Don’t Be Fooled: The City’s Still Unfairly Taxing Businesses

Business owners and job-seekers rejoice! The job-killing Business Privilege Tax is no more. Those of us who have been working for decades to transform Philadelphia into a city of opportunity have long awaited the day when we could finally say that our city recognizes that creating a business is not a privilege to be taxed, but economic development and job creation that should be encouraged.

But, oh, there is the small bothersome detail to go along with this happy news: We didn’t actually eliminate the tax, we just renamed it.

The Business Privilege Tax is dead. Long live the Business Income and Receipts Tax.

The simple fact remains that most localities in America—cities, boroughs, towns, counties—do not tax business activities. The few that do, generally tax business receipts. Fewer still tax business income or profits at the local level. Philadelphia is the only city I know of that taxes business receipts whether you make a profit or not, and business income, if you are lucky enough to make a buck or two. Economists and business owners have long recognized that this tax costs us jobs every day as some firms refuse to start here or leave Philadelphia once they become successful to avoid cutting the city in on a share of their profits.

A recent examination of the effect of the business tax on our ability to attract and retain employers conducted by the Central Philadelphia Development Corporation concluded that the tax adds as much as a 57 percent premium on space-rental costs for certain firms compared to their costs if they relocated to suburban locations. This means that their per-square-foot office space effectively increases from about $30 to about $47 —an unreasonably high price for many to pay.

When I served as a member of the city’s Tax Reform Commission in 2003, we recommended that the city gradually phase out this hated levy over 10 years. We projected that job growth and the increase in the value of commercial real estate (if the tax goes down, the value of commercial real estate goes up) were projected to generate tax revenues to more than offset the city’s loss of revenue from phasing-out these business taxes.

Today, the Business Privilege Tax—or Business Income and Receipts Tax—stands as two taxes: a .1415 percent tax on receipts and a 6.45 percent tax on net income. Had we implemented the recommendations of the Tax Reform Commission, the rates today would be .007 percent on receipts and 1.95 percent on net income, scheduled to fall to zero percent and zero percent for 2015.

To be sure, the worldwide economic meltdown could have slowed or paused those scheduled reductions, but there is no doubt that Philadelphia’s economy—with more employers and more jobs—would have been in much better shape to begin with had we been reducing our rates aggressively all along.

We must also note recent important changes to the business tax. These changes include: taxing net income based only on the amount related to sales in Philadelphia, exempting the first $100,000 of receipts, exempting all new firms from the taxes on receipts and income for two year, and eliminating Business Privilege License Fees. These changes should definitely help the economic prospects for certain firms. They are positive steps, but because they, themselves, are to be phased in, we won’t enjoy their benefits for years to come

But if we continue to tax business receipts and employer profits, Philadelphia will continue to be at a competitive disadvantage in the fight for jobs with all of the surrounding jurisdictions and other cities that do not tax business activities. Despite any pronouncement that we eliminated the Business Privilege Tax, I don’t think any firms will be fooled by the fact that we didn’t eliminate our job-killing tax, we just changed its name.

To paraphrase the great bard, this tax by any other name still stinks.