City leaders are engaged in the most significant debate over Philadelphia’s tax structure in years.
Mayor Jim Kenney has proposed accelerating cuts to the city’s unusually high payroll tax, while city council members focus on property tax relief. Progressives are pushing for a new city “wealth tax,” while the Chamber of Commerce is pushing for business and payroll tax cuts. And some observers question fundamental assumptions about how the city collects revenue.
Council members and administration negotiate the city’s budget, which begins July 1. Since many of those involved are pulling in opposite directions, next year’s tax structure may look a lot like this year’s. But that won’t be the end of the debate, with potential candidates for next year’s mayoral and council races setting out their visions for how the city should be funded.
There are several reasons why taxes have taken center stage this year after recent budget cycles, which have focused on how the city would survive the economic downturn at the start of the COVID-19 pandemic and how it would address the crisis of gun violence.
The first citywide property reassessment in three years has prompted lawmakers to prioritize how to mitigate the impact of rising property taxes. The city’s progressive movement aims to entrench a left flank of a debate that has long been dominated by centrist solutions. And the coronavirus pandemic has changed the economy, with rising work-from-home threatening the already fragile payroll tax, and an infusion of federal handouts giving the city wiggle room in its budget.
READ MORE: ‘That’s wrong’: Philly property assessments double in some working-class neighborhoods
“It’s terrible that the pandemic is the thing that’s driving us to focus on this, but it’s a positive side effect,” said Paul Levy, who leads the Center City District, which promotes the success of the center- city and was at the heart of the latest big push to reshape Philly’s tax structure. “That’s what forced this debate, and that’s good.”
Next year’s mayoral race, for which five Council members are planning to run, will see the tax divide reach new levels.
Council members Derek Green and Allan Domb, for example, believe cutting payroll taxes will promote job growth and would likely make pro-business policy solutions a central campaign theme if they arise. . Council member Helen Gym, meanwhile, is part of the gradual push to shift the city’s focus away from tax cuts and towards investing in social services. And technocratic adviser Maria Quiñones-Sánchez wants to continue her work to reform corporate income and revenue taxes.
But first, Council and administration will compromise on tax policy for the city’s next budget in the closed-door meetings that are now proliferating. They must reach an agreement by the end of June.
In 1939, Philadelphia became the first city in the nation to pass a payroll tax. It was meant to be a temporary measure to help the city through the Great Depression, but it stayed on the books and became the root of a tax system unique among major American cities.
Philadelphia’s property tax rate of 1.3998 percent—55 percent of which goes to the school district and 45 percent to the city—is lower than most local governments. Its payroll tax rate – 3.8398% for city residents and 3.4481% for people who work in the city but live outside it – is the highest among major cities.
In this year’s $5.6 billion budget, the city projects it will collect $719 million in property tax revenue and $1.5 billion in payroll taxes.
This year, Kenney is proposing to cut the payroll tax rate for city residents to 3.7% over two years, while tackling rising property assessments by increasing the homestead exemption from $45,000 to $60,000 and adding funding for programs that help low-income Philadelphians hang on. Their houses.
READ MORE: Here’s the contents of Mayor Jim Kenney’s $5.6 billion budget proposal
The council will likely go further with property tax relief, potentially increasing the homestead exemption to the legal maximum of $90,000, and some members are less keen on levying a significant chunk of property tax. wages.
No major proposals on corporate income and revenue tax have been made public, but business groups are pushing the Council to lower or reform it.
Critics of the payroll tax say it pushes jobs to the suburbs and subjects the city budget to unnecessary volatility because it is more sensitive to economic ups and downs than property taxes. A succession of Philadelphia mayors, beginning with Ed Rendell, have followed a policy of small annual payroll tax cuts, but it remains the highest in the nation.
The payroll tax and the city’s propensity to adopt new levies—in the past 10 years alone, Philadelphia has created new taxes on cigarettes, sugary drinks, and construction—have transformed the idea that Philly is a high-tax city in conventional wisdom.
But progressives are now challenging that assumption. Marc Stier, director of the left-leaning Pennsylvania Budget and Policy Center, in April published an analysis in the Philadelphia Citizen showing that the city’s overall tax burden is in the middle of the pack compared to comparable cities.
At $4,302 per person, Philadelphia’s annual tax burden ranks 13th among the 30 largest U.S. cities, Stier found. Past analyzes showing Philly with extraordinarily high tax collections, he wrote, did not take into account Philadelphia’s status as a city and county.
Levy replied with an essay of his ownarguing that it was misleading to focus on the per capita dollar value of the city’s tax burden instead of tax rates that push businesses out of town.
In many ways, the authors were talking about each other: it’s true that Philadelphia has an unusually high payroll tax rate, and it’s also true that Philadelphia as a whole is not one of the the most taxed.
A new group called Tax the Rich PHL wants city leaders to focus on better finance services instead of making the city more business-friendly through tax cuts. Led by Arielle Klagsbrun, who managed council member Kendra Brooks’ historic 2019 win for the Working Families Party, the group backs Brooks’ wealth tax proposal, which would capture up to 0.4% of direct holdings of Philadelphians in stocks and bonds.
Although the tax seems unlikely to pass this year, progressives hope it will help reignite the debate with a vision of what progressive taxation might look like in Philadelphia.
Strangely absent from the discussion is the tax reform task force, which was convened last year by Kenney and the board. Jim Engler, Kenney’s chief of staff, said the group met several times but failed to reach a consensus.
“It was really good to have these discussions and to have a common understanding of the challenges we face, but when you have these discussions, I don’t know if there really is a perfect answer,” Engler said.
Debates over Philadelphia’s tax structure tend to blur ideologies.
Levy and the business community, for example, have long pushed for a substantial reduction in the city’s payroll tax rate, despite the tax being one of the main reasons Philadelphia has a regressive tax structure. He even helped lead a major campaign to replace payroll tax revenue with increased commercial property taxes.
Because of the “uniformity clause” of the Pennsylvania Constitution, which requires that all taxpayers be treated equally, Philadelphia cannot adopt a progressive structure for the payroll tax by levying a higher percentage on high earners, as the federal government does with income tax.
This means that low-income workers pay the same percentage of their wages as high-income people, which puts a greater strain on the livelihoods of the working poor, as the wealthy tend to derive more of their income from investments that are not taxed at the local level. .
Many progressives, meanwhile, are resisting calls to cut payroll taxes, arguing that the city should focus on ways to increase funding for city services instead of cutting taxes. But they are loath to endorse the property tax hike — which would make the city’s tax structure more progressive, as people with more valuable real estate would pay more — due to fears such a hike could accelerate. gentrification.
After seeing assessments skyrocket in his West Philadelphia district, for example, council member Jamie Gauthier floated the idea this year of responding by lowering the property tax rate, which could help some owners in his district, but would disproportionately benefit wealthy Philadelphians and developers in general.
Gauthier says she is not actively pushing to lower the rate now, but supports a property tax relief package introduced by council member Kenyatta Johnson.
The city, she said, should focus on raising revenue to fund city services instead of cutting payroll and business taxes.
“We are trying to come out of a pandemic. City services have plummeted over the past two years and we need to get back to delivering high quality services in a fair way,” she said. “We need to support our communities, and I think our tax policy needs to be looked at with that in mind.”