Philly Workers and Businesses Might Get a Big Tax Cut … In Two Years

State lawmakers just passed a bill that would let Philadelphia enact major tax reform. But will voters and City Council approve it?

Photo credit: ryanoshea via Flickr.

Photo credit: ryanoshea via Flickr.

For years, a chorus of business leaders and policy wonks has been singing the same tune: The business and wage taxes in Philadelphia are too high, and they drive jobs to the suburbs.

It’s been a loud, harmonious chorus. It’s rare to find someone who disagrees. Opinions diverge, though, when the conversation turns to solutions. City government can’t easily lower business taxes, not with a huge hole in the pension fund and a school district perpetually starved for every dime of revenue it can get. And City Council is loath to again raise taxes on homeowners, an entrenched constituency that feels like the go-to source for revenue every time the city needs more cash.

But a remarkable thing happened earlier this month. State lawmakers took the first step toward allowing Philly to raise taxes on commercial properties without having to raise taxes on residential properties, too, as long as it matches the increase with a reduction in the wage and business taxes. It would be the first hole in the part of the state constitution known as the “uniformity clause,” which requires Pennsylvania cities to tax all real estate properties at the same rate.

It’s far from a done deal—amendments to the state constitution require approval from state lawmakers during two sessions in a row, plus the consent of voters in a referendum—but it’s a culmination of a few years of focused advocacy by the Philadelphia Jobs Growth Coalition. The proposed amendment, which was introduced in March by Philadelphia state Rep. John Taylor and passed the state House and Senate with flying colors in early July, is part of a more detailed set of tax reform policies sometimes called the “Levy-Sweeney plan.” Two of that plan’s primary advocates are Paul Levy of the Center City District and Jerry Sweeney of Brandywine Realty Trust; they enthusiastically back Taylor’s legislation.

“Philadelphia has taken a giant step towards competitiveness,” Levy wrote in CCD’s summer newsletter.

The legislation has also won the support of Mayor Jim Kenney. But there is a substantial difference between what developers, builders’ associations, influential unions and even the good-government group Committee of Seventy have advocated—which is an end to the state’s uniformity clause so that Philadelphia can enact a more progressive tax on real estate and potentially reduce wage and business taxes at the same time—and what the proposed amendment would do, which is require that any revenue raised by increasing taxes on commercial property be matched with a reduction in revenue from business and/or wage taxes. 

If the proposed amendment does make it all the way through another legislative session and a voter referendum, Philadelphia will be authorized to increase taxes on commercial properties by 15 percent above the residential property rate. According to the legislation, if that increase causes a spike in revenue, the city would be required to reduce its business and/or wage taxes by the same amount of money brought in by the property tax increase. Proponents say that will help bring more jobs to the city, stabilize government revenue by taxing property that can’t leave the city, and lower taxes paid by workers who are already here. 

“First of all, the primary and first beneficiary is every single working person in Philadelphia who gets a much more aggressive reduction in the wage tax than the city can currently afford to do,” Levy told Philly Mag on Tuesday. The reduction in wage taxes is essentially a pay raise for workers in the city, he said.

It’s a small miracle that such a large majority of state lawmakers agreed to support a plan that’s been advocated almost solely by Philadelphians. But there’s at least one powerful Philadelphian who doesn’t like the plan approved by the General Assembly: City Council President Darrell Clarke. Now, Clarke likes the idea of amending the state’s uniformity clause so the city can tax residential and commercial property at different rates. But he doesn’t like the idea that the city will be required to lower business and wage taxes if it increases commercial property taxes. 

“This proposal would handcuff local tax policy by effectively creating a business tax freeze once the city decided to raise the tax rate on properties used for business purposes,” Clarke said during a hearing on the proposal earlier this year. “As long as the 15-percent variance were in place, if the city ever needed to raise additional revenue, it could not increase a single business tax unless it first raised the real estate taxes on homeowners.”

In 2015, Clarke was the lone vote in opposition to a Council resolution referencing the Levy-Sweeney plan and encouraging the state legislature to amend the constitution. Earlier this year, he introduced a resolution opposing the proposal to tie a constitutional amendment to a requirement to reduce wage taxes, but withdrew it a few weeks later. Later in the session, Council members voted to approve a separate resolution asking the General Assembly to amend the uniformity clause so the city could tax different classes of property at different rates. That resolution did not mention the amendment proposed by Rep. Taylor.

Clarke supported a proposed change to the uniformity clause in 2012, when the city was undergoing an overhaul of its property tax assessment system. But he says that as long as an amendment is tied to a reduction in business and wage taxes, it’s just going to be a windfall for big business in Philly. He believes the Levy-Sweeney plan could hurt small commercial property owners, and limit City Council’s ability to increase business or wage taxes in the future. 

Clarke testified at a hearing on the bill held at the Convention Center in June, saying that if business tax reductions are required as part of the deal, City Council may never implement the change that the constitutional amendment authorizes, according to a report in the Inquirer. Taylor responded that it’s unlikely the state legislature would approve any amendments to the uniformity clause without such a condition.

At the same hearing, Rob Wonderling of the Greater Philadelphia Chamber of Commerce said he supported the goal of lowering business taxes, but expressed skepticism about raising commercial property taxes. The city should also be barred from raising the use-and-occupancy tax, he said. “The Chamber supports the aspirational nature of [the legislation],” Wonderling said. “But the Chamber restates its public policy priorities on local tax reform: 1) Any steps to reduce local taxes should be initiated first by City Council and the mayor; and 2) before any state action considers increasing commercial property taxes in Philadelphia, action should be taken to protect businesses by capping the city’s use-and-occupancy tax.”

There is another potential stumbling block here. Last year, a U.S. Supreme Court decision on a Maryland income tax called a portion of Philly’s wage tax into question. At issue is whether the city can legally impose different wage tax rates on residents and non-residents, as it currently does. If Philly were to lose a challenge to its current taxing structure, it would likely bring in less revenue. And so the city might have to raise taxes to make up for that lost money, putting the whole tax reform plan in peril. But no one’s filed a challenge to Philadelphia yet.

Taylor said on Tuesday that he plans to sponsor the second round of legislation required to amend the constitution next January, when the new session begins. If it is approved quickly, a referendum could be placed on the primary ballot in May 2017, he said.

Taylor said he’s confident the legislation will move forward in the General Assembly a second time. But wording the ballot question will be the tricky part, he said, since the proposal calls for a tax reduction wrapped in a tax increase.

Correction: The original version of this story did not adequately describe the difference between the goal of Council President Darrell Clarke and others, which is to simply amend the state’s uniformity clause to allow Philadelphia to tax commercial and residential real estate differently, and state Rep. John Taylor’s bill, which would require the city to reduce wage and/or business taxes if it increases taxes on commercial properties. The article has also been updated to more information on who supports which plan, and why.

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