City leaders clash on tax controversy

While many feel that Philadelphia's business-privilege tax should be reduced, city politicians are at odds over how exactly to do it.

Philadelphia is the only major U.S. city with a business privilege tax. The tax is widely criticized because it is calculated solely from business' sales, disregarding whether they post a profit or a loss.

Mayor John Street said that he will veto City Councilman Michael Nutter's bill for reducing taxes on businesses, which City Council passed Dec. 22. Despite the veto, Street did not rule out altering the tax rate, which is currently 6.5 percent.

The veto "does not mean I will oppose similar legislation presented during the budget process," Street said in a press release. "I have long supported tax reduction."

Councilwoman Jannie Blackwell introduced a separate tax-reducing bill Dec. 22. Unlike Nutter's bill, her version stipulates that the proposed rates for future fiscal years, including 2007, will only take effect if City Council approves them using "separate ordinances."

Blackwell, who represents most of West Philadelphia, including Penn's campus, said cuts will benefit her district.

"The West Philadelphia community will be very pleased," she said. "I believe that this tax will help all of our concerns."

Blackwell said her plan offers more tax relief than Nutter's bill.

"We do about 10 times more in terms of taxes than his does. My tax [cut] is $300 million dollars, where his tax [cut] is $38 million dollars," she said.

Nutter, however, believes his plan will be more beneficial because of the way it is structured.

"The bill I introduced has basically a five-year guarantee for cuts and Councilwoman Blackwell's plan has a schedule for five years, but you would have to implement them on a year-by-year basis," Nutter said.

Wharton Finance professor Robert Inman, an expert on urban fiscal policy, said the business privilege tax in general stifles business growth.

The tax "encourages organizations to collect themselves all internally -- have one big firm and never make a transaction out of the firm," he said. "It creates really bad incentives, particularly for cities or small economies where people are free to move."

Because high business tax rates especially affect smaller firms, Inman said the many small businesses in West Philadelphia around the hospitals and Science Center -- what he considers the main draws to the area -- would suffer under a high-tax environment.

Inman said the tax is an example of a so-called "turnover tax" because every time a transaction is made its firm must pay.

Inman said that higher rates reduce business activity because firms leave the city.

"All I have to do is take my hundred guys, put my machines in the back of a truck and drive across city lines," he said. "It's pretty much a no-brainer."

Inman favors Nutter's legislation because he said it locks in rates, adding that firms need the assurance that tax rates will not be raised in later years.

"The Blackwell bill says we'll lower it for one year, but if for any reason things don't go the way we want it to go ... we're going to bump it up the next year," he said. "The Nutter bill says: It's a contract."

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