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Dr. Paul Levy: Making the Case, Building the Coalition for Municipal Tax Reform


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Presentation from Drexel School of Economics / Econsult Solutions, Inc. Joint Conference on Urban Economic Policy
April 27, 2016

Published in: Economy & Finance
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Dr. Paul Levy: Making the Case, Building the Coalition for Municipal Tax Reform

  1. 1. 1 Why tax reform is key to job growth Philadelphia was a major manufacturing center 1906: 16,000 manufacturing plants Spread across all older neighborhoods; Unlike Pittsburgh & Detroit not a one-industry town Highly diversified A place that used to make Stetson Hats
  2. 2. 2 Baldwin Locomotives Atwater Kent radios Military equipment at the Frankford Arsenal Huge garment industry
  3. 3. 3 Gave life to our neighborhoods & waterfront Manufacturing tied to fix assets, rail & river Changes in transportation technology, growth of sunbelt & global economy Accelerated immediately after World War II Factories were moving out the city
  4. 4. 4 Long-term loss of manufacturing jobs 23,000 3.5% 2015 1880 - 2015 Red blighted areas = old manufacturing areas Residential abandonment: inner city 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008 Declining share of regional residents Suburbs City 2.1 million
  5. 5. 5 Municipal tax policy responds to decline • Philadelphia introduced 1.5% “temporary” wage tax: 1939 when industry was tied to factories, railroads & ports & Philadelphia was the only employment center in region • As jobs & population declined in 1960s & 1970s, wage tax is increased, reaching 4.96% by 1990- levied on all employees in Philadelphia, living in city or suburb. • In the 1980s Philadelphia introduced “business privilege tax” levied on both gross & net business revenues • Philadelphia carefully avoided raising resident property tax, until it was ordered by the courts to carry-out a comprehensive re-evaluation in last 5 years 1950s & 1960s extensive renewal 1953: the demolition of “Chinese wall” Penn Center
  6. 6. 6 Building a post-industrial city Similar process of renewal in University City View across Walnut St bridge, 1920s Transformed into dynamic, growing district A center for research & health care
  7. 7. 7 Global center for education Center City + University City = 8% of city’s land area 53% of city’s jobs;37% all in-movers to city 2010-2014 40% of downtown jobs are in the office sector Footloose tenants, highly cost sensitive 80% of University City’s jobs are in eds & meds
  8. 8. 8 More tied to fixed assets; labs, beds, technology, classrooms Usually exempt from real estate & business taxes Major wage tax payers But the renewal of Center City & University City Is simply not big enough to offset industrial decline Outside of major employment nodes, jobs quickly thin out
  9. 9. 9 2011 Regional Job Share 188,000 Philadelphia residents (40% of workforce) Reverse commute to suburbs each day Growing ½% annually since 2002 By contrast only 15.3% of NYC residents commute to suburbs By contrast only 15.3% of NYC residents commute to suburbs 27% Educational requirements in the suburbs are no different from those in the city Suburbs have simply grown more jobs than Philadelphia Our peer cities: Boston, New York & Washington DC All lost 85%-90% of manufacturing jobs they held in 1970
  10. 10. 10 But since 1970 they recaptured lost jobs while Philadelphia is down 28%; similar to Detroit One of the highest poverty rates among major cities City % Below Poverty Line Philadelphia, PA 26.0% Baltimore, MD 23.6% Boston, MA 22.6% New York City, NY 20.9% Washington, DC 17.7% Uneven job growth: Eds & Meds + 50.5% citywide since 1990 Leisure & hospitality + 51.2%. But office industries down 23% in the last 25 years 2003 & 2009 tax commissions both concluded: Local tax policy: major cause of decline If you over-tax what can move (wages & business revenues), it will!
  11. 11. 11 Wage tax dependency: Detroit 20% PHL from RE TAX 41% NYC 36% Washington DC Philadelphia excessively dependent on wage & business taxes “Only by making a wholesale shift & lowering the burden on people & businesses & placing a greater emphasis on land & improvements can we guarantee a future of growth.” 20% 26% Both 2003 & 2009 Tax Commissions: shift burden from taxing what moves (wages & business revenues) to taxing what is fixed & stable: land & improvements 2016 2026 Both RE tax Sustained period of job growth, added jobs for 9 of the last 10 years
  12. 12. 12 But…we’re in the midst of an urban led national economic recovery Cities are growing fast everywhere 25 largest cities all grew faster than Philadelphia 2010-2014 Nation grew at 2.1% 25 largest cities 2.7% Philadelphia 0.9% Philadelphia has rebounded from Recession But not yet regained private sector job levels of 1990 Philadelphia has strong entrepreneurial culture, even among those with limited education
  13. 13. 13 But in the absence of a growing economy, entrepreneurs can’t secure enough work to add employees % of sole proprietors taken on employees to work for them Occupied office supply is identical to 1990; New supply offset by conversions to housing As a result, rents are far below comparable cities Philadelphia’s diminished commercial tax base = insufficient to support schools Source: Pew Charitable TrustsSource: Pew Charitable Trusts
  14. 14. 14 We have a highly successful, walkable downtown With a diversity of uses Thriving with day & nighttime activities Mixed-use walkable places prevailed in recession Fastest growing residential section of Philadelphia +17% overall since 2000 = 185,000 25% of those who moved to PHL between 2000-2014 moved to downtown We have attracted the highest concentration of educated workers in city & region 57.7% of all downtown residents have at least BA 30% have advanced degrees
  15. 15. 15 So there ought to be a rent-premium for locating in the employee & amenity rich downtown National average = 25%; PHL rent premium= 4% 112% 75% Low rent = low assessed value = insufficient funds for schools Philadelphia commenced tax reduction in 1996 Suspended in 2008 Goal: Restart tax reduction to induce job growth
  16. 16. 16 Regional tax competitiveness • Philadelphia wage tax is almost 4 x regional median. • BIRT has no counterpart & adds 20% to 30% premium • Property tax is 66% of suburban Pennsylvania median The theory of reform • Taxing salaries & revenues discourages small business formation, weakens demand for commercial office space, depresses rents & reduces share of real estate taxes local government derives from business properties across city. • As the burden of wage & BIRT (the cost of working & doing business in the city) goes down, the demand for real estate here will go up, increasing the RE tax base & the share of real estate taxes that can be derived from business properties. • It is the RE tax, not the wage tax, which supports schools Job growth means rising commercial office rents: Beneficial to owners & the City Increasing average Class A rents just $1 per square foot — from $27 to $28 per square foot for occupied space — would equal $8.2 million more each year in real estate taxes from the CBD. An increase in rent to Cira levels— $37 to $38 per square foot —would equal $87 million more each year in real estate taxes from the CBD. At Boston levels, $56/sf - over $100 million more to City Job growthJob growth Every 500,000 square feet of occupied office space: Provides 3,333 office jobs, 5 building engineering, 18 cleaning and 12 security positions. • Every time tenants turn over, construction trades renovate space. Supports 11,000 hotel rooms filled with business travelers. Generates $2.8 million in retail demand. Adds 2,333 riders to SEPTA.
  17. 17. 17 How to achieve tax reform? • Cut 5% from City’s budget, so municipal government needs less revenue. In a city with huge social needs & county functions, like courts & prisons to support, that seems unlikely. • Reduce City’s need for taxes by selling a large public asset to pay down pension liabilities which are eating our municipal budget. • Raise RE millage rate for all real estate taxes from 1.39 to 1.60 & use new revenues both to achieve reduction in wage tax & BIRT, while generating substantially more funds for School District. History of AVI. Hardest path: modification of Uniformity Seek approval from the Commonwealth for only Philadelphia to assess business properties at 15% more (1.39 residential; 1.61 commercial). 15% differential (not actual rates) locked in by state law. Revenues generated from differential are dedicated by state law to reducing wage & business taxes. Dedicated modification not open-ended modification Goal: Reduce wage tax below 3% over next decade & cut net income portion of BIRT in half over same period Up-front increase in commercial RE taxes to insure no gap opens in City’s budget. Modification of Uniformity Analysis by major accounting firms show a positive impact on tenants as taxes on their revenues & employee wages go down more than RE tax pass- through increases; creates incentives for growth. Similar analysis for small business owners
  18. 18. 18 Council reduced number of U&O payers in 2014 to 12,841 tax payers by exempting the first $177,000 in income. Council exempted the first $50,000 earned by a business from Business Income & Receipts tax (BIRT). Exemption increased to $75,000 for tax year 2015 & $100,000 for Tax Year 2016 & thereafter. This reduces the number of BIRT payers to 45,000 By contrast, there are currently 90,000 properties that pay commercial real estate taxes Why this works The impact: Econsult study: 80,000 jobs added over next decade 25,000 jobs downtown means building, leasing & operating 4 Mellon Bank Centers or 5 Cira Centres 70 •It will stimulate substantially more job creation & economic activity within Philadelphia than the City’s most recent Five-Year Plan: 80,000 jobs over the next 10 years. •It will produce more tax revenues than the City’s most recent Five-Year Plan (it is “revenue positive”), because it pays for wage and business tax reductions with an increase in the commercial real estate tax rate. •It generates $362 million more for the School District over the next ten years than the City’s Five-Year plan. It will also, will generate additional tax revenues for the School District from the use and occupancy tax, liquor tax, and school income tax. A broad coalition of supporters
  19. 19. 19 Importance of business leadership Business community leads with investment in growth All citywide residents & small businesses see their wage tax & BIRT go down (required by state law) Whole city benefits from job growth: Econsult analysis suggests an addition 80,000 new jobs over next decade HB 1871 has been introduced with bi-partisan support & backing from Mayor Kenney