Tax-Rate Cuts Can Increase Tax Revenue

Philadelphia, it’s time for tax reform. And yes, “reform” should include strategic, substantial and forward-looking tax cuts.

Philadelphia has more types of taxes than just about any large city in America. Its wage tax, which hits all residents earning income from a job with the same flat tax rate, is the highest of its kind in America. It’s been well-documented that the city’s tax burden is a major reason why the city has trailed nearly all other big cities in job growth over the past 50 years. And low job growth is a major factor behind the city’s stubborn poverty rate, which is higher than in any other U.S. city of Philly’s size.

Enough Talk. It’s Time for Action

City Council formed a tax reform working group earlier this year, which considered some meaningful changes—such as reducing the wage tax by nearly a full percentage point. But its self-appointed timeline for making recommendations has come and gone with no proposals being offered. Mayor Kenney has proposed a modest decrease in the wage tax (from 3.8398% to 3.7%) as a way to cushion the blow of rapidly escalating property taxes. City Council seems cool even to that idea.

Attend the Rally

On June 1, the Greater Philadelphia Chamber of Commerce and numerous other business groups will sponsor a rally at City Hall in support of reductions to the wage tax and the city’s Business Income and Receipts Tax (BIRT). The BIRT is unique among cities in the way it taxes businesses twice—on both sales and profits. Small business owners, led by the African-American, Hispanic and Asian-American chambers of commerce in the city, say the BIRT is a huge obstacle to their growth. Think about it. If you had to pay tax on sales even if those sales weren’t big enough yet to generate a profit, wouldn’t it make you less likely to start a company, take out a loan or make a big investment to expand into new products or services?

According to a report by the Center City District, Philly has the lowest number of businesses per capita when compared to peer cities in the eastern United States. It also has the lowest number of Black-owned businesses per capita. Washington and Atlanta have more than two and a half times the Black-owned business density as Philadelphia.

A big reason the city talks about tax reform but rarely acts is the concern that reducing tax rates will lead to lower tax revenue, and thus less funding for city services. This is a legitimate concern, of course. Especially in the first couple of years, tax reductions very well might lead to lower tax receipts. That’s one reason now is the ideal time to implement cuts. Philadelphia has received more than $1 billion in Covid relief funds from the federal government, and much of it has yet to be spent. Congress tried to limit cities and states’ ability to use the relief funds to offset tax reductions, but several courts have since frowned on the constitutionality of that limitation.

Cut Taxes and Increase Tax Revenue

Another reason now is a good time to get serious is recent evidence of how tax cuts can lead to increased tax revenue. In 2017, the federal government cut the corporate income tax by nearly half (from 35% to 21%). Sure enough, tax revenue from corporations fell at first. But since the economy began to ramp up after the first year of Covid, corporate tax revenue has rocketed higher. For the government’s fiscal year 2022, corporate tax revenue is on pace to set an all-time record. Businesses are investing and growing and generating profits, and the net effect is higher tax revenue even with lower rates. This corresponds to the many cities that have outpaced Philadelphia in both job and tax-revenue growth in recent decades while maintaining lower overall tax burdens.

Even fresher evidence can be found right here in Philadelphia. The city just announced that property assessments will increase by 21% citywide next fiscal year. After accounting for tax appeals and collection losses, the city estimates property-tax revenue will jump 14%. That’s with zero increase in the property-tax percentage rate. A booming real-estate market—facilitated by the city’s tax abatement program and no increases in property-tax rates since the Nutter administration—has negated the need for increasing the tax rate and created a fiscal environment in which we can reasonably talk about reductions to other taxes.

If structured and sequenced carefully, reductions in the wage and BIRT taxes should eventually lead to a similar effect. More businesses would open and expand, creating more jobs and more profits and a bigger tax base. The combination of lower tax rates and a bigger tax base is the best way to increase tax revenue. It’s a win-win solution: less of each dollar earned that taxpayers have to give up, and more revenue per taxpayer for the city government.

Philly Needs More Taxpaying Employers

Although Philly’s natural advantages helped produce improving job growth in the last decade, relative to the previous three decades, it has continued to lag other cities. And much of the city’s job growth has been in the nonprofit sector—meaning among employers that don’t pay income or property taxes. With the exception of American Airlines, all of Philadelphia’s 10 largest employers are nonprofits that don’t pay taxes.

Keeping things the same and expecting a different result? There’s a word for that. Let’s try something different, and put Philadelphia on a course to grow private-sector jobs, expand tax receipts long-term, and help small and minority-owned businesses create wealth.