Tax Cuts, Open Government, and Reality-Based Decision Making

Dear Mayor Nutter and City Council,

We in Philadelphia are gladly watching the beginning of the Nutter administration. I, for one, am especially heartened by the sense that we are entering a period in Philadelphia where we use reality-based decision making. Think about it: Outcome-based budgeting. A 311 system and Citi-Stat. Open records and open government.

A new day, indeed.

However, this reality-based lawmaking and open government is about to get a test, and it the test comes in the form of (wait for it, wait for it, wait for it….) business tax cuts. Here is where the rubber meets the road.

As most know, the BPT is made up of two parts- receipts and profit. Councilman Goode just introduced a bill to eliminate the receipts portion of the tax. This is by far the smallest of the taxes, at just .19% 1415% (versus 6.5% for profits). The receipts part of the tax is a symbol, because people have to pay it whether they make money or not. The bill will probably pass as of today, as will a bill to significantly cut the larger tax on corporate profits. Even the most rosy scenario of tax cuts predict that at least in the short term, there will be a decrease in revenue.

Why do we cut business taxes? Most times, it is talked about as a way to grow jobs, especially in the context of small businesses. Given that general business location decisions of big corporations put emphases away from taxes and tax packages, and towards services, workforce education, etc., we can assume that tax cuts are aimed to help small businesses. And, Brett Mandel, et. al., have done an admirable job of getting small business people up in arms about the devilish BPT.

I agree that if you presented a small business with enough money to hire an additional person, to invest in new equipment, etc., then a tax cut may make sense. On the other hand, if the typical BPT payer is not getting much of a break, and the City and small businesses could desperately use a 1)more user friendly City Hall and 2) better and more services (think the surcharge that the Center City District businesses pay), then it may make sense to forget cutting business taxes, and instead invest more in our City.

So, here is where the open-records, and reality-based decision making comes into play:

Before we make a decision on whether to cut business taxes, we should know how much each business actually pays to the City each year. (As we know from the Vince Fumo property tax fiasco, how much each person pays in property taxes is a public record.) Is a small businessperson actually saving enough money to re-invest in their business, or to hire additional workers? Without having real statistics, how would we know?

So, before we decide to cut business taxes or not, we should know how much every business- from big old Comcast to the smallest person just opening up shop, pays in taxes to the City each year. This may shock you, but under the previous Mayor, the Commerce Department generally refused to provide these numbers. I guess they thought it was their business only. But, with a new Mayor focused on transparency and the like, I am hoping things change.

Until we know these numbers- and see just how much business people will actually benefit from a tax cut (as opposed to our biggest firms)- we can not use reality based decision making.

I suspect very few people- from City Council, to the new Commerce Director to Small Businesspeople themselves- actually get what these numbers are. But, before we simply start cutting taxes, shouldn’t we make sure that these basic questions are answered? If there is a real privacy issue, the actual business names themselves can be redacted. But, either way, all we need is something that should be quite simple: some sort of excel/dbf type file, with a business, and the amount of each tax that it paid per year. We can analyze it from that.

It is a new day in Philadelphia. A day for open government. And a day when we can make budgetary decisions with our eyes wide open. Let’s see those numbers before we start tax cutting.

Well said, Dan

I can't help but think that for as reasonable as the Nutter administration is about most things, the question of business tax cuts is a matter-of-gospel, and anything so drippy and hippieish and school-marmish as facts would never be allowed to get in the way of making a tax cut here. No question, he raised a lot of money on this promise.

Hopefully, I am wrong once again (I also said the guy had no chance of winning -- go me) and he really does let us seriously evaluate the ways eliminating the receipts tax might play out for the start-ups that matter most.

BR

---
This Too Will Pass, treating grave matters lightly and light matters gravely, since 2001.

And don't forget the real reason for the gross receipts tax

The main purpose of the tax is to prevent large corporations like Walmart, Comcast, Sunoco, and other big corporate chains from avoiding taxes by offloading their profits into other jurisdictions with low corporate tax rates. The gross receipts tax compels these lawyered up companies to pay some reasonable amount for whatever they receive in Philadelphia, regardless of where they pretend their profits came from. For instance, between 1999 and 2005, according to Citizens for Tax Justice, Walmart smartly accounted for itself only half the state taxes it should have paid at established corporate state tax rates. The other half of what it should have paid went up in smoke due to a variety of tax shells and other schemes. My favorite example is Walmart setting up "captive Real Estate Trusts" in Delaware. It then, apparently, rented space to itself in properties owned by the Trust and set the "rentals" up as an expense that it deducted from its profits. This is the kind of scheme that the gross receipts tax was established to defeat.

Now whether the receipts tax is effective at preventing Walmart and other big local corporations from gaming the City's net profits tax is not clear. And it's not clear because the City's Revenue Department refuses to release individual taxpayer info. But it has never given any legal reason for refusing to do so. And I doubt that there is any such reason, especially for public corporations. Most of these voluntarily release such information in their shareholder reports, and the State of Wisconsin, again according to CTJ, is at least one state that publicly discloses this info. So again, as we move into an era of transparency, our Revenue Department needs to step up. And Council, before it passes any tax cuts, needs to demand this information if Revenue doesn't volunteer to produce it.

Here are some other simple sets of statistics that Revenue should produce, or that Council should require Revenue to produce:

-- How much tax is lost because of preferences embedded in Business Privilege Tax under state law? Insurance companies, banks, securities firms, and utilities are all given major preferences under the state law that authorized our business privilege tax. Some of them get to choose whether they pay the net profits tax or the gross receipts tax, but not both. So how much do they save from this cozy arrangement? How much more would they save if the gross receipts tax is abolished? Would their tax go to 0? (I think so.) How much more revenue would the City receive if the legislature wiped out the preferences?

-- How much tax is produced by different categories of business taxpayers? For instance, Revenue might categorize taxpayers in groups based on levels of profits reported, in $100,000 increments. Thus, they would tell us how many businesses report profits of less than $100,000 and how much tax they pay as a category, and then the same for businesses reporting less than $200,000, $300,000, $400,000 etc. They could do the same based on gross receipts reporting. With information like that, decisions could be made about cutting taxes selectively, for businesses that truly need help without giving money out for the hell of it to the big players who are probably not paying their fair share to begin with.

--Similar reports should be made for taxpayers based upon number of employees, say in segments of 100. This might require some digging on the part of Revenue, but it would be a worthwhile project. Still another category could be length of time in business. How much is paid by relatively new businesses, say 5 years old in the City or less, as opposed to more seasoned businesses? Maybe tax cuts should be targeted to new businesses as proposed by Chaka Fattah last Spring.

True tax "reform", if it even pretends to be progressive, should involve something more than simply wiping out particular taxes. It should change the system to limit revenue losses as much as possible while focusing its burden on those who can afford to pay. Council and the mayor have, in the past, avoided grappling with the difficulties involved in true tax reform by remaining blissfully ignorant of the facts it needs in order to proceed. That lazy arrangement should now come to an end.

Pro-tax cuts, Pro-disclosure

I support reducing the BPT, but I also support greater disclosure. It is impossible for Council or the public to embrace any particular plan to reduce the BPT without knowing and debating their relative impact on businesses and the city budget. If we want to make the city more attractive to businesses large and small, we need to know how much bang we hope to get for the buck.

Councilman Goode's proposal fazes out the gross receipts portion of the BPT by 2015, with a decent-sized cut at the front end, but maintains the net profits tax at 6.5%. Here are the numbers:

2008 1.415 mills 6.50%
2009 1.3 mills 6.50%
2010 1.150 mills 6.50%
2011 1.0 mills 6.50%
2012 0.75 mills 6.50%
2013 0.5 mills 6.50%
2014 0.25 mills 6.50%
2015 0.0 mills 6.50%

This essentially continues the phased reduction of gross receipts that was begun over a decade ago, which are widely seen as very successful.

Now, even if you support the elimination of gross receipts -- as each of the five mayoral candidates did, with Evans the most ambivalent and Fattah proposing an additional profits tax -- you may have different ideas about the speed of the cuts, whether to also cut or to increase net profits, etc. And you can't really do any of those things in the absence of numbers.

I think Stan makes two particular points above that are excellent and worth repeating. The first is that the city can release nonidentifiable tax information if it has any qualms about releasing specific business figures. (Who knows, you may not want to broadcast that the neighborhood grocer at such-and-such address does $250,000 worth of business a month.) Figures for numbers of employees and for bands of income/business levels would be particularly useful.

The second is that the reason why we have a gross receipts tax is to prevent large companies from hiding profits to reduce their tax burden. I am actually quite skeptical of any proposal that eliminates gross receipts tax outright for exactly this reason. (I was particularly skeptical of Chaka Fattah's plan, which would have made it especially attractive to hide profits, but that's another story.) Surrounding suburban communities charge a gross receipts tax without business grinding to a halt. So do many other cities. Reducing gross receipts is a terrific idea to increase our competitiveness with those communities, but at a certain point we stop seeing returns on those reductions. We might see more in a reduction of net profits, or the wage tax, or in other kinds of tax credits. But again, we need the data.

Also, since this is my new favorite idea, I think we should explore a BPT exemption up to a specific dollar amount rather than an overall elimination/reduction of the tax. For example, let's say Vern's numbers are right, and then $1mil--$5mil worth of business is about the range for a small business. Why not eliminate the gross receipts tax for the first $1 million for every business? This gives a targeted tax cut to smaller/local and new businesses, who supposedly will benefit the most from reduction/elimination of the tax.

Now, it's possible that we actually have very few very large businesses in the city, and that a great deal of the gross receipts revenue is shouldered by the thousands of small businesses in the long tail, and this plan would be disastrous. Or it's possible that small businesses actually make a very small contribution to the overall revenue from the BPT, and their taxes could be cut without making much of a dent. Or it's possible that larger businesses are much more sensitive to the tax burden, since they do bear a higher burden and have more options when choosing a location. All of these are considerations that we need to make. But again, we need the data to make them.

Not clear; do you support Goode's bill without data?

I agree with your comment except that it's not internally logical if you support Goode's bill in the absence of the data that we've all agreed in this thread that we need. You state that previous cuts in the gross receipts tax "are widely seen as successful" but in the absence of data, we really can't know. So, maybe you could clarify your view of Goode's bill as it stands.

I'll put it this way

I'll put it this way, if I were a City Councilman, it isn't the bill I'd propose. What I would want to hear in debate is

1) Why it's necessary (and not just convenient) to eliminate the entire gross receipts portion of the tax;
2) Why this schedule of reductions is ideal (with budget projections to support that);
3) Projections to make up the lost revenue.

in addition to statements of impact on small, large, high-volume and low-volume businesses, i.e., the data you're calling for.

The tax cuts are "widely seen as successful" in that they are credited with helping turn around the business climate and have been pretty much revenue-neutral after inflation. You can make the case for lost opportunity of additional budget dollars, if you think the revenue would have been there anyways, but that's a slightly different argument.

Again, for data from the last ten years it would be useful to know if the reductions in gross receipts have been largely compensated for by additional volume or additional profit, and what percentage of each (probably a combination of both).

Forgot to mention, for the

Forgot to mention, for the last year I have data, there were about 75k payers of the BPT.

It would be great to see votes backed by empirical data

I like the idea of actually KNOWING the numbers before votes are cast. Seems like common sense to me.

That being said, let's say a typical small business has gross receipts of $20,0000 a week. In a year, those gross receipts amount to about one million dollars, which is on the lower end of the spectrum for the nationally accepted definition of a "small business". 2% of a million bucks is $20,000 a year (isn't it?). Is a savings of $20,000 a big deal for a mom and pop small business? 1% is ten grand and one half of one percent is 5 grand. Still a signifigant amount of money. And let's remember, small businesses that gross 1 million dollars annually is on the lower end of the spectrum.

That being said, if this bill will result in a loss of city revenue (thereby threatening funding of much-needed services) I'd like to see:

1. A projected savings goal via the use of citistat/311
2. Other proposed cuts in wasteful spending
3. A tiered approach to gross receipts tax reductions with larger companies carrying the tax burden, mid-size companies seeing modest reductions and small businesses seeing virtual elimination of the gross receipts portion.
4. A re-institution clause in the bill that brought the tax back if it resulted in severe budget cuts/reductions of core services.

If I were one of the 17 and there were assuarnaces that these items were going to be addressed, I'd feel much better about voting for the bill's passage.

But let's not forget here. The Chamber's (of Commerce) candidate won the election and the Chamber wants to see these cuts.

****I support Joe Vignola, Inpedendent Democrat for Pennsylvania State Senate in the first district and am proud to work to make it happen. My opinions, however, are my own and do not reflect those of Joe Vignola or his campaign****

not a whole answer Vern

The BPT is flawed no doubt. But no one is talking about eliminating business taxes in any form, are they? Doesn't your little math experiment anticipate tax elimination?

Let's not over complicate Dan's post: just show us the numbers so we can have an intelligent discussion about the BPT.

MATH

Ray, if my business grosses one million dollars a year, .20% of that (the gross receipts portion) is about $2500.00 a year. A small business grossing 5 million a year pays about $12,500 a year in gross receipts tax. If we cut or elimnate that portion of the tax, that is a significant savings for a small business owner.

Math provides the answers Ray. All we have to do is count.

My experiment anticipates nothing. Whether we cut the gross tax or wipe it out, the savings is still signifigant.

****I support Joe Vignola, Independent Democrat for Pennsylvania State Senate in the first district and I am proud to work to make it happen. My opinion, however, is my own and does not reflect the opinion of Joe Vignola or his campaign****

i'm good at percents

I can handle percent. But you keep saying that if we eliminate the tax, a business will save $20,000. We might eliminate the BPT (as we know it) but we won't eliminate business taxes--or at least I hope we don't. So, no business is gonna "save" 20,000 k no matter what. They might pay something less than $20 k, but not nada.

Here's what Dan wrote:

Here's what Dan wrote:

"Councilman Goode just introduced a bill to eliminate the receipts portion of the tax."

That means, if Wilson's bill were to pass, a small business w/ 5 million in gross receipts would save approx. $12,500.

I think you're incorrectly focusing on that 20 grand number. I was just setting my answer up with that. Savings will range from $2500 to $12,500 (for 1 million in gross receipts to 5 million in gross reciepts) for what we typically consider small businesses.

What I'd like to see is the entire BPT cut by 2% (all of the gross and 1.80% of the net) for small business (especially if those four assuarnces were placed on the table with such a bill). But I digress.

At the end of it all lies the question : at what price?

****I support Joe Vignola, Independent Democrat for Pennsylvania State Senate in the first district and I am proud to work to make it happen. My opinion, however, is my own and does not reflect the opinion of Joe Vignola or his campaign****

Yes, at what price

So we also need clear information on what each part of the BPT raises. Altogether it raises more than $400 million, so it's not a revenue source to trifle with.

Calculating the price of tax cuts is a very interesting enterprise, btw. Should we assume that tax cutting is a good thing as long as it leaves enough to pay for city services as is? Or do we look at lost opportunity costs. Thus, if growth in the BPT without tax cuts would yield $50 million or so annually over the next 2 or 3 years, would it be better to forego that increase through tax cuts, or, say, give it to the School District to reduce class size? Or make child care affordable to another 1,000 or so mothers who would then be enabled to work? Or any of another wide array of choices that would make life better in the City? On a national level it's clear that Democrats would choose the latter set of possibilities. Why is it at the local level so many of us choose the first?

I agree Vern

I am not trying to pick on you. I do think conversations about the BPT have become almost entirely rhetorical which is why getting the facts is so important.

Hopefully, if Council passes any bill to eliminate any portion of the BPT, they will figure out a way to introduce a new tax that fairly taxes everyone. That is the goal that has been lost in the past few years of arguing: everyone has to pay taxes, and that should not ever be a problem if they are levied fairly.

Right?

So let's see who pays what, and see if we (you know, the people) agree with Councilman Goode.

It boggles my mind as well

It boggles my mind as well Stan. I just came from an open house at our local elementary school (Jacob Dean is going to be 5 on September 1st and eligible for kindergarten).

I spent almost an hour with the principal discussing the budget, various cuts in the past few years, and what sort of belt-tightening has occured as a result of reductions in budget. No sports programs. Fewer opportunities for school plays and assemblies. No T.A.s. All small-group art and music instruction converted to large 30-kids-per-class instruction. No Latin or other foriegn language instructions. Some of this stuff I see as basic things EVERY school should have. Sports? Latin or other language instruction? These should be the floor, not the ceiling.

And this is one of the top test-scoring elementary schools in the city.

If someone asked me to choose between paying my gross receipts tax and having a local school with foriegn language instruction, sports programs and smaller class sizes OR a cut in taxes and status quo schools, I'd pick the former.

But I may be in the minority because....populus operor non reputo porro term.

What most of council has failed to do is make an effective argument for this position and take it to the citizens of the city in a way that is understandable and acceptable. Certainly the proponents of tax cuts have done a fine job, with the help our our friend Brett from Philadelphia Forward. Maybe once CitiStat gets here and members of council no longer have to act as expediters of city services, they will focus on these types of things.

****I support Joe Vignola, Independent Democrat for Pennsylvania State Senate in the first district and I am proud to work to make it happen. My opinion, however, is my own and does not reflect the opinion of Joe Vignola or his campaign****

We're in agreement, Ray

Right. Yes, it's my belief that an elimination of the BPT should be accompanied by a sister bill that begins to tax businesses fairly. And I believe any thoughtful member of council would ask the question "at what price" will this particular bill's passage cost customers of the city of Philadelphia (those of us who rely on services from the city). And no worries, I know you're not "picking" on me. You just want to know where I stand. That's fair. It sounds like we stand together on this one.

Knowing Wilson, I would venure to guess he knows what this bill's passage would cost over the short term and what, if any, revenue it might generate or cost us in the long term. If I were one of 17, I'd ask those questions before casting a vote. And, in the sprit of transparent governance, it would be nice for all of us to have that information before we support or oppose the passage of this legislation.

My politics was formed in the Joe Vignola school of legislating. That means fiscal responsibilty must come first. For every new initiative that would cost us money, a responsible legislator must ask "how will we pay for it" and for every bill that cuts revenue, we must ask "how will we fill the revenue gap and/or what services will suffer (if any) because of it".

Only a fully transparent government will be able to answer those questions for the general public. But we deserve nothing less.

****I support Joe Vignola, Independent Democrat for Pennsylvania State Senate in the first district and I am proud to work to make it happen. My opinion, however, is my own and does not reflect the opinion of Joe Vignola or his campaign****

Transparent Government - the Fiscal Impact Analysis of BPT Cuts

The fiscal impact analysis of the bill assumed a flat 4% growth rate over five- and ten-year periods.

With that assumption, the bill costs less than 1% of five-year plan revenue (roughly six-tenths of 1%) and roughly 1.5% of total revenue projected over the next ten years (the schedule is back-loaded).

Of course, I'm not assuming that growth will be flat over five or ten years - it will undoubtedly fluctuate and may average above 4%.

The bill will be considered along with the budget and five-year plan - and the Mayor has already asked almost all of his department heads to prepare 3% and 5% cuts to their budgets for his own budgetary priorities which most likely will include business tax cuts.

WWGjr

Thanks for responding Councilperson, but

Your answer is alarming. If I calculate correctly, six tenths of one percent of 5 year revenues is over $100 million, or about $22 million per year (averaged out). That's approximately the entire amount the City appropriates to Community College each year. Such a revenue hit might not be so alarming were it not for the last sentence in your post which informed us of the Mayor's apparent plan to pay for further tax cuts with service cuts. That would confirm some of the worst fears that some of us had about a Nutter mayoralty, that he would cut taxes even at the expense of services. If you recall, when he was a Council member, Mayor Nutter frequently expressed the view that tax cuts would pay for themselves. One could certainly hope that he would become more realistic once the burden of proposing a budget was on his shoulders, and that he would then opt to put services ahead of tax cuts. It sounds like that hope is about to be dashed. If so, this City faces years of austerity at the same time that hundreds of thousands of Philadelphians are struggling to make ends meet. An amazing and truly depressing choice in a City run wall to wall by Democrats.

Services Cuts?

Stan, where in my post did I mention "service cuts"?

Nonetheless, your math is correct. It's roughly $125 million over 5 years - and only about $9 million in the first year.

And still significantly less than 1% of total revenue.

Does six-tenths of 1% force service cuts?

WWGjr

The money has to come from something

My recollection is that there have been quite a few battles at Council over far less than an average of $25 million a year for five years. I believe that Council allocated $3 million to the Health Centers last year that Mayor Street refused to spend for budgetary reasons. And if you start the first year with a $9 million cut, you still have to begin preparing immediately for larger cuts in following years. Furthermore, even if you can avoid cuts with efficiencies -- and every mayor is constantly claiming that he will cut waste, fraud and abuse out of the budget -- you still lose the ability to use the tax revenue for increased services that are desperately needed. Is it obvious that eliminating the gross receipts tax is better for the City than using the $125 million for day care services, or more police, or a program to help homeowners facing foreclosure?

Of course Council may decide, in the out years when your bill takes more than $25 million out of the budget, that the tax cut is unaffordable and seek to stop or reverse it. But with a Mayor Nutter in charge, that may take 12 votes. This kind of bill is, frankly, a dangerous leap of faith.

Although I definitely think your bill is a mistaken choice of options, my service cut prediction was actually aimed at the Mayor's apparent plan. You did say he was calling for a reduction of 3-5% "from almost all of his department heads." That is certainly not chump change and while his plan will undoubtedly be spun as completely affordable, I'm more than a little dubious.

Street Administration's Budget Battles & Tax Reform

The "budget battles" during the Street administration were a "game" related to his position on business tax reform.

Game over.

Six-tenths of 1% = AFFORDABLE.

WWGjr

um, Councilman Goode, let's not lose focus on question at hand

Councilman, perhaps you have this information on hand, but under the Street administration, we, the citizens of the city, were not allowed to know how much businesses paid in gross receipts taxes.

Dan's request is quite simple: can we see that data now?

The data has always been available.

I've constantly referred people to the city's website to view the City's Five Year Financial Plan - it's never been hidden information.

Roughly $100 million a year is paid in gross receipts.

More specifically - FY08 ($112.1m).

You don't have to demand information that's at your fingertips. :)

WWGjr

Hey Councilman,

Hey Councilman,

That is not what we are asking for. We would like to see on a payer by payer basis, how much tax is actually paid. And, if there are privacy concerns that can be articulated (as opposed to our public real estate taxes), then names could be redacted, especially if we can still get some categorization and information on the business- such as number of employees, or business type, or whatever Commerce or Revenue has.

That's what Ray asked for...

I understood your request is different and should be referred to Revenue, not Commerce.

WWGjr

Thanks, Councilman

A copy of the request has been addressed to Revenue.

to be clear Councilman

I said:

Councilman, perhaps you have this information on hand, but under the Street administration, we, the citizens of the city, were not allowed to know how much businesses paid in gross receipts taxes.

I regret not making it clear that i meant individual businesses, but with the 20 comments on this post preceding mine, I thought that would be clear contextually.

So, I am in fact demanding info not at my fingertips, yes?
;)

Or mine! :)

I don't know if the raw data can be released ... but some reporting on the data by the Revenue Department is reasonable.

WWGjr

Thank you again

Your office should have received a copy of our request, along with the Departments of Revenue and Commerce and several of your colleagues on Council. I am sending a copy to Finance Director Rob Dubow.

If you have any suggestions or could assist in furthering the process of getting the basic information, we would certainly appreciate it, and please do not hestitate to contact me!

does that mean you'll be sending a request too?

I'm sure a Councilman will get snappier service than the rest of us after all...

We can assist in the request follow-up.

My office can certainly provide follow-up to the request.

WWGjr

Thanks, It's nice to see this level of responsiveness

and it's not even an election year.

So there should be $125 mil we can spend on foreclosure relief

as well. Given that such an amount over 5 years is AFFORDABLE. And the bang for the buck would clearly be more certain than tax cuts when you save people's homes, preserve the tax base, and prevent the annihilation of neighborhoods.

:)

How many times can you spend $125m in a $20 billion (or more) Five-Year Plan?

About 160 - including your idea.

WWGjr

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Syndicate content