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Testimony on Philadelphia Tax Policy

Testimony on Tax Policy
David Thornburgh, President and CEO
Committee of Seventy
Philadelphia City Council
Committee on Legislative Oversight
February 21, 2018

Good morning, Mr. Chairman and members of the Committee. I’m David Thornburgh, President and CEO of the Committee of Seventy, Philadelphia’s nonpartisan advocate for better government, and it’s my pleasure to join you here today.

I’ve held civic leadership roles in the Philadelphia region for over 30 years. For twelve years I served as Executive Director of the Pennsylvania Economy League and another seven as Executive Director the Fels Institute of Government at the University of Pennsylvania. Earlier in my career I also spent 7 years advising entrepreneurs and startup companies at Wharton’s Entrepreneurial Center.

During my career I have worked on initiatives to strengthen our schools, build the quality of our workforce, grow our arts and culture sector, and accelerate our entrepreneurial economy. In all of these efforts, there is one constant: Philadelphia’s high and unusual wage tax has been an enormous barrier to the economic growth of the city – growth that would provide jobs for our college graduates, growth that would lessen the push on young families to leave the city, growth that would create new companies and new markets to employ our residents and attract the best and brightest the world has to offer. Unless and until we remove that barrier, and the City’s wage tax is dramatically and fairly reduced, Philadelphia will continue to lag our competitors and the nation as a whole. Without a fundamental resetting of our competitive landscape, our prospects to escape the dubious distinction as the nation’s poorest big city are dim. (I should add that Detroit, one other big city also burdened by the wage tax, would still be the nation’s poorest big city but for the fact that because of population and job loss it’s no longer a big city—not the future we have in mind for Philadelphia.)

There’s a perception out there that Philadelphia has become a boomtown, that our days of economic stagnation are over.  We are clearly in the midst of a revival, but that revival is at best incomplete.  Despite the demography-driven flowering of Center City in the last few years, Philadelphia has lost a quarter of the jobs it held in 1970, while our Amtrak Corridor seatmates in Boston, New York City, and Washington have gained between 12 and 24 percent since then. Philadelphia is the slowest growing of the 26 largest cities in the country, and our region ranks 10th out of the 10 largest metros. We have not yet reached the employment level of 1990, while our competitor cities have far surpassed that benchmark. And, as the Center City District has pointed out, there are so few jobs in Philadelphia itself that 40 percent of our residents outside of Center City leave the city every day to go to work.

A 2015 Brookings Institution report demonstrates the consequences of slow economic growth. For cities like San Francisco, the numbers told a story of great wealth but great inequality, with almost 40 percent of households making more than $100,000 and a staggering 16.4 percent making more than $200,000.  In stark contrast, in Philadelphia just 12 percent of households made more than $100,000 and only 2.4 percent of households made more than $200,000.  Even the city of Camden had a higher percentage of very high-income households than Philadelphia.

Much has rightly been made of Philadelphia’s high poverty rate, but these numbers suggest an equally troubling conclusion — that in addition to being poor, Philadelphia is also not wealthy. Why is this important? It means that even if city leaders wanted to redistribute wealth to poorer residents, there’s not much to redistribute. It means that if we want to spend more on schools, we don’t have the local wealth to support it.  In 2015, Philadelphia had only 15 percent of the real estate tax base per pupil as Lower Merion — so it hurts much more to generate the same tax revenue. Unless and until Philadelphia generates sustained economic opportunity and jobs and the wealth that follows, our prospects for becoming both less poor and more wealthy seem slim.

I’d also like to add one more note of urgency.  As much as we’re enthralled by the presence of the Millennial generation, and their love for the city, it’s important to realize that with some degree of certainty we can forecast that ten years from now 25 year olds will be 35, and will then face a new set of life and career choices.  And, I’d note that we have already reached the peak year of the Millennial generation cohort.  What will keep them in Philadelphia?  According to a recent Pew survey, job opportunities rank first on their list.

In past testimony around this issue, dating back almost twenty years, I would at this point dive into the numbers, into the analysis about the harm that our tax burdens and tax structure have brought to this city. I’m not going to go there today. That ground has been plowed...and plowed, and plowed again. Going back in time, between the fine work of the City Controller's Office, the Tax Reform Commission, City Council staff, the Mayor's office, independent researchers from the Federal Reserve, the Wharton School, the Center City District, Temple University, and the Economy League, I think the harmful effects of the wage tax have been demonstrated way beyond any reasonable doubt.

What could put Philadelphia on a new path of growth?   A significant cut in the wage tax.  Since its inception as a temporary tax in 1939 to tide the city over the Great Depression, the wage tax has been identified in scores of commissions and studies as the root of the city’s job growth challenge.

Both the 2003 and the 2009 Tax Commissions concluded that to grow jobs, Philadelphia must reduce wage and business taxes and shift to a greater reliance on the real estate tax.  Let me say a word about the 2003 Commission. In November 2002, with their approval of the creation of a Tax Reform Commission, almost 80% of Philadelphia's voters delivered a message, loud and clear, that the time had come for major tax reform in the city of Philadelphia. The Tax Commission did a remarkable job. The Commissioners developed a comprehensive and fiscally responsible set of recommendations for reforming the City's tax system to better serve the City's residents and businesses.

So in my mind, the debate about tax policy--whether the wage tax, in particular,  makes a difference to job growth, and whether a substantial cut in the wage tax would create jobs--is long over.  I was convinced of that twenty years ago by the fine work that the folks at Econsult did for us when I ran the Economy League, drawing on Dr. Robert Inman’s groundbreaking work. The time for action is here.

What has always stymied efforts to lower the wage tax to grow jobs is a legitimate challenge about how to bridge the revenue gap to maintain vital city services as employers and new companies learn about and take advantage of a more competitive tax picture. The Job Growth Coalition proposal that will allow the Mayor and Council to trade wage tax cuts for increased commercial property taxes solves that problem simply, and elegantly. After being introduced by Rep. Taylor and Keller, it’s already been passed by both the state House and Senate with respective votes of 170-25 and 47-2.Such broad bipartisan support from the Pennsylvania legislature to allow a Constitutional amendment that would solely benefit Philadelphia is extremely rare and indicates the far reaching benefits the proposal would bring to both the city and state.

This potentially game-changing bill will soon be reintroduced to the Legislature and, when it passes, will then appear on the ballot in November of this year.  It’s a creative and thoughtful approach that avoids the tired guns-or-butter debates (which firehouse should we close if we reduce wage taxes?) that have stymied previous discussions.  With business and commercial property owners paying more in real estate taxes the city will become more competitive by reducing the wage tax rate below 3% and cutting the net income portion of the Business Income and Receipts Tax (BIRT) in half over a ten year period.  Analysis suggests that an additional 50,000 to 100,000 new jobs would be created as a result. The tax cuts would be paid for by a 15% increase in the commercial property tax rate.  Residential property taxes would not be affected.  Most important, no gap opens in the City’s budget.  While I realize this measure was supported in 2012 by City Council’s Jobs Commission, I would urge your continued support.  In the twenty or so years in which I have been involved in this issue, this is the best shot we have at finally, finally, changing our job-killing tax structure to bring jobs to the city and ensure a future for all our residents.

I am a veteran of the Briefcase Brigade march organized by the Chamber of Commerce in 2002 to demand substantial reductions in the wage tax. At the time, when that effort achieved partial victory--with the support, I might add of Councilman Jim Kenney--we told ourselves that “this was only the beginning” of long-term reductions to the job-killing wage tax. But it wasn’t to be. Hammered soon after by the headwinds of the Great Recession and then by the budget realities of a wealth-strapped city, the city has yet to return to investing in substantial wage-tax reductions.

It’s time to get back on track, and the Growth Coalition proposal gives us the chance to do so.