset by taxing banks, insurance and brokerage companies. Although a real estate circuit breaker would cost the city money, an income tax that taxed capital gains and dividends might make up the gap. In order to set appropriate rates for this program, we need the City Revenue Department to do what it has consistently refused to do over the years: provide meaningful statistics on who pays and who doesn’t pay business taxes in Philadelphia based on the size and income of companies. City candidates should pledge to demand that this information be produced.

If the City does need more funds, whether as a result of tax changes or otherwise, Philadelphia must have a tax system to raise those funds that is fair and feels fair to the large majority of its taxpayers. It is not merely regressive, it is also not practical, to retain a system which is sharply skewed toward the wealthy. That is what we have now with flat tax rates applied to every dollar of wage and business income, and every dollar of assessed real estate value. Exemptions from this scheme are only available to well-off developers, individuals and big businesses. The Philadelphia Forward approach just increases these deformities. For instance, buried within the small print of the Tax Reform Commission report that Forward touts, is the observation that eliminating the BPT will also cause huge increases in real estate assessments and, therefore real estate taxes. Except, of course, none of those increases will fall on the billions of dollars of real estate owned by rich developers and huge corporations that have been exempted from the property tax altogether.

Thus, Philly Forward essentially says, lets impose more pain on the poor on the crackpot theory that ultimately they’ll be glad for their suffering. We should suggest directly curing the pain.

We Must Also Demand Additional State and Federal Aid

Whatever we calculate the revenue take from a new progressive tax system to be, we are likely to need still more. We have multiple crises on our hands in this city. The murder rate is out of hand, the school system continues to founder, the housing supply for the poor is grossly inadequate. In addition, the City’s debt to its pension system, and its health care costs for city workers, are both exploding. Furthermore, PGW is a bankruptcy waiting to happen. We should not have to rely on City taxes alone to meet these needs; we must obtain our fair share of revenue from the state and federal governments. This has to become a major priority, especially given the election results. Hopefully to increase funding from other governments we can form creative alliances with suburban representatives fighting sprawl, other counties that are hurting from paying unconstitutionally imposed court costs, and municipalities in general that are unable to provide essential services.

Of course we will be met with complaints that the State already overfunds the City. This is flatly untrue. Below is a chart comparing the City’s tax effort compared to that of the rest of the state as of 2001.

Philadelphia’s Tax Burden Compared to Other Jurisdictions in
Pennsylvania, Fiscal Year 2001 (Total Taxes Collected as a Percent of Market Value
of Real Estate)

Expenditure Type Philadelphia State Average (Excluding Philadelphia)
Municipal Services 4.3% 0.4%
Public Education 1.8% 2.1%
County Services 2.8% 0.5%
Total 8.9% 3.0%

Source: Commonwealth of Pennsylvania, Department of Community and Economic Development,
2003; City of Philadelphia, 2001; Commonwealth of Pennsylvania, State Tax Equalization Board,
2003.

Some claim that the City’s high tax burden is due to its overspending. But the truth is that Philadelphia has been cutting, not expanding, the size of city government for years. The City has cut 1800 positions over the past 6 years, and current staffing is at a 40 year low. Yet the social problems we must contend with are growing. We are entitled to more support and we should expect those who would be our city leaders to aggressively push for it.

Taxes and Economic Growth

There remains the question of the impact that a progressive tax program would have on economic growth in the City. First we should be clear that most studies debunk the notion that tax rates are a major factor in business location. Although Philadelphia’s Tax Reform Commission found otherwise, its business heavy composition foreordained that result. In contrast, Washington, DC’s tax reform commission found:

The economic effect of taxes tends to be both small and less important than other factors. Labor force availability and quality, for example, appear to be more important for explaining differences across locations in economic activity. The way that tax revenues are spent tends to be important – important enough that high relative taxes may not be a deterrent to economic growth if the revenues are used to finance services of value to business, such as education and transportation infrastructure. These studies do make clear that a policy of cutting taxes to induce economic growth is not likely to be efficient or cost-effective in the general case.

Countless other studies have found essentially the same thing. Our program should include business tax cuts; however they should be based on principles of fairness and targeted towards smaller and neighborhood-based businesses. But the cuts we propose – for business as well as individuals -- should also produce economic benefits. Making individual and business taxes progressive, and cutting real estate taxes for poorer homeowners through a circuit breaker program, would put money into the hands of neighborhood people. Those city residents, by and large, would spend their extra income in the City, helping to revitalize neighborhoods. On the other hand, Philadelphia Forward’s proposal to cut business taxes across the board would largely result in enrichment of upper income businesses and individuals. Much of those cuts would wind up in dividends to shareholders living around the world, and in the purchase of goods and services from locations far from our borders. So a program of progressive reform would not only be the right thing to do from the perspective of tax justice; it would also be the right thing to do for the Philadelphia economy.

To sum up, progressives in Philly should embrace real tax reform, not shun it, and real tax reform should be a major priority that we should push in the upcoming election. We know that the City must spend significant sums, perhaps more than at present, to grapple with the myriad problems the City faces. To do that the people of the City will properly insist that we raise those funds with appropriate participation by those who have done best in our society, and by other branches of government that have not contributed their fair share. Let’s insist that both those things happen. And let’s take back the tax issue from those whose only real goal is the upward redistribution of wealth, and who ever so artfully, have concealed the damage they seek to do to ordinary Philadelphians.