Soundings

David Whelan
A Philly Tax Cutter
Can Mayor Nutter cure the city’s cancer?
Winter 2008

With 380 homicides recorded already this year, a spate of recent cop shootings, and one particularly gruesome cop killing that led to a nationwide manhunt, Philadelphia is among America’s most dangerous big cities. The crime issue dominated this year’s mayoral race, which Michael Nutter, a blunt and sometimes histrionic former councilman, eventually won. But while crime gets the most attention, Nutter’s success as mayor will ultimately rest on improving the city’s dysfunctional economy. Notwithstanding the glitzy renaissance taking place in its center, Philadelphia is an economic basket case.

The last mayor to tackle economic issues in Philadelphia was Ed Rendell, now starting his second term as Pennsylvania’s governor, who memorably referred to the city as “a cancer patient with a gunshot wound.” The gunshot in Rendell’s metaphor was the threat of bankruptcy that the city faced when he took office in 1992. The cancer was the slow drain of jobs and people from the city.

Early on, Rendell believed that the city’s image was its biggest liability. As journalist Buzz Bissinger recounts in his book A Prayer for the City, the mayor focused on splashy projects like a convention center and downtown condos and hotels. When it came to jobs, Rendell thought of Philly as a jigsaw puzzle of employers, each representing a bloc of workers. Rendell’s responsibility, as he saw it, was to keep the biggest pieces from falling off the table. When Breyer’s Ice Cream, for example, threatened to pull up stakes and fire several hundred factory workers, Rendell rushed in with an incentive package to get it to reconsider (Breyer’s left anyway). The most conspicuous example of Rendell’s approach involved preventing the planned closure of a 200-year-old navy shipyard that employed 8,000 workers. Rendell spent years negotiating a deal with a German shipbuilder to take over the facility in exchange for $400 million in government subsidies. The shipyard now reportedly employs only a small fraction of the original workforce.

Eventually, however, Rendell began to reconsider his policies. In 1995, for the first time in 50 years, the mayor’s budget included cuts in income taxes, which had run neck and neck with New York City’s for the highest in the nation. Rendell passed tiny reductions at first, from 4.96 percent to 4.61 percent over five years (and from 4.31 percent to 4.22 percent for commuters). The mayor also passed a ten-year tax abatement on any new residential construction or rehabilitation, a measure that has helped fill neighborhoods near downtown with construction crews, real-estate agents, and young homeowners.

Rendell’s plan also included cutting the business-privilege tax, a noxious three-part levy that requires a $250 license fee to start a business in Philadelphia, deducts over 6 percent of any profits, and also gobbles up a portion of gross revenue. The levy applies even to businesses that are just starting up or losing money. (Entrepreneurs like to joke darkly that Philadelphia is a 6 percent partner in everything they do.) Rendell shrank the gross-revenue part of the privilege tax from $3.25 to $2.65 for every $1,000 in revenue, and he scheduled a long-term phase-in of further cuts; the levy currently stands at $1.42 for every $1,000 in revenue. Still, its very existence is amazing, given that it yields limited revenue and sends a frosty message to any entrepreneur contemplating starting up in the city.

Since the Rendell tax reductions, the city has seen total annual tax revenues rise by $1.6 billion. But Rendell’s successor, John Street, relentlessly opposed any further cuts and even tried to roll back the income-tax cuts. He vetoed then-councilman Nutter’s proposals to trim business taxes four times and scheduled no further overhauls of the business-privilege tax. Instead, Street oversaw a bloating of the budget, mostly to pay for increased pension and health costs for city workers. Street did open up the city to two new gambling casinos, but this wasn’t as pro-business a move as it may sound, since the state takes a huge cut of casino profits. “They’re not casinos. They’re ATMs for the state,” says Brett Mandel, head of the tax-advocacy group Philadelphia Forward.

The results of the city’s hostility toward business are evident. While the greater Philadelphia region added 110,000 jobs over the last decade and Pennsylvania gained 300,000, the city lost 10,000. Moody’s latest report on the city warns off businesses, pointing to “aging infrastructure,” “weak population growth,” and a grim long-term economic forecast. The city’s largest employers are immobile businesses—hospitals and universities. The population continues to flee, with another 8,000 people leaving last year.

Philadelphia continues to have the nation’s second-highest individual tax burden after New York City. Philadelphia Forward cites a study finding that a typical city resident’s total tax burden from state and local taxes is 14 percent, compared with 9 percent in the nearby suburbs. For businesses, it’s way worse—roughly nine times what businesses pay in other large American cities or nearby suburbs. Defenders say that Philadelphia has been a victim of the same deindustrializing forces facing other densely populated, older cities. Yet it has adapted poorly. Even the mild-mannered Federal Reserve has spoken out against Philly’s taxes, calling them “onerous” and an “incentive to leave.”

Further, thanks to the new five-year plan that the city council passed and that outgoing mayor Street signed, the city can claim a balanced budget, but based only on the dubious assumption that union negotiations, which will occur early in Nutter’s first term, won’t produce any new wage or benefit hikes. So Nutter will face serious problems as he takes office this January. congratulations, mayor nutter: boy, are you screwed, read the cover of a recent issue of Philadelphia. But don’t count Nutter out: he claims that he will get rid of the $250 business start-up fee and cut both the profit and the gross-revenue parts of the privilege tax. “We’ll make Philadelphia a model city,” he says. With a tax cutter in the mayor’s office, who knows?

David Whelan is a Philadelphia-based staff writer at Forbes.

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