Focus: Business Tax Reform


If you start a business in Philadelphia, the City considers it a "privilege" that should be taxed, not economic development that should be encouraged.

While the city has adopted the Tax Reform Commission’s recommendation to dramatically reduce the oppressive Wage Tax in future years, relief from job-killing taxes on small and expanding firms remains elusive. This city will only thrive if it can nurture and grow fledgling businesses. Without such an environment for growth, Philadelphia will continue to lose employers and jobs.

Consider the facts:

  • Since 1970, Philadelphia has lost about 250,000 jobs -- one-quarter of its employment base.
  • Even during the tremendous nationwide employment expansion in the 1990s, Philadelphia actually lost jobs.
  • While certain large, Center City employers have created headlines by announcing that they will remain in the city, many more employers across the city have moved or gone out of business.
  • The Tax Reform Commission found that Business Taxes in Philadelphia are much higher than taxes in competitor jurisdictions -- Philadelphia’s (then) .19% tax on receipts is more than 300 percent higher than the average rate in large U.S. cities and more than 500 percent higher than surrounding Pennsylvania suburbs (the rate is .1415% now). Philadelphia’s 6.45% tax on business income is perhaps incalculably higher than other cities and suburban jurisdictions as such a tax is nearly unheard of at the local level.
  • The Federal Reserve Bank in Philadelphia states clearly, "Taxes in the city of Philadelphia are onerous when compared to taxes in other large cities, and they are a significant deterrent to economic growth in the city. Relative to other cities, Philadelphia is generally ranked among those with the highest taxes in the nation."
  • The state and local tax firm Vertex Inc. compared business tax burdens for a model firm and found that Philadelphia's business tax burden is the highest among major American cities.
  • The Philadelphia Business Journal also found that Philadelphia's tax burden is the highest in the nation and trumpeted its results with the headline: "City tops in business tax burden."
  • The April 2004 edition of Treasury & Risk Management included a graphic based on a Kosmont-Rose Institute of Cost of Doing Business Survey that blared: "Thinking About Where To Set Up Shop? On the whole, you wouldn't rather be in Philadelphia after all." Philadelphia ranked first as the most expensive city to do business.
  • In its latest report, the Commercial Real Estate Advisory Firm Grubb & Ellis forecasts the worst vacancy rate in Center City in more than a decade. Why? "The main culprit for the Central Business District's tepid demand is tied to the city's business taxes."

Tax Reform Will Grow Jobs In Communities Across The City:

  • The Tax Reform Commission determined that its plan for tax reform will create 47,000 new or retained jobs in Philadelphia by 2010 and 175,000 jobs by 2017.
  • The City of Philadelphia's own retained tax expert recently echoed the thought that tax reform improves the city economy and determined that the city's modest recent tax reduction efforts have saved the city more than 22,000 jobs.

A crucial part of the Commission’s blueprint for change is the reform and eventual elimination of the city’s Business Privilege Tax. Today, this tax on business receipts and business income forces city businesses to pay the nation’s highest local business tax. It is almost unheard of for a locality to tax both receipts and income, yet we do in Philadelphia.

The high rate of the tax — .1425% on gross receipts and 6.45% on net income — is certainly problematic, but it is also frustrating that:

  • Unlike business taxes at the state and federal level, the Business Privilege Tax must be paid all at once on one date.
  • The gross receipts portion of the Business Privilege Tax must be paid whether or not a firm makes a profit, which is extremely harmful for growing firms that operate on narrow margins.
  • The net income portion of the Business Privilege Tax provides a very compelling reason for firms to leave the city as it places businesses at a serious disadvantage when competing against non-Philadelphia firms.
  • The tax is unfair to small businesses as it is imposed in a way that forces sole proprietorships and partnerships to pay a higher tax burden than corporate competitors.
  • The city discourages any firm that figures on operating with a net operating loss in the early years from locating in Philadelphia since the city only allows a net operating loss carryforward period for three years when other jurisdictions offer longer timeframe.

The Tax Reform Commission proposed a series of recommendations to fix the problem of high and unfair business taxes that will allow firms to compete and grow in Philadelphia:

  • Incrementally eliminate the Business Privilege Tax by fiscal year 2015.  Legislation pushed for by Philadelphia Forward and enacted into law will eliminate the Gross Receipts Portion of the BPT by 2017 and reduce the Net Income Portion of the BPT to 6.0% in 2017.
  • Establish two estimated payment dates for the Business Privilege Tax so taxpayers no longer have to assemble the cash to make their tax payment on one date.
  • Adopt single-sales factor apportionment based on Philadelphia sales to remove the disincentive for firms with few Philadelphia sales to remain in the city.
  • Grant unincorporated businesses a deduction for payments to partners, members, and sole proprietors to eliminate the disparity that forces partnerships to pay a higher tax burden than their corporate competitors.
  • Lengthen the Business Privilege Tax net operating loss carryforward period from three years to ten years so that start-up firms are no longer discouraged from locating in Philadelphia.

Tax reform must be a priority for Philadelphia.  The recommendations of the Tax Reform Commission represent a true plan for change that must be a prerequisite for the implementation of other initiatives.

The time for study is over. The time for action is now.