Are Philadelphia's Taxes Really So Unfriendly to Business?

It's often said that the city has one of the country's highest business tax burdens. But it's really residents and homeowners who are taking the disproportionate tax hit.
by | October 31, 2013

Whenever state or local tax structures are being debated -- which, of course, is pretty much always -- much of the discussion centers around whether those tax systems are friendly to business and whether they aid or hinder economic development and job creation. All too frequently, however, these debates turn on perceptions that do not square with reality.

Take Philadelphia, for instance. If you follow the city's ongoing budget battles even casually, you have probably heard it said that Philadelphia has one of the highest business-tax burdens of any city in America -- that, in the words of Councilman Bill Green, Philadelphia has a "business-unfriendly culture." Yet a closer look at Philadelphia's tax structure shows that this perception is inaccurate. Far from being overly punitive to businesses, Philadelphia's tax structure puts a disproportionate share of its burden on poor and middle-class families.

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In 2012, KPMG released a study comparing the tax environment for businesses in cities across the world. The consulting company looked closely at all of the different taxes that businesses face and weighted each to derive a measure of businesses' total tax burdens. KPMG then created a "total tax index" to help companies make effective cost comparisons when choosing where to locate. Given the rhetoric so often heard about Philadelphia's tax structure, one would expect it to be at or near the bottom. In fact, of the 71 U.S. cities analyzed in the study, Philadelphia was ranked 32nd, beating out places like Austin, Texas, and Oklahoma City, Okla.

A closer look at Philadelphia's current tax structure shows that it is surprisingly regressive. Frances Burns, the executive director of the Pennsylvania Intergovernmental Cooperation Authority, explained in a recent presentation to a Fels Institute of Government class at the University of Pennsylvania that 78 percent of Philadelphia's tax revenues comes from the wage tax, the sales tax and the property tax -- all of them regressive flat taxes.

The results of this tax structure are not surprising. Of 51 cities compared for a tax study by the government of the District of Columbia, Philadelphia, along with Birmingham, Alabama, had the highest tax burden for a family with an annual income of $25,000. Philadelphia came in third for a family making $50,000 and second for a family making $75,000. A typical Philadelphia family making $25,000 pays over 18 percent of its income toward city and state taxes. Thus, more than almost any city in the country, Philadelphia puts a disproportionate share of its tax burden on low- and middle-income families.

Philadelphia Mayor Michael Nutter's "Actual Value Initiative" (AVI), a proposal to overhaul the city's property tax, would only exacerbate this problem, shifting at least $72 million in taxes off of large commercial properties and onto homeowners; some report the number as closer to $200 million. In addition, the city council has voted to repeal a wage tax rebate for low-income families.

Businesses in Philadelphia face, at worst, an average tax burden compared to other American cities. Low- and middle-income Philadelphians, however, pay more than residents in almost any other city. As Philadelphia's leaders debate the future of the city's tax system, it is important to understand where the city's revenues are really coming from.

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Alan Sable

Alan Sable is a second-year graduate student at the Fels Institute of Government at the University of Pennsylvania and an associate consultant at Fels Consulting.

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VOICES is curated by the Governing Institute, which seeks out practitioners and observers whose perspective and insight add to the public conversation about state and local government. For more information or to submit an article to be considered for publication, please contact editor John Martin.

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