Investing the Proceeds of Growth: City of Philadelphia Budget Choices: 2020-2024 - Center City District
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Investing the Proceeds of Growth | 1
CENTER CITY REPORTS
Investing the
Proceeds of Growth:
City of Philadelphia Budget Choices: 2020–2024
FEBRUARY 2020
CENTER CITY DISTRICT,
CENTRAL PHILADELPHIA DEVELOPMENT CORPORATION
FIND MORE REPORTS AT:
CENTERCITYPHILA.ORG
After decades of decline, Philadelphia 2019. On an annualized, inflation adjusted within its geographic boundaries.1 It can do
has enjoyed 10 consecutive years of basis, that represents an increase of 2.7% this through program and capital budget
unprecedented economic expansion, adding per year. expenditures, but also through tax policy.
almost 89,000 jobs since 2009. Growth After decades of struggling against the
During his first term, starting in 2016,
produced not only more employment, but forces of decline, Philadelphia enters the
Mayor Kenney focused increased revenues
also rising salaries and more residents; 2020s facing the new opportunities and
primarily on social inclusion: creating a new
accelerating real estate construction, sales challenges of managing and expanding the
City-funded pre-K program, investing in
and rentals; and a flourishing hospitality benefits of growth. This report suggests
libraries, recreation centers and community
and retail industry. All these contributed three broad strategies or paths to consider:
schools; boosting support for the School
to an expanded municipal tax base that,
District of Philadelphia; and enlarging Strategy 1: Enlarge the share of tax revenues
when combined with several legislated rate
funding for social services, addiction devoted to address crime, criminal justice and
increases, produced a 39% upsurge in the
treatment and homelessness. As the mayor the city’s substantial social and educational
real value of tax revenues collected by the
prepares a new operating budget and needs and disparities.
City during the last decade.
five-year plan that will guide his second
Strategy 2: Place greater emphasis on
Expanding tax revenues fueled a dramatic term, it is helpful to reflect on recent trends
quality of life issues, infrastructure and
growth in municipal spending as the and to consider the different policy options
economic development to retain and attract
recovery accelerated. From fiscal year 2010, Philadelphia now has, especially because
more residents and businesses with the
the low point of the recession’s impact on economic expansions do not last forever.
means to choose many other regional or
City operating expenditures, through 2019,
Cities are shaped by regional and national national locations.
spending from the General Fund, the city’s
economic and demographic trends, by
primary operating account, increased by Strategy 3: Invest more of the proceeds of
changing programs and priorities of
$1.6 billion, a 43% increase (4.0% per year), growth in tax reduction, lowering the cost of
higher levels of government. However,
at a time when the region’s Consumer Price working and doing business in Philadelphia,
in an era of diminished federal funding
Index (CPI) increased on average 1.3% per to prompt more widespread and inclusive,
for cities, local government must play a
year. Adjusting for inflation, General Fund private-sector job growth.
greater role influencing what happens
expenditures grew by 27% from 2010 to
1: In the last half-century, federal resources for cities have steadily declined as population has decentralized nationally. While Philadelphia’s leaders need to maximize the
revenues the city can secure from Washington D.C. and Harrisburg, it is important to underscore that through both recent national Democratic and Republican administrations
funding from higher levels of government has declined. The City of Philadelphia now generates 75.5% of its operating budget from tax and other revenues raised from within its
boundaries.
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG2 | Investing the Proceeds of Growth
Each of these strategies present viable FIGURE 1: WAGE & EARNINGS TAX RATE HISTORY, 1952–2020
alternatives, pursued by prior mayors. Each
WAGE AND EARNINGS TAX RATE
exemplifies a theory of change, focusing 1984: 4.9600%
5.0%
on different levers to achieve policy goals. 2008: 3.9800%
With limited resources however, governing 4.5%
is about choice: not choosing one strategy 2020: 3.8712%
4.0%
4.3125%
to the exclusion of another; rather, deciding 1984:
3.5%
the appropriate emphasis to place on each 2008: 3.5392% 2020: 3.4481%
3.0%
and then forging a blended strategy that
secures the most prosperous future for all 2.5%
city residents. This report seeks to inform 2.0%
that decision by looking back at the trends
1.5%
and decisions of the last two decades and
1.0% 1952: 1.2500%
forward to the paths that might lead to
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
more expansive and inclusive growth.
Resident Non-Resident
Legacy from Recent History: Source: City of Philadelphia, Summary Schedule of Tax Rates Since 1952
In the 1970s and 1980s, the loss of
manufacturing, the decline of federal FIGURE 2: MEDIAN HOUSEHOLD INCOME (CITY & SUBURBS)
funding and the departure of working- and
middle-class residents left behind physical
deterioration, abandonment and growing Bucks County
Montgomery $86,055
poverty. To respond to growing social
County
challenges, the City sought to sustain
$88,166
high levels of service through frequent
municipal tax increases, even as the tax
base was steadily contracting. (Figure 1)
A real estate boom in the mid-1980s was
Philadelphia
followed by a national economic downturn $43,744
at the end of the decade. A severe, local
fiscal crisis ensued in 1990-1991, during
which tax collections dropped precipitously.
The City struggled to pay bills and meet
contractual and budgetary obligations
incurred when the economy was still
expanding. Bankruptcy was prevented only
Burlington
through state intervention with the creation County
of the Pennsylvania Intergovernmental $84,992
Cooperation Authority (PICA), the issuance
of PICA-backed bonds to reduce debts, the Delaware
introduction of a new local sales tax and County
$71,539
the establishment of fiscal guardrails as
part of a required five-year financial plan.
Camden County
With PICA’s authority set to expire in 2023,
$67,118
Philadelphia appears to have turned a
corner.
Despite positive trends however, the city
still has the highest poverty rate of the 10
largest U.S. cities and the second highest
Tract
of the largest 25. Too many residents have Gloucester Less than $20K $50K to $74,999 Not Available
low incomes that create significant housing County $20K to $34,999 $75K to $99,999 Source: US Census Bureau,
affordability challenges. Job growth since $85,160 $35K to $49,999 $100K or More
American Community Survey,
2014-2018
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 3
the end of the recession, while positive, $1,503,818.4 Without broader growth, the next nine years, with real (inflation-
remains low compared to other major cities. Philadelphia’s low median income and adjusted) total spending increasing by $1.1
Recent accelerating employment expansion limited assessed value of property outside billion by 2019, a 27% increase (Figure 4).5
is concentrated disproportionately in low- Greater Center City will leave the City and This translates into an average annual real
wage jobs, when compared to other major the School District with a diminished tax increase of 2.7%.
cities, which are growing a much larger base and continuing fiscal challenges
A recent analysis by The Pew Charitable
share of family sustaining jobs.2 Even with (Figure 3).
Trusts found that Philadelphia’s growth
the revival of neighborhoods surrounding
Looking in the rear view mirror at the in per capita government expenditures
Center City and University City, housing
recent past, Philadelphia’s growth appears from 2008 to 2018 is comparable to other
deterioration and abandonment remain
impressive. Out the side windows however, major cities. However, the analysis did not
major challenges in many communities.
we see many peer cities that faced similar examine the specific categories that grew,
Despite a few thousand luxury challenges, passing by with faster rates of nor did it ask if there are alternative ways
condominiums downtown being added to growth, more family-sustaining jobs and for Philadelphia to allocate or invest these
Philadelphia’s citywide inventory of 680,000 significantly lower poverty rates. The sunset unprecedented proceeds of growth.6 That is
housing units, regional wealth remains of PICA in just three years provides the a central focus for this analysis.
overwhelmingly concentrated in the suburbs impetus and opportunity for Philadelphia
Expansion of the Base: With more jobs,
(Figure 2). We are far from reversing the both to look back and to consider the
higher salaries, increased business volume
effects of 50 years of decentralization, choices that might produce a more
and sales, population growth and new
disinvestment and decline. Philadelphia’s prosperous future.
construction, there is more to tax, even
median household income is just $43,744.
The median household income in Chicago
Fiscal Trends of the without an increase in rates. An expanded
Past Decade: municipal tax base is a huge dividend
is $55,198; New York City, $60,762; Boston
of growth. From 2009 to 2019, adjusting
$65,883 and San Francisco $104,552.3 The After reaching a peak in 2008, just before
for inflation, the base for the wage and
assessed value per pupil of city real estate the Great Recession, the City’s General
earnings tax grew by 27%; the sales tax
is $241,946, the state average is $489,935; Fund expenditures fell to a low point in
base expanded by 18%, while the real
Pittsburgh, $690,347; Lower Merion is 2010 and then rebounded dramatically over
estate transfer tax base jumped by 131%.7
FIGURE 3: ASSESSED VALUE PER PUPIL: 2017 MARKET VALUE/2017-18 ENROLLMENT
Lower Merion $1,503,818
Radnor $1,395,072
Council Rock $990,724
Pittsburgh $690,347
Philadelphia $241,946
Erie $214,146
Reading $85,540 State Average:
$489,935
$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000
Source: PA Department of Education
2: Growing More Family Sustaining Jobs in Philadelphia, Center City District, October 2019.
3: US Census Bureau, American Community Survey, 2018 five-year estimates.
4: CCD calculations based on PA Department of Education data.
5: This calculation includes Department of Human Services expenditures within the grants revenue fund to account for the transfer of DHS grant funding to that
fund in fiscal year 2012.
6: How Philadelphia’s Expenditures Have Increased in Recent Years, The Pew Charitable Trusts, December 2019.
7: Wage and earnings tax base growth calculation includes PICA tax revenues.
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG4 | Investing the Proceeds of Growth
FIGURE 4: CITY OF PHILADELPHIA ADJUSTED GENERAL FUND EXPENDITURES, FY 1998 – FY 2019
(2019 DOLLARS IN BILLIONS)
$6.0
$5.0
$5.24
$4.96
$4.72
$4.66
$4.51
$4.49
$4.46
$4.44
$4.46
$4.30
$4.30
$4.0
$4.29
$4.29
$4.21
$4.19
$4.18
$4.15
$4.12
$4.10
$3.96
$3.92
$3.78
$3.0
$2.0
$1.0
$0.0
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
FIGURE 5: CITY OF PHILADELPHIA TAXABLE ASSESSED VALUE OF Following the implementation of the Actual
PROPERTY TAX YEAR 2013 – 2019 (DOLLARS IN BILLIONS) Value Initiative (AVI) in 2013, total taxable
assessed value increased from $91.9 billion
$140.0 to $115.6 billion in 2019, an 18% increase
after adjusting for inflation (Figure 5).
$120.0 $115.6
On top of a growing base came several
$104.2 $105.0 legislated rate increases for use and
$100.0 occupancy, sales, parking and real estate
$91.9 $90.9 $90.2 $91.8
transfer taxes. The real estate tax rate
increased from 8.264% in 2010 to 9.771%
$80.0
in 2013, prior to the citywide reassessment
under the AVI. Rates then increased again
$60.0 from 1.34% in 2014 (after AVI) to 1.3998% in
2016.
$40.0
As a result, the yield from every major
City tax rose (in inflation-adjusted dollars)
$20.0 from FY09 to FY19. Wage and earnings tax
revenues were up 25%; real property tax
revenues were up 53%; business income
$0.0
2013 2014 2015 2016 2017 2018 2019
and receipts revenues were up 23%; net
profits tax revenues rose by 158%; sales tax
revenues increased by 54% and real estate
transfer revenues were up 152%.
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 5
In total, municipal tax revenues increased Increased Benefits to the School District: Other Revenue Sources:
from $2.95 billion to $4.11 billion during this Because the School District of Philadelphia
For a complete understanding of the City’s
period, an increase of 39% in real terms.8 is not an independent taxing authority,
overall financial picture, it is essential to
City tax revenue increased every year for the City of Philadelphia also collects
consider not only the General Fund, the
the past 10 years, with the exception of taxes for the benefit of its public schools.
City’s largest operating account, but also
2015, when state legislation required the Each of those major taxes also increased
other sources, such as federal and state
dedication of $120 million in local sales tax significantly in real terms from fiscal
grants and funds dedicated to specific
revenues to the School District. (Figure 6) 2009 to fiscal 2019. The rise in real estate
purposes. Besides the General Fund, the
taxes resulted in an increase of 18% in the
Curtailment of Rate Reductions: The growth City also manages a Grant Revenue Fund,
revenue received by the School District
in revenues also reflects a significant, the Hotel Tax Revenue Fund, the Community
from this source.9 Use and occupancy tax
additional policy choice, discussed in Development Fund, the Housing Trust Fund,
revenues were up 38%, while school
detail below: the City did not continue the Car Rental Tax Fund, a Special Gasoline
income tax revenues rose by 70%. In
the substantial annual, across-the-board Tax Fund and a County Liquid Fuels Tax
addition, the District began receiving
reductions in the wage and business taxes Fund. Together, these constitute all local
$120 million annually in revenues generated
that began in 1996 and continued for 14 tax, non-tax and grant revenue sources that
by the local sales tax, beginning in fiscal
consecutive years during the Rendell and pay for the programs that are largely within
2015. Overall District tax revenues increased
Street administrations and the first two the discretion of local decision-makers. By
46% in inflation-adjusted dollars over the
years of Mayor Nutter’s term. comparing these over time, it is possible to
past decade.
track how priorities have changed between
fiscal year 1998 and 2018, the most recent
year for which complete data is available.10
FIGURE 6: CITY OF PHILADELPHIA TAX REVENUES BY CATEGORY, FY 1990 – FY 2019
(2019 DOLLARS IN BILLIONS)
$4,500
$3,600
$2,700
$1,800
$900
$0
FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Wage and Earnings Real Property Business Income Sales Real Estate Transfer Other
and Receipts
8: These calculations include wage, earnings, and net profits taxes dedicated to the Pennsylvania Intergovernmental Cooperation Authority (PICA). These are effectively local
taxes although they are dedicated to PICA and used to cover debt service payments on PICA debt. The amounts of PICA taxes not required for debt service are transferred to
the City General Fund.
9: The real estate tax of 13.998 per $1,000 of taxable assessed value is divided in 2020: 6.317 goes to the City and 7.681 goes to the School District.
10: Funds excluded from the analysis are the city’s “enterprise” funds: the Water and Aviation funds, which are financed primarily by user charges, the HealthChoices Behavioral
Health Fund, which finances Medicaid behavioral health services though federal and state dollars, and the Acute Care Hospital Assessment Fund, which holds tax funds
received from local hospitals that are returned to the state to finance the Medicaid program. These latter funds were established relatively recently, and excluding them allows
for comparisons over long time periods, the focus of this report.
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG6 | Investing the Proceeds of Growth
In fiscal year 2018, the sum total of The City’s spending growth began to FIGURE 7: CITY OF
revenue received by these funds was accelerate after fiscal 2015, increasing $529 PHILADELPHIA REVENUES
$5.74 billion with tax revenues being million or 10% in real terms from 2015 to IN MAJOR FUNDS, BY FUND
the largest share, accounting for 68.5% 2018. This represents an average annual AND TYPE FISCAL YEAR 2018,
of all revenue11 (Figure 7). Other local increase of 3.2%. (DOLLARS IN MILLIONS)
sources, besides taxes, include fees for
While data for all operating expenditures in
licenses and permits, emergency medical REVENUES BY SOURCE
fiscal 2019 is not yet available, rapid growth
services, trash collection and court filing
appears to have continued. General Fund LOCAL TAXES
fees, interest earnings, and code violation
spending increased 6.3% in FY19, and is General Fund $3,856 67.2%
fines. These constitute another 7.0% of
projected to increase an additional 7.7% in Hotel Room Tax Fund $69 1.2%
revenue. Together, they add up to 75.5%
fiscal 2020, at a time when inflation is less
of City operating revenue – all generated Car Rental Tax Fund $6 0.1%
than 2% annually.14
locally, based on decisions made locally. The TOTAL $3,931 68.5%
other large source of funding is grants from Changes in Priorities Over LOCALLY-GENERATED
federal and state governments and other Two Decades: NON-TAX
$403 7.0%
entities, which make up 23.4% of revenues. GRANTS
Overall, real spending increased by $1.22
Figure 9 shows how these revenues are billion or 26% from fiscal 1998 to fiscal Federal $401 7.0%
allocated by broad program categories. 2018. Some portions of the city budget State $881 15.3%
Public safety and court costs form the grew while others declined, reflecting not
Other $63 1.1%
largest category at $1.51 billion; health only the priorities of different mayors and
TOTAL $1,345 23.4%
and human services is next at $1.45 city councils, but also mandated pension
contributions and declines in some INTERFUND
billion; employee benefits is third at $1.38 TRANSFERS
$55 1.0%
billion; economic development, culture categories of federal funding. However,
OTHER $8 0.1%
and recreation comes next at $593 million; some clear patterns emerge over the last
governance and administration totals $502 two decades. TOTAL $5,742 100.0%
million; debt service and other consumes REVENUES BY FUND
Figure 11 compares expenditures
$338 million; and education receives General $4,556 79.4%
(in constant 2018 dollars) in 1998 to
$158 million.12
expenditures in 2018 in seven broad Grants Revenue $1,017 17.7%
Expenditure Trends program categories. In six out of seven, Community
$33 0.6%
Over Two Decades: spending increased. The largest categories Development
– public safety, health and human services, Hotel Room Tax $69 1.2%
Figure 10 looks at longer-term trends,
and employee benefits – all increased Car Rental Tax $6 0.1%
comparing total City expenditures from
substantially, by 23%, 12%, and 91% County Liquid Fuels
fiscal year 1998 to 2018. Total expenditures, $9 0.2%
respectively in the last two decades. The Tax
expressed in constant 2018 dollars,
largest dollar increase was in employee Special
increased 26% over the 20-year $37 0.6%
benefits, rising by $657 million in real terms, Gasoline Tax
period, from $4.71 billion to $5.94 billion.
representing more than one-half of the total, Housing Trust $14 0.2%
Real spending declined in only six of the
real increase in spending in all categories. TOTAL $5,741 100.0%
20 years.13
Education spending increased by more than
Figure 8 shows all these revenue sources in pie chart form.
11: T
he tax amount includes local wage, earnings and net profits dedicated to the Pennsylvania Intergovernmental Cooperation Authority (PICA). The amount shown is PICA taxes
net of the cost of PICA debt service.
12: A detailed listing of how City departments and agencies were assigned to these categories is presented in the Appendix.
13: The reasons for declining expenditures were: Fiscal 2005 and 2006. Reduced spending reflected austerities due to the City’s deteriorating financial position. The fund balance
had declined from $295 million in fiscal 2000 to $14 million in fiscal 2004. Increasing pension costs were also a factor, because the pension fund incurred significant losses in
the recession of the early 2000s. Fiscal 2009 and 2010. Spending declined due to the recession, which caused significant reductions in most major tax revenues. The City cut
spending through a hiring freeze, efficiencies in criminal justice and child welfare programs, adopting self-insurance for employee health care benefits, and state-authorized
deferrals of pension contributions. Fiscal 2013. City spending declined modestly ($9.1 million) due to lower spending in economic development, housing, health, and human
Reinvestment Act (ARRA) of 2009. Fiscal 2015. Spending in fiscal 2015 was lower due to two unusual factors that had increased costs in 2014: repayment of deferred pension
payments, and retroactive wages for City firefighters that were paid in fiscal 2014 but represented prior year wages, due to a delayed contract settlement.
14: Quarterly City Managers Report, Period Ending September 30, 2019, City of Philadelphia Budget Office, November 15, 2019.
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 7
to a decline in real General Fund spending.
FIGURE 8: CITY OF PHILADELPHIA REVENUES BY TYPE Grants revenue for operations in these
MAJOR FUNDS, FY 2018 areas has kept up with inflation. Notably,
there was a significant capital grant from the
William Penn Foundation in 2016 of up to
$2.29 B Wage, Earnings and Net Profits Tax
$100 million for the Rebuilding Community
$650 M Real Estate Tax 15% Infrastructure Initiative (“Rebuild”) to
$446 M Business Income and Receipts Tax 35% transform city parks, libraries, recreation
7% centers and playgrounds. The decline in
$332 M Real Property Transfer Tax
the City’s support for the Pennsylvania
$198 M Sales Tax 7% Convention Center reflects the state’s
$276 M Other Taxes 5% assumption of additional financial
$403 M Locally-Generated Non-Tax 4% 11% responsibility for the Center following its
6% 8% expansion in 2011.
$401 M Federal Grants
State Grants Reduced spending in Planning and
$881 M
$5.74 Billion Development results primarily from cuts
$63 M Other Grants Total Revenue in the federal Community Development
$63 M Interfund Transfers and Other Block Grant (CDBG) and related programs,
but also reflects some reduced local
taxpayer support. These reductions were
FIGURE 9: CITY OF PHILADELPHIA EXPENDITURES BY
partially offset by new local funding
PROGRAM CATEGORY MAJOR FUNDS, FY 2018
through the Housing Trust Fund, which
receives dedicated revenue from real estate
$1.51 B Public Safety and Judicial recording fees.
6%
$1.45 B Health and Human Services The reduction in the Streets Department
8% 26%
primarily results from declines in local
$1.38 B Employee Benefits support. State grant funding from the
10%
Economic Development, county liquid fuels and special gasoline tax
$593 M
Culture and Recreation grants has largely kept pace with inflation.
$502 M Governance and Administration However, Mayor Kenney has signaled his
23% 24% intention to increase spending for sanitation
$338 M Debt Service and Other
services in the coming fiscal year.
$158 M Education
The only subcategories within the economic
$5.94 Billion development category that increased during
Total Expenditures this period are arts and culture (+$4.5
million) and the Department of Commerce
(+$34.1 million) (Figure 12).
200%, primarily due to higher contributions During the last two decades, reductions
The last increase is entirely due to growth
to the school district and new community occurred for the Free Library (-$4.4
in the special-purpose Hotel Room Rental
schools and pre-K programs established by million); Parks and Recreation (-$8.3
Tax, which supports the City’s convention
the Kenney administration. The only broad million); City support for the Pennsylvania
sales and tourism marketing agencies.
category that declined was the economic Convention Center (-$29.1 million); housing
This investment of industry-specific tax
development, culture and recreation, which and planning programs that recently
dollars has supported efforts to expand
decreased by 18%. consolidated under the Department of
the hospitality industry and fill the
Planning and Development (-$90.7 million);
Appendix 1 contains a brief overview of increased number of hotel rooms, resulting
the City’s operating subsidy to SEPTA
changes in those major spending categories in significant job growth in entry-level
(-$0.7 million); and the Streets Department
and various subcategories of spending. positions in hotels, restaurants and
(-$33.1 million).
The discussion that follows below focuses food services.
on the one category that decreased: The reasons for lower spending vary by
Economic Development, Culture category. In the case of parks, recreation
and Recreation. and libraries, reductions are primarily due
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG8 | Investing the Proceeds of Growth
Changes in Local Funding programs. The largest increases were in judicial system and for social needs like
Over Two Decades: employee benefits ($584 million), and public health, human services, and education.
safety, and judicial programs ($287 million). Emphasis shifted away from Strategy 2
Because federal and state funds may rise
Economic development, culture and priorities: improving quality of life across
or fall, a different way to frame this analysis
recreation programs declined $63 million all neighborhoods, facilitating commerce,
is to look at just the priorities for local tax
(Figure 14). helping attract and retain residents and
dollars. The picture remains largely the
businesses. Where the City has invested in
same. From fiscal 1998 to 2018, local tax In sum, City budget priorities during the
economic development in the last decade,
support through the General Fund for every past two decades shifted toward employee
it has yielded significant dividends, though
major spending category increased in real benefits and to those activities termed in
primarily focused on lower wage sectors.
terms, with the exception of economic the introduction as Strategy 1 priorities:
development, culture and recreation expanding support for public safety, the
FIGURE 10: CITY OF PHILADELPHIA EXPENDITURES, ALL PROGRAM CATEGORIES
MAJOR FUNDS, FY 1998 – FY 2018 (2018 DOLLARS IN BILLIONS)
$7.00
$6.00
$5.94
$5.77
$5.65
$5.56
$5.57
$5.48
$5.52
$5.41
$5.39
$5.41
$5.00
$5.30
$5.29
$5.29
$5.28
$5.35
$5.23
$5.17
$5.04
$4.92
$4.88
$4.71
$4.00
$3.00
$2.00
$1.00
$0.00
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
FIGURE 11: CITY OF PHILADELPHIA EXPENDITURES BY PROGRAM CATEGORY
MAJOR FUNDS, FY 1998 AND FY 2018 (2018 DOLLARS IN BILLIONS)
$1,600
$1,513
$1,449
$1,400
$1,383
$1,292
$1,233
$1,200
$1,000
$800 $725 $721
$600 $593
$502
$454
$400 $338
$237
$200 $158
$49
$0
Health and Public Safety Employee Benefits Economic Governance Debt Service Education
Human Services and Judicial Development, Culture and Administration and Other
and Recreation
FY98 FY18
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 9
Given compelling local need and the decline well-maintained parks are critical to event of an economic downturn of having
in federal funds to facilitate inclusion, it ensuring that Philadelphia remains an to choose between cutting services or
is understandable why City priorities have attractive place to live, locate a business increasing taxes. Cutting services in a
moved in this direction. Public safety is an and to work. However, absent more funds recession will be devastating to those in
essential focus in a city where crime rates from higher levels of government, the need. Raising tax rates will be counter-
remain high. Quality public education is City must rely on its own municipal tax productive to the retention and attraction
key to lifting children out of poverty and base, which remains relatively small in of business and the growth of family
increasing workforce participation. comparison to other major cities and to sustaining jobs.
adjacent counties, whether measured in
Avoiding Either/Or Choices: terms of property values or income. This
Philadelphia has already found creative
ways to avoid these either/or choices.
Still, quality of life factors like clean and constrains Philadelphia’s ability to fund
During the past 20 years, the largest
pothole free streets, reliable transit, and all programs and creates the risk in the
FIGURE 12: CITY OF PHILADELPHIA EXPENDITURES FOR ECONOMIC DEVELOPMENT, CULTURE,
AND RECREATION PROGRAMS (2018 DOLLARS IN BILLIONS)
Notes:
AMOUNT PERCENT
PROGRAMS FY98 FY18 1.Includes Art Museum subsidy, Office of Arts and
CHANGE CHANGE
Culture and the Creative Economy, Atwater Kent
Arts and Culture1 $4.5 $8.9 $4.5 100% Museum subsidy, Civic Center subsidy, and Mural
Arts Program.
Free Library $54.5 $50.1 ($4.4) -8%
2. Includes Camp William Penn.
Parks and Recreation 2
$81.5 $73.2 ($8.3) -10% 3. Includes Office of Housing and Community
Development, Department of Planning and
Commerce/City Representative $51.4 $85.5 $34.1 66% Development, City Planning Commission,
Convention Center Subsidy $44.1 $15.0 ($29.1) -66% Historical Commission, and Zoning Board
of Adjustment.
Planning and Development 3
$171.1 $80.4 ($90.7) -53%
SEPTA Subsidy $82.7 $81.9 ($0.7) -1%
Streets $231.2 $198.1 ($33.1) -14%
TOTAL $720.8 $593.1 ($127.7) -18%
FIGURE 13: ECONOMIC DEVELOPMENT AND RECREATION PROGRAMS LOCAL TAX SUPPORT AND
TOTAL SPENDING, FY 1998 – FY 2018 (2018 DOLLARS IN BILLIONS)
$900
$800 $786
$721 $736 $728
$697
$700
$604 $613
$593
$600
$500
$440 $432
$415
$400 $385 $365
$336 $351
$290
$300
$200
$100
$0
FY98 FY99 FY00 FY02 FY07 FY12 FY17 FY18
Local Tax Support Total Expenditures
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG10 | Investing the Proceeds of Growth
reductions in federal funding have been in FIGURE 14: CHANGE IN GENERAL FUND TAX SUPPORT FOR
the area of community development – not PROGRAM CATEGORIES, FY 1998 – FY 2018
resources to address homelessness, but (2018 DOLLARS IN BILLIONS)
funding to rehabilitate existing homes,
reinforce stable neighborhoods and improve $700
housing quality and options for working $584
$600
families whose incomes are constrained.
The City has increased local funding for $500
housing and community development
$400
by harnessing the proceeds of growth:
committing expiring abatements from $300 $287
market rate development to affordable
housing, providing density bonuses (not $200
$108
exactions) in return for contributions to $85
$100
affordable housing and dedicating transfer $41
$8
taxes to the Housing Trust Fund. These $0
are promising ways to align, rather than
-$100 -$63
juxtapose, the momentum of the market Employee Public Safety Education Debt Service Health and Governance and Economic Development
with the need for affordable housing, so Benefits and Judicial and Other Human Services Administration and Recreation
long as they are not achieved by adding even
more costs onto development. Other cities Public services in general, such as in education, job training and services
also augment constrained capital budgets sanitation, public safety and education, for those of limited means and mobility
by making greater use of tax increment and physical projects, like playgrounds, and seeks to stabilize moderate-income
financing (TIF) districts to capture the recreation centers and street paving neighborhoods, it must simultaneously
proceeds of local growth for broader capital, produce visible results. They signal progress prompt faster employment growth.
transit and public area improvements that in toward stated goals. They build the public’s Only in this way will there be sufficient
turn prompt additional private investment. confidence in government and send positive opportunities in the city for those seeking
signals to those who seek to invest. to enter the workforce and to enjoy the
There is also a lot of evidence that quality
benefits of growth. Only the creation of
of life investments, like cleaning, greening However, 41.2% of all working residents
more family-sustaining jobs will persuade
and gardening on abandoned lots in low of Philadelphia reverse commute to jobs
those with the option to leave that there
income neighborhoods, improve community outside the city. At the same time, our
are promising reasons to stay.16 This leads
confidence and home values and have a two largest employment nodes, Center
to a consideration of Strategy 3: Expanding
positive effect on Strategy 1 objectives, City and University City hold 53% of all of
employment by lowering the cost of working
reducing crime and enhancing perceptions Philadelphia’s jobs and are easily accessible
and doing business in Philadelphia.
of safety. at the center of the regional transit
system. Therefore, as Philadelphia invests
FIGURE 15: CITY AND SCHOOL DISTRICT OF PHILADELPHIA TAX RATES
WAGE TAX BIRT
GROSS NET REAL USE AND REAL ESTATE
YEAR RESIDENT NON-RESIDENT
RECEIPTS INCOME ESTATE OCCUPANCY TRANSFER
1995 4.9600% 4.3125% 3.25 mills 6.50% 8.2640% 4.6200% 3.000%
2000 4.6135% 4.0112% 2.65 mills 6.50% 8.2640% 4.6200% 3.000%
2005 4.3310% 3.8197% 1.9 mills 6.50% 8.2640% 4.6200% 3.000%
2010 3.9296% 3.4997% 1.415 mills 6.45% 8.2640% 4.6200% 3.000%
2015 3.9200% 3.4915% 1.415 mills 6.41% 1.3400% 1.1300% 3.000%
2020 3.8712% 3.4481% 1.415 mills 6.20% 1.3998% 1.2100% 3.278%
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 11
Tax Policy, An authority from the Commonwealth to levy (Figures 1 & 15). Further increases in the
Historical Perspective: a temporary 1% wage tax. By the 1960s, as 1980s brought it to 4.96%, as Philadelphia
the city lost its industrial base and jobs and became a very highly taxed municipality,
When Philadelphia thrived with a vibrant
residents accelerated their movement to the compared to competitor cities and nearby
manufacturing economy in the early 20th
suburbs, the City doubled the wage tax to suburbs. Today, despite recent reductions,
century, anchored by railroads and rivers,
2% and added new business taxes. our wage tax still remains almost four times
the majority of jobs in the region were
as high as most surrounding municipalities
concentrated in the city. Local government In the 1970s, additional rate increases were
and our business taxes can add a 20%
supported itself primarily through the levied on a steadily declining tax base to
to 30% premium to locating in the city
real estate tax. In 1939, a decade into support generous municipal employee labor
compared to adjacent suburbs.
the Great Depression when property contracts. In that decade, the wage tax
values plummeted, Philadelphia received was raised multiple times from 2% to 4.3% In an era when post-industrial firms and
FIGURE 16: FISCAL IMPACT OF WAGE AND EARNINGS TAX RATE REDUCTIONS
(2019 DOLLARS IN MILLIONS)
$40 $38.4
$35
$30 $29.2
$28.2
$25 $24.1
$20.4 $21.1
$20 $18.0
$17.3
$14.9 $14.7 $14.9 $14.7 $14.5
$15
$9.6 $10.0
$10
$4.7 $4.9 $5.1 $5.2
$5
$1.7 $1.8
$0.6 $0.0 $0.0
$0
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Note: The most significant wage cuts over this period occurred at the beginning of FY09, when the resident wage tax declined from 4.219% to 3.98% and the non-
resident tax from 3.7242% to 3.5392%. The FY09 reductions were financed primarily by a large infusion of $86.5 million in state gaming proceeds, a funding stream
that the City has continued to receive at a much reduced rate over the past decade. (In the figure, the $14.5 million reduction in FY09 represents the amount of the
reduction financed by local taxpayers.) In all other years, the primary source of reductions came from the decision not to spend every tax dollar collected for services.
FIGURE 17: FISCAL IMPACT OF BUSINESS INCOME AND RECEIPTS TAX RATE REDUCTIONS
(2017 DOLLARS IN MILLIONS)
$18
$16.8
$16
$14.1
$14 $13.4
$9.6
$12
$10 $9.2
$8
$6
$4
$2 $1.8
$1.0 $1.0 $1.0
$2.5
$0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Gross Receipts Net Income
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG12 | Investing the Proceeds of Growth
employees are highly mobile, one way to jump-start development; by 14 years of the proceeds of growth should be invested in
to measure the City’s commitment to sustained and predicable tax reduction and tax reduction, lowering the cost of working
economic growth is the extent to which it by long-term municipal financial stability, and doing business in Philadelphia, to prompt
takes the less visible steps to improve its courtesy of the guidelines and guardrails more widespread and inclusive, private-sector
attractiveness through tax competitiveness. established by PICA. job growth?
Effective and equitable tax policy is more
than geographic or industry-specific,
Philadelphia 2020 — A Tale of To answer, it is important to underscore
One City Growing Too Slowly: that 14 years of significant, annual tax
targeted inducements, abatements or
reduction implemented by Mayors Rendell,
incentives. Rather, it should be a citywide The rebound from decades of manufacturing
Street and Nutter from 1996 to 2010 was
effort to create a competitive setting for the decline, however, is far from complete.
not primarily achieved by securing new
growth of jobs of all kinds. Philadelphia has the highest poverty rate of
sources of revenue to pay for tax reduction
the 10 largest U.S. cities. More than 200,000
Beginning in 1992, with the infusion of new (though new gaming revenues did have a
city households, that make $50,000 or less,
revenues from PICA, with their requirement significant impact in one year). Wage and
devote 30% or more of their incomes to
for a balanced budget, a five-year plan business tax reduction occurred largely
pay for housing. While job growth has been
and the provision that all municipal labor because not every tax dollar collected by
positive since the end of the recession, it
contracts take into account their impact the City was devoted to salaries and services.
remains low compared to other major cities.
on the municipal budget, the City regained Instead, some was reserved to enhance
Philadelphia has added jobs at the rate of
financial stability. Following decades of rate competitiveness.
1.5% per year since 2009; the 25 largest
increases across most of the city’s major tax
cities have achieved growth rates of 2.3% The Slowdown of Tax Relief: As shown in
sources, in 1996 the Rendell administration
per annum. Cities like Boston, New York Figure 16, the amount of collected revenue
began a multiyear plan of reductions in
and Washington D.C. have exceeded their not spent on services, but dedicated to wage
wage and business taxes, recognizing
1970 job levels. Philadelphia still has 23% tax reductions, in constant 2019 dollars,
their deleterious effect on local growth.
fewer jobs than in 1970. Recent accelerating ranged from $9 million to $38 million per
Significant reductions continued through
employment expansion is concentrated year for 15 consecutive fiscal years, from
eight years of the Street administration
disproportionately in low-wage jobs, when 1996 to 2010 for an average of $19.3 million
and the first two years of the Nutter
compared to other major cities, which are per year. Continuous wage tax reduction
Administration. They were temporarily
growing a much larger share of family came to a halt with the recession. There
suspended during the recession and
sustaining jobs. High school and college was no reduction in fiscal 2012 and 2013.
resumed at a much slower rate beginning
graduation rates outside of Greater Center Beginning in fiscal 2014, the City resumed
in FY14. (Figures 16 and 17)
City remain very low in comparison to our the reductions, but at a much lower level,
The city’s resurgence in the past decade suburbs and many with reductions since that time averaging
builds upon the national economic other cities. just $5 million per year.
expansion, upon favorable demographic
2020 and Beyond — From fiscal years 1996 to 2010, the revenue
trends and a growing national preference
Choosing the Path Forward: forgone due to tax cuts in any single year
for walkable, transit-oriented, live-work
was never more than 1% of total General
settings with diverse cultural amenities. In 2020, Philadelphia has an extraordinary
Fund obligations. The actual revenue
Local strengths include professional and opportunity created by the 39% increase in
impact of the tax rate reductions ranged
business services; education, health care the real value of tax revenues received by
from 0.23% to 0.98% of General Fund
with a growing focus on biomed innovation; the City during the last decade. As Mayor
spending, and averaged 0.47% of the budget.
a burgeoning technology sector, small Kenney begins his second term, he has the
When the rate cuts resumed in FY14, they
business formation and a vibrant restaurant ability to adjust spending priorities to focus
were significantly smaller, never exceeding
and startup scene. more on key quality of life challenges, gar-
one-tenth of one percent of General Fund
ner new support for investments in schools
The stage was set for growth in the 1990s spending.15 Had Philadelphia devoted the
and, by revisiting tax policy, he can set in
by major investments in quality of life same amount to wage tax reduction from
motion more expansive and inclusive growth
and hospitality; by sustained, well-funded 2014 to 2019 as the average committed
trends, leaving a legacy that bears fruit long
public space management programs from 1996 to 2010 ($19.3 million per year)
after his second term in office ends.
and enhancements in Center City and in rather than $5.2 million per year, the wage
University City; by citywide tax abatements To consider Strategy 3, it is necessary first tax for city residents would have been
to pose the question: How large a portion of
15: T
hese calculations include Department of Human Services’ obligations in the Grants Revenue Fund to allow for comparisons over time. Beginning in fiscal year 2012, the City
shifted the majority of that department’s spending from the General Fund to the Grants Revenue Fund.
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 13
reduced to 3.6881% rather than 3.8809%. in annual increments of 0.05% to 6.20% in net income), reducing the tax base but not
For suburban residents working in the city, 2020. The rate is scheduled to decline to the rate. This exemption has mitigated
the rate would have dropped to 3.2863% 6.0% in 2023. the impact of BIRT on thousands of small
rather than 3.4567%. If cuts in this range businesses, removing more than 50,000
While the fiscal impact of the gross receipts
were projected forward for the next four from the tax rolls, while shifting the burden
cuts ranged from $9 million to $17 million
years, by 2024 the wage tax could be to larger businesses. A 2018 CPDC analysis
from 2004 to 2008, since resuming in 2014,
reduced to 3.5148% for city residents and to of Department of Revenue records found
the reductions in the net income portion
3.1323% for suburban residents who work that office-using firms account for 21% of
have not cost more than $1.8 million
in Philadelphia.16 citywide jobs, but shoulder 57% of the BIRT
per year. If reductions beginning in 2020
burden. When added to Use and Occupan-
There were also significant reductions in were funded at the same annual dollar
cy charges, these taxes place a premium
the Business Income and Receipts Tax commitment between 2004 and 2008, ($13.1
from 20% to 30%, depending on the type of
(BIRT) beginning in 1996, with the gross million/year), the net income portion of the
firm, on the cost of locating within the city
receipts portion reduced each year from BIRT could be reduced to 5.15% by 2024.17
compared to the surrounding suburbs. As
1996 to 2008, cutting the rate from 3.25
The Shifted Tax Burden: Since the reces- a result, while the exemption was helpful
mills to 1.415 mills (a 56% reduction)
sion, the City also altered the structure of to many small neighborhood businesses,
(Figure 17). The rate reductions ceased
the BIRT, changing how revenues within it shifted the burden onto precisely those
during the recession and in 2011, the City
and outside the city are apportioned for tax firms with the greatest ability to leave
adopted a new policy approach, maintaining
purposes to favor all businesses located the city.
the gross receipts tax at 1.415 mills,
in Philadelphia. In addition, new regula-
implementing instead modest reductions The Case For Tax Reform:
tions exempted the first $100,000 in gross
to the net income portion of the BIRT. This
receipts from the BIRT tax base (along Those who defend the diminished size
rate dropped from 6.45% in 2013 to 6.4% in
with a proportionate reduction in taxable of reductions suggest that it is all the
2014, and has been reduced subsequently
City can “afford,” given other compelling
needs and cuts that were made during the
FIGURE 18: CITY AND SCHOOL DISTRICT OF PHILADELPHIA Great Recession. They frequently cite the
TAX REVENUE DISTRIBUTION BY TAX CATEGORY, FY 1995 – FY 2019 cumulative, multiyear total of the reductions
from 1996 to the present, rather than the
actual annual amount of the commitment
100%
3% 3% 3% 4% 5% in relation to the overall size of the General
4% 4% 4% 7%
6% 7% Fund. Nor do they weigh the positive impact
10% 7%
11% 13% on business decisions by firms considering
11% 11%
80% 11% 10 to 15 year leases, if the City’s five-year
plan provides reassurance that occupancy
costs due to business taxes will go steadily
down, narrowing the gap between city and
60%
47% 48% suburban occupancy costs.
46% 45%
44% 43%
The core argument for tax reduction, on
the scale of the Rendell, Street and first
40%
few Nutter years, is that it constitutes an
investment in citywide job retention and
expansion, putting more income into the
20% hands of wage earners, while making the
36% 34%
33% 34% 33% 33% city a more competitive place for businesses
of all sizes to grow.
0% A further justification for wage and business
FY95 FY00 FY05 FY10 FY15 FY19 tax reduction, first advanced in the Rendell
Real Property Tax Personal Income Tax Business Income Tax Sales Tax Other Tax
years and reaffirmed by two independent
16: This calculation assumes that the wage tax base will increase at the rates projected in the City’s FY20-FY24 Five Year Financial Plan, and that the value of the City’s annual
investment in wage tax cuts increases by 2.5% annually through 2024.
17: This calculation assumes the BIRT net income tax base will increase at rates projected in the City’s five-year plan, and that the annual investment in BIRT reduction will
increase at 2.5% annually.
Center City District & Central Philadelphia Development Corporation CENTERCITYPHILA.ORG14 | Investing the Proceeds of Growth
tax reform commissions, one in 2003 and larger share of local tax revenue, nor were business taxes are avoidable through
another in 2009, is that the overall mix of they used to offset and reduce the burden of relocation within the region, they have
taxes that Philadelphia levies is counter- other taxes. What needs to occur is growth the most significant negative economic
productive. It is not that Philadelphia taxes in the base as more businesses choose to impact.19
too much; Philadelphia disproportionately expand, develop and lease more real estate.
Each day, as 41.2% of Philadelphia’s
taxes the wrong things. Growing demand for office and workspace
workforce reverse commutes to jobs in the
produces rising rents and more property
Considering all local taxes (including suburbs, they work alongside colleagues
used for business purposes, yielding higher
those levied by the City and on behalf of who live in the suburbs, paying no more
assessed values and a greater share of
the School District), wage and business than their locality’s 1% wage tax. Since
real estate tax revenues from commercial
taxes in fiscal year 2019 comprised half state law obligates suburban employers
properties. What little change in the
of all local tax revenue, while real estate to withhold the 3.8% wage tax from city
proportional weighting of Philadelphia’s tax
taxes (including the use and occupancy tax) residents, there is a significant incentive
portfolio that has occurred during the past
made up just 31%. The sales tax and real (a 2.8% salary increase) for reverse
quarter century has been largely due to
estate transfer tax each generate 6% of commuters to find homes closer to
the increase of sales and parking tax rates
revenue, while other levies (including taxes their jobs. The amenities and lifestyle of
and new taxes on cigarettes and sweetened
on parking, amusements, liquor, cigarettes, Philadelphia have a strong appeal, but they
beverages.
and sweetened beverages) make up the are pitted each day against pocketbook
remaining 6%. A recent analysis by the Pew Charitable issues that Philadelphia has the direct
Trusts found that, among the 30 largest US ability to address.
The basic share of City tax revenue that
cities, Philadelphia’s overall reliance on
comes from these different sources has not Philadelphia can perhaps continue to levy
the property tax in 2015 was the lowest – at
changed significantly since 1995. Excluding these taxes at rates significantly higher than
only 25% of tax revenue raised by local
the volatile real estate transfer tax, wage the region and other cities and still achieve
government. That study also concluded that
and earnings taxes have declined modestly, modest levels of growth during periods of
Philadelphia ranked second highest out of
from 47% to 43% of all tax revenue. economic expansion, as we are currently
30 major cities in the percent of total local
Business tax revenue has increased from doing, because of significant amenities
revenues derived from business taxes and
10% to 11% of the total (Figure 18). and locational advantages. However, slow
third in its dependence on the wage tax.18
growth and low wage jobs will never
Despite recommendations of the two tax In 2020, Philadelphia’s very high reliance on
generate sufficient revenues locally to
commissions that the city should increase wage and business taxes still makes us an
meet needs unless the tax base grows. Nor
its reliance on the real estate tax (taxing outlier among competitor cities.
will it create sufficient well-paying jobs
what cannot easily move, rather than
Options and Choices For for those with the education and means to
taxing highly mobile businesses and
the Next Four Years: leave. Both can achieved best by lowering
employee salaries), revenues from the
wage, business and use-and-occupancy tax
property tax have actually declined from Put simply, funding for schools, recreation,
barriers more aggressively, bringing them in
36% to 33% of total taxes. This occurred housing and social services is essential to
line with other cities and nearby suburbs.
despite the enactment of the AVI, which meet the needs of Philadelphia’s residents.
held the promise of realizing increased real However, it is not sufficient to secure a What is an appropriate wage tax rate?
estate tax revenue in growth areas (and future with more of the well-paying job One can compare Philadelphia rates to
lower taxes in areas that were struggling) opportunities. other major cities with local income taxes.
assuring that assessments would more With the notable exception of New York,
Wage and Business Tax Reform: To realize
closely reflect market values. The 2009 tax America’s largest city and one with global
more expansive and diversified growth, as is
commission specifically recommended reach, no other large U.S. city levies a local
occurring in other large cities, Philadelphia
dedicating a portion of increased revenue resident income tax at a rate that exceeds
should reaffirm its commitment to a
from rising real estate taxes to lowering 3.05%, the rate in Baltimore. (Notably,
more competitive tax structure by making
the rates for wage and business taxes. their commuter income tax is only 1.25%,
significant, predictable, ongoing reductions
However, increases in the real estate and and other Maryland counties typically
to wage and business taxes. Philadelphia’s
the use and occupancy tax rates during levy income taxes at similar rates.) Most
unique mix of taxes is an outlier compared
the past decade have not been sufficient business leaders interviewed as part of the
to other cities, and, because wage and
to cause real estate taxes to constitute a 2009 tax commission process suggested a
18: The Cost of Local Government in Philadelphia, The Pew Charitable Trusts, March 2019.
19: Other factors that may account for Philadelphia’s slow job growth rate and the disproportionately small share of family-sustaining jobs created since 2009 are outlined in
CPDC’s October 2019 report, Growing More Family-Sustaining Jobs. However, local tax policy looms large and is largely within local control.
CENTERCITYPHILA.ORG Center City District & Central Philadelphia Development CorporationInvesting the Proceeds of Growth | 15
reasonable goal for Philadelphia would be tax from 3.4481% in 2020 to 3.3023% in pay debt service and returned the remainder
to get the wage just below 3%. Other cities 2025. The stronger strategy would result to the City’s General Fund. Currently, PICA’s
with income taxes include Indianapolis in a resident rate of 3.5433% and a non- share of the wage tax revenue exceeds $550
(2.02%), Detroit (2.4%), and Columbus (2.5%). resident rate of 3.1566% by 2025. For BIRT, million annually. Because the debt service
if the entire competitiveness investment was structured in large declining tranches,
The annual commitment to wage tax
were allocated to lowering the net income unlike the level debt service of a typical
reduction can be incremental, because the
tax, under the moderate scenario the rate home mortgage, the amount currently
cumulative impact can be significant. Since
would drop from 6.20% in 2020 to 5.50% in devoted by PICA to retire the bonds has
1996, the resident wage tax has declined by
2025. Under the stronger scenario, BIRT’s declined to just $47 million per year, with
more than a percentage point (from 4.96%
net income rate would be lowered to 4.81% the balance annually transferred to the
to 3.87%), and the gross receipts portion
in 2025. City in form of a grant to supplement the
of the BIRT has declined by 56% (from
operating budget.
3.25 mills to 1.415 mills). The principle Predictability is particularly important for
of continuous, reliable, predictable and businesses and office tenants considering PICA will sunset in 2023. City and state
fiscally responsible reductions should be a long-term leases. If current wage and officials and civic leaders are beginning to
cornerstone of the city’s fiscal policy. business tax rates are committed to a discuss whether to reauthorize its oversight
Rather than lock in a schedule of rate downward trajectory in the five-year plan, powers and/or its ability to issue debt for
reductions that may be not achievable this provides confidence to businesses some new purpose; whether its oversight
in time of contraction, Philadelphia that tax rates and higher-than-suburban powers might be increased or decreased;
could adopt simple rule: expressing its occupancy costs will steadily decline. or if it simply goes out of business.20
commitment to competitiveness as a Considering how many regional and
If the Authority’s debt issuance powers
percentage of total annual expenditures. national firms currently have small
are renewed, the PICA portion of the wage
If tax revenues and budgeted spending outposts, clustered in coworking spaces on
tax could also be reauthorized. (However,
rise, so does the amount committed to tax short-term agreements, Philadelphia has a
given how little is currently devoted to
reduction. If they fall, the dollar amount of significant opportunity to lock in for a longer
debt service and how much flows into
tax reduction would be curtailed. term many expanding businesses who value
the City operating budget, only modest
our workforce, but are concerned about our
A moderate tax reform strategy, based on amounts could be borrowed, unless the
costs.
the experience of the last two decades, City restructured its sources of operating
would commit 0.5% of the budget to wage Expiration of PICA and Opportunities for income.) If the bonding capacity of PICA is
and business tax rate reductions. A strong Change. The expiration of PICA in 2023, not reauthorized, the resident portion of the
tax reform strategy would set the annual the last year of Mayor Kenney’s second wage tax will automatically drop by 1.5%
investment in tax competitiveness and term, will occur as many candidates will be (currently that would achieve a reduced
economic growth at 1.0% of budgeted positioning to run for Mayor. This creates resident rate of 2.3%). Alternatively, in 2023
spending. Based on projected spending another significant opportunity for change. the City will have to increase the wage
growth rates in the current five-year tax rate for residents by 1.5%, largely to
When PICA was created in 1991, it was given
financial plan, the moderate scenario would stay even with wage tax revenues, while
the authority to receive a portion of City tax
result in a $28 million allocation to tax cuts not having a visible impact on taxpayers.
revenues to pay debt service on bonds that
in 2021, an amount that would increase to Regardless, the decision represents a major
it issued to ease the City’s fiscal crisis. The
$30 million by 2025. The stronger scenario landmark for the City that should not be
City decided to allocate to PICA the first
would result in a $56 million investment taken lightly, if only because its implications
1.5% of the wage tax paid by City residents.
in tax reduction in 2021, increasing to $61 need to be represented now in the coming
Since FY92, PICA has used this revenue to
million by 2025. Based on the proportional five-year plan.
revenue generated by the wage tax and
the BIRT, a reasonable allocation would FIGURE 19: STRONGER TAX REDUCTION SCENARIO:
be to devote 70% of the funds allocated to PROJECTED WAGE AND BIRT RATES, 2021–2025
competitiveness to the reductions in the
wage tax and 30% to BIRT reductions.
2020 2021 2022 2023 2024 2025
The moderate strategy would reduce the
Wage Tax Resident Rate 3.8712% 3.8035% 3.7368% 3.6713% 3.6067% 3.5433%
resident wage tax from 3.8712% in 2020
Wage Tax Non-Resident Rate 3.4481% 3.3879% 3.3286% 3.2704% 3.2130% 3.1566%
to 3.7072% in 2025 and the non-resident
BIRT Net Income Rate 6.20% 5.93% 5.65% 5.37% 5.09% 4.81%
20: The Future of Fiscal Oversight in Philadelphia, The Pew Charitable Trusts, January 2020.
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