Protesters march in front of City Hall. As Philadelphia re-emerges from the pandemic, changes in taxes and job opportunities could lead to a renaissance or stagnation, according to a new Pew Charitable Trusts report. Read more TYGER WILLIAMS / Staff Photographer
Philadelphia faces a turning point in its post-pandemic recovery, and a new report suggests that just 70,000 new jobs within the city limits could mean the difference between a renaissance or stagnation.
In its latest report, Pew Charitable Trusts projected four recovery scenarios — ranging from rosy to grim — and the impact that each could have on the city’s operating budget through 2026.
The difference between best and worst-case scenarios is an estimated $1.6 billion in local tax revenues generated over the next five years, Pew found. That compares with this year’s budget proposed by the mayor of $5.6 billion.
“To a large degree, the city’s fiscal future depends on the number and type of jobs that Philadelphia’s economy generates and where the actual work is done,” said report author Larry Eichel, a senior adviser for Pew’s Philadelphia research and policy initiative. “Again, these are estimates and projections, not predictions,” he added.
Of the $1.572 billion in revenue separating Pew’s best and worst-case scenarios, roughly $737 million, or 47%, derives from wage tax, $375 million from real estate tax, $277 million in business tax and $184 million from consumption or sales tax.
In the best-case scenario, Philly generates an additional 70,000 jobs over the next five years, reaching a total of 774,900 workers. In the worst case, the economy’s jobs numbers fall to 704,800. Before the pandemic in 2019, the city had roughly 738,800 jobs.
Econsult Solutions estimates that the city will lose $572 million in non-resident wage tax revenues from 2022 through 2026, compared with what was expected had there been no pandemic.
Move away from wage tax
Philadelphia’s budget currently relies heavily on the much reviled wage levy — imposed on all Philadelphia residents whether they work in the city or not, and on outside residents if they work in Philadelphia. The levy accounts for just over half, or 51%, of tax revenues, according to the Pew report.
During COVID-19, many commuters stopped working in person within city limits, setting Philadelphia up for a steep fall in wage taxes. In fiscal 2021, Philadelphia’s wage tax revenues dropped just over 5% to $2 billion from $2.1 billion in fiscal 2019, according to quarterly city managers reports.
Business leaders have urged that Philadelphia shift its reliance on wages taxes to property taxes and other sources of revenue.
One council member agrees. Councilmember Isaiah Thomas this week circulated a new proposal to slightly reduce wage taxes for city residents to 3.77%, from 3.8398%, and to 3.39%, from 3.4481% for nonresidents. Thomas’s “Keep It Local” plan would shift Philadelphia’s budget reliance away from the wage tax and more to property and other taxes.
“This is just an idea,” said Thomas. “Some people want us not to cut taxes at all, some say this doesn’t go far enough.”
Mayor Jim Kenney has proposed the lowest wage tax rates in Philadelphia since 1976, according to his spokesman. With $460 million in anticipated additional property tax revenues over five years, Kenney proposes that $260 million be used to offset reductions in the wage tax. Under his plan, residents’ rate would be reduced over the next two years to 3.7% and the non-resident rate to a flat 3.44%.
Critics of that approach, however, say that rapidly rising property taxes often drive out poorer residents from gentrifying neighborhoods.
Thomas proposed his plan after the Kenney administration announced long-awaited property tax reassessments and said the idea includes shifting about $40 million annually over the next five years out of American Rescue Plan federal funds to balance the budget.
Philadelphia’s latest property reassessment bumps up residential property values 31% on average citywide, although an Inquirer analysis of assessment data found residents in some rapidly developing areas could see hikes three to eight times that.
Pew relied on data and projections from Econsult, and those estimates don’t include Philadelphia’s remaining American Rescue Plan funds from the federal government.
The most significant swing factor in all four economic growth scenarios, Eichel noted, is wage taxes. Under the best and worst cases, residents of Philly would continue to pay more in taxes than nonresidents either way, he said.
That’s because higher-paying jobs are now often remote, and easily transfer outside city limits.
“If you live in the suburbs, have a job based in the city, and work at home of your own volition, you’re supposed to pay city wage tax. The risk is that companies may change that by assigning those jobs to locations outside Philly,” Eichel said.
Also, commercial real estate may decline similarly, according to national trends.
“The degree to which workers don’t come back to offices means businesses don’t rent as much space. That results over time in lower property assessments for commercial landlords,” he said.
In the most optimistic case, the city reaches 774,900 jobs over the five-year period, called the “Overall Growth” scenario. That represents a gain of 70,000 jobs, Eichel said.
The second scenario is represented by the “Uneven Gains” scenario; that’s the baseline, and the city’s official five-year plan for fiscal years 2022-2026. In the “Uneven Gains” scenario, the city reaches 754,500 jobs.
Pew’s other two scenarios, “Competitive Loss” and “Stunted Recovery,” would be weaker, with 727,700 and 704,800 jobs, respectively.
Reaction from Business
Business groups said the Pew report poses the “central question our leaders need to come to terms with. Whom are we building the city for?” said Jennifer Rodriguez, president and CEO of the Greater Philadelphia Hispanic Chamber of Commerce.
“If we value small businesses, then, business taxes should be addressed,” she said, citing a recent survey by the Diverse Chambers Coalition of Philadelphia — the African American, Asian American, Hispanic chambers and IBA, the LGBTQ chamber — which found that the top priority for a thriving small-business environment is lowering taxes.
Her members cite the BIRT, Business Income & Receipts Tax, which uniquely among peer cities taxes both profits and sales, as most burdensome.
“Small businesses are the backbone of the American economy and in Philadelphia they generate 33% of the city’s employment,” Rodriguez estimated. “Philadelphia’s high cost of doing business must be addressed.”
The current rates for BIRT are 1.415 mills ($1.415 per $1,000) on gross receipts, and 6.20% on taxable net income. The city exempts the first $100,000 in revenue, so 75% of Philadelphia businesses don’t have a BIRT liability, city officials estimated.
Jennifer Rodriguez, president and CEO of the Greater Philadelphia Hispanic Chamber of Commerce GPHCC
“Everybody wants a tax cut. But the BIRT tax is key,” said Narasimha Shenoy, head of the Asian-American Chamber. “Philly may be the only city in American with a BIRT tax. You have to make the playing field level, especially for immigrants coming here who start businesses.”
Shenoy said 75% of the city’s revenue comes from small business and job creation, “but that message the City Council doesn’t seem to get. They’re using businesses as a piggy bank. Why not grow the piggy bank, instead, grow the income first, before you tax it?”
City Hall predicament
Pew’s latest report highlights City Hall’s predicament: how to create a more predictable and equitable revenue stream as workers relocate and don’t pay city wage taxes, while property owners and their associated taxes are fixed in place. Kenney and City Council must pass a budget by June 30.
Councilmember Isaiah Thomas last summer. This week, Thomas circulated a new proposal to slightly reduce wage taxes for commuters as well as for city residents. TYGER WILLIAMS / Staff Photographer
“The pandemic changed how we work, how we socialize. It should also change the way we govern and run our cities,” Thomas said.
As the pandemic shifted how and where people work, “many businesses and employees, through remote work, may have left the city and are questioning their post-pandemic workplace,” Thomas said. “Philadelphia must send the message that the city is open for business and ready to welcome back all who left.”
Paul Levy, CEO of the Center City District, agreed. “A wage tax cut is actually a pay raise, especially for low-income workers,” he said. Unlike other cities with progressive tax rates, “we in Philadelphia actually have the highest tax rate for lower-income people.”