City Council has scheduled a public hearing for bill 040767, which would eliminate the city's job-killing Business Privilege Tax. That is a big step forward for a reform (perhaps the Tax Reform Commission's most important recommendation) that can help end the long-term loss of jobs in Philadelphia that has cost the city more than 250,000 jobs since 1970.
At the same time, the city received news that its bond rating was lowered as a rating agency decided the city is less creditworthy today than it was in the past. One major reason for the decrease is the city's poor prospect for economic growth, which limits revenue growth.
The two items are closely related -- unless we make our city more competitive by making our tax structure less burdensome and more fair, we will continue to struggle to increase jobs and expand economic development. If we cannot grow, it is hard to imagine how creditors -- or anyone else -- will have much faith in our city's future.
To no surprise, the city's bond rating fell for the first time since the city's fiscal crisis in the early 1990s when the city's bond rating fell to what was essentially "junk bond" status. Philadelphia's bond rating steadily improved since then, but the city continued to have the lowest bond rating of the largest US cities. Essentially, the bond rating measures the city's credit worthiness and the bond rating goes up or down based on whether investors think the city will be in position to pay its creditors. The consequence for the city is that when its bond rating goes up, it can borrow at a lower cost, but when the bond rating goes down, borrowing is more expensive. (Full Release By Fitch)
After assembling a fund balance of nearly $300 million in 2000 (that's an impressive almost 10% of the budget), the city has spent more than it collected in recent years until the fund balance was all but gone. The city continues its long-term population and job loss while it continues to increase expenditures -- all while subsidizing a failing gas utility that is likely to continue to drain scarce funds from the city budget.
After listing the many reasons for the downgrade including the dwindling fund balance, increased spending, the threat of a Philadelphia Gas Works collapse, and poor prospects for growth, Fitch took a moment to address tax cuts saying, "while tax reductions may be of long-term benefit to the city's competitiveness, they have had a dampening effect on revenues that has not been offset by spending reductions." That's the problem. We cannot continue to increase spending while our revenue base is not expanding. Looking ahead we can either reform our taxes to improve the city's competitiveness and grow -- or we can continue to cut and cut and cut to pay for our expanded spending while we continue our long-term population and job decline.
In "City's debt-rate downgrade fuels debate over tax cuts," The Philadelphia Inquirer reports on how the development is being spun. Predictably, the city administration suggests that we should avoid future tax cuts as it continues to endorse expanded future city expenditures. Tax reform advocates counter that, without additional tax reform, the city cannot grow, which will force us to cut our budget in future years since expenditures are increasing faster than revenue collections. (Full Article)
In "Another excuse not to cut costs," Inquirer columnist Tom Ferrick notes that far from curtailing spending, the city administration has increased personnel costs through recently completed contracts with municipal unions. He concludes "The pols lack the political will to face these issues. Maybe the only way to go is to restrict tax revenue, so they are forced to make the tough decisions needed to curb government costs." (Full Column)
Those who whine that tax cuts are the cause for the downgrade, should remember that our bond rating had been going up while we were cutting taxes because we were expanding our fund balance at the same time. However, in recent years we have been spending so much that we spending increases have outpaced revenue collection (even though revenues have outpaced budgeted estimates), squandering our fund balance. Consequently, our bond rating stopped improving and now that we have spent through our fund balance, it is declining -- and it will continue to decline until our revenues begin to outpace our expenditures again.
The city administration's expert estimated that tax reductions in recent years have been responsible for saving 22,000 jobs. The Tax Reform Commission estimates that its tax reform plan will create or retain an additional 47,000 jobs in the future. That growth could expand our tax base and increase collections so we can afford additional spending and improve our bond rating. If we just continue to spend more, we will have to cut and cut in the future as we continue to lose jobs and nieghbors and continue to watch our creditworthiness deteriorate.
