Philly’s private-sector job growth has long lagged other cities. Can the next mayor make a difference?

Philadelphia’s private-sector job growth has been among the slowest of the nation’s large cities, according to a report released earlier this month.

The Center City District, one of the city’s leading pro-business groups, says the data offer fresh evidence that Philly’s unique, and much criticized, reliance on the wage tax threatens to hamper the city’s recovery from the pandemic.

With the November election approaching, the Center City District is holding up its analysis of more than two dozen downtowns as a guide for how the next mayor could tackle the problem.

The challenge going forward isn’t simply bringing new businesses to Philly — it’s also persuading suburban office workers to resume their pre-COVID-19 commutes to Center City, which would generate more demand for services from restaurants and other local businesses.

The wage tax gives employers, and workers, a further reason to avoid the city in the era of remote work, according to Paul Levy, Center City District’s outgoing president and CEO. The group’s latest data show that only 59% of Center City office workers are back this September in comparison with the same time in 2019.

“In the 1950s and ‘60s, we had lots of middle-class people move to the suburbs and we left the city behind,” Levy, who has long pushed to drastically reduce the city’s wage and business taxes, said in an interview last week. “We diminished its tax base, we impoverished it. Are we living through a version of digital suburbanization? Is this the world we want to create?”

But Philadelphia’s weak private-sector job market predates the pandemic.

In the decade following the Great Recession, most of the country’s largest downtowns, including Center City, added private-sector jobs. But Philly’s downtown private job growth increased by an average of less than 1% annually from 2011 to 2019 — ranking near the bottom of the 25 cities studied by the Center City District in the report.

Among Philadelphia’s 20 biggest employers, most are government entities or nonprofit educational and medical institutions, while just four are taxable for-profit companies, according to state data.

“We saw growth, but nowhere near at the scale of other cities,” Levy said during a presentation last week. “No criticism of our great eds and meds and nonprofit community, but we really lag in for-profit businesses within this city, and that has huge implications.”

The odds-on favorite to win the November mayoral election, Democrat Cherelle Parker, has supported efforts to gradually reduce Philly’s wage and business taxes much as previous administrations have done. Critics of the city’s tax structure, like Levy, say more aggressive measures are needed.

The issue is also shaping a competitive race for two seats on City Council that represent the city at large. Two Republicans vying for the seats favor steep tax reductions and have criticized incumbent Councilmember Kendra Brooks, of the progressive Working Families Party, for voting against legislation decreasing the city’s business taxes.

Foes of dramatic changes to the city’s tax structure generally don’t defend the levy on wages, but ask how the revenues could be made up. An older plan backed by Levy and Brandywine Realty Trust’s Jerry Sweeney sought state permission to shift the burden on to commercial real estate taxes — a proposition that now seems dubious in light of the office market’s struggles.

Levy and his allies have argued that changing Philadelphia’s tax structure could generate an economic boom, helping plug any hole left by dramatic reductions to the wage tax. But critics are skeptical.

“If we could eliminate the wage tax, that would be spectacular, but you can’t,” said Stan Shapiro, vice chair of Philly Neighborhood Networks, a grassroots progressive organization. “We can’t just hope for increased business to magically reproduce the revenue. Nobody can guarantee in any way, shape, or form that the revenue is going to show up.”

Why are there so few big for-profit companies in Philly?

Once famously known as the “workshop of the world,” Philadelphia has never fully recovered from the loss of manufacturing jobs it suffered during the second half of the 20th century. While many other big Northeastern cities faced similar postindustrial challenges, they’ve mostly regained and actually increased the number of jobs they had compared to 1970.

Philly stands out in that prior to the pandemic, it had 22% fewer jobs across all sectors — including government — than it did in 1970, according to another Center City District report that cited data from the U.S. Bureau of Economic Analysis. Between that year and 2000, the city lost 200,000 manufacturing jobs and twice as many residents.

City government responded to the economic downturn of the ‘70s and ‘80s by increasing the wage tax and adding business taxes.

While Philly has seen strong growth in education, health care, and hospitality, it has lost jobs in office-based sectors like real estate, finance, and insurance — areas in which other cities like Boston, New York, Washington, and San Francisco have thrived.

A 2016 report by Pew Charitable Trusts, the most recent data available, found that among big U.S. cities, Philadelphia was the only one that imposes two taxes on business income — both profits (5.81%) and sales (1.415% per $1,000).

And Philly has among the highest wage taxes in the nation: 3.75% for residents and 3.44% for people who commute to the city for work. By contrast, local wage taxes are lower or nonexistent in the surrounding suburbs.

That competitive disadvantage is compounded by the fact that some suburban residents who work fully remotely from the suburbs are exempt from Philly’s wage tax even if their employer is based in the city.

“That is such a disincentive, particularly at this moment,” Levy said. “Imagine trying to grow crops on land where the sun doesn’t shine. That’s our wage tax and business tax, a big overcast over the city itself. More competitive taxes would mean more Black and brown businesses, more businesses of all kinds across the city.”

What do Cherelle Parker and David Oh say about jobs and taxes?

Council has gradually reduced business taxes over the last few decades, and last year the net income portion of the business income and receipts tax (BIRT) fell below 6% for the first time since 1988.

Beginning during Ed Rendell’s mayoral administration, local policymakers have inched these taxes down, albeit with breaks during national emergencies like the Great Recession and the early years of the COVID pandemic. Council and Mayor Jim Kenney have reduced the wage tax by tiny increments throughout his two terms and continued that trend in this year’s budget.

But the changes have not generated the kind of economic benefits that business-friendly voices say would be created by more radical reductions.

As City Council members, both Parker, the Democratic nominee for mayor, and David Oh, the Republican nominee, voted in favor of business tax cuts and have expressed support for continued small reductions. Oh supports additional cuts.

Parker has said that boosting jobs in Center City’s office towers starts with keeping the city safe and clean, and with further reductions of wage and business taxes.

“We … want those buildings to be filled with firms who choose Philadelphia, who want to come back because they feel the vibrancy and the growth,” she said at a February campaign event. “And if we don’t fix those basics first, we’re not going to be able to get much of anything else done.”

Parker has said she wants to reduce the city’s reliance on the wage tax and instead impose a higher tax on commercial real estate — the idea that was promoted several years ago by Levy and others, but died in the state legislature.

Parker has pointed to her experience as a state legislator as evidence that she can make deals in Harrisburg. “You have to form alliances and build coalitions with people you never thought that you would have to work with in order to be successful,” she said in February.

Under Pennsylvania’s constitution, all state and local taxes must be flat — meaning that owners of a Philly rowhouse pay the same real estate tax rate as commercial landlords.

Changing the so-called uniformity clause to raise commercial real estate taxes without affecting homeowners would require a constitutional amendment approved by the legislature and, ultimately, voters.

How are taxes affecting City Council elections?

The next mayor will also need to work with City Council, which votes to set tax rates annually. Perhaps the most competitive citywide election this fall is for two at-large Council seats that are effectively reserved for non-Democrats. Republicans have historically held those seats, but in 2019, Brooks became the first third-party candidate to win a seat on Council in modern history.

She’s running for reelection alongside the Rev. Nicolas O’Rourke, also of the Working Families Party. In addition to opposing incremental business tax cuts, Brooks last year proposed reinstating a decades-old wealth tax, or a levy on directly held stocks and bonds.

Brooks said in a recent interview with The Inquirer’s editorial board that while she “would love” to cut taxes, she won’t do so if it means reducing city services or deepening economic inequality.

“We need investments,” she said. “We can’t cut taxes at the expense of perpetuating poverty in our communities.”

Republicans Jim Hasher, a real estate broker, and civic leader Drew Murray both support lower wage and business taxes.

“The fact that we have a gross revenue tax is insane to me,” Murray said in a recent interview. “We need to put businesses on notice that Philadelphia understands we need to be more pro-economic development.”

by Andrew Seidman and Jake Blumgart | The Philadelphia Inquirer | October 17th, 2023