This memo was drafted in April 2019 for informational purposes for the City of Philadelphia Department of Commerce. It does not in any way represent the Department of Commerce’s opinion or policy on this matter.
Introduction
Philadelphia is the only one of the thirty largest cities in America to collect both a net income and a gross receipts tax on businesses. This leads to the City imposing some of the highest business tax rates in the country. According to a recent Pew Charitable Trust report, Philly also leads the way in the number of Exemptions and Incentives to lower these same taxes. The end result is a complex set of programs that compete for attention and applications from the cities’ stock of firms. While Philly may not benefit from lowering taxes to the lowest allowable level, a restructuring of tax policy to target harder to move assets and a simplified set of taxes could allow for similar revenue collection and lessen the burden on businesses.
What is the current state of business tax in Philly?
Pew reviewed five cities who collect only Gross Receipts tax – one element of BIRT in Philadelphia. These cities – Los Angeles; Memphis, TN; Nashville, TN; Seattle; and San Francisco – tax all of the money a business collects regardless of their profitability. Philadelphia’s rate is actually lower than all five of these cities – currently 0.1451% on all businesses regardless of size. Tennessee is a bit of a unique case as the state collects the gross receipt tax and remits to the cities. San Francisco has one static rate slightly above Philadelphia’s (SF charges 0.1625%). Both Seattle and Los Angeles have a bracketed approach to the Gross Receipts tax. Both Seattle (charges 0.150% to 0.415%) and LA (charges 0.101% to 0.507%) differentiate their tax rate by industry classification.
What would a Gross-Receipts-only model look like in Philly?
If the City were to take a similar route in their tax policy, it is possible that the city could lower taxes on certain classes of businesses while scaling up the rate to those firms who generate the most revenue in the city. If Philadelphia were to triple the current rate for those industries it deems appropriate, it would still be lower than the high-end tax rate in Los Angeles (0.4353% in Philly vs. 0.507% in LA). If one were to triple the tax revenue associated with Gross Receipts in 2016, that would mean $240 Million in revenue. This would still leave the city short in the short-term, though the simplification of the tax code and lowering of overall tax burden should make Philadelphia more attractive to expanding or relocating firms.
What other goals should be set for Philly’s business tax policy?
In general, Philadelphia should be focused more on taxing revenue sources that are not as mobile as net income or gross receipts. In 2018, the U.S. Supreme Court ruled on Wayfair v. South Dakota, which related to the collection of sales (and use) taxes by firms, despite not having any physical presence in a state. This ruling takes away some of the “mobility” previously available to Gross Receipts tax incidence. Another policy avenue available to other cities, but not cities in Pennsylvania, is a differentiated property tax rate for commercial properties. Due to the uniformity clause in the State Constitution, Philly does not have access to the potentially potent tool.
Conclusion
In conclusion, Philadelphia has policy tools available to it if the city wants to be more business-friendly, if not as many as other cities. Our number and type of tax policies create confusion and discourage businesses from complying with our rules. Our relatively low rate of Gross Receipt tax leaves room for the city to expand this piece of the revenue pie in line with other large cities. A general policy of moving to a simplified system which taxes revenue sources that are harder to move – like real estate, gross receipts, etc. – would make for a more stable revenue stream and limit opportunities for firms to reduce their tax burden artificially.
Joe Buckshon 