Compromise city budget brings modest tax cuts and money for housing | Editorial

Under different circumstances, Philadelphia’s new $6.8 billion budget could have been bolder. But fiscal prudence prevailed amid the looming threat of federal funding cuts from the Trump administration.

As is, the budget offers sensible compromises that will help move the city forward.

Business groups got a long-term commitment on reductions to the city’s wage, profit, and gross receipts levies. Mayor Cherelle L. Parker secured $800 million for her signature housing initiative and preapproval for the sale of a significant tranche of city-owned land. And Council won welcome oversight over some of the mayor’s housing spending.

But not every interest emerged unscathed from the negotiation process, and while the mayor and Council can honestly say they did not set out to tax small businesses more, that’s what will soon happen.

Since 2015, the city has effectively exempted companies that make less than $100,000 in revenue from its business taxes. For small retailers and independent operators, this measure was a huge boon, providing nearly $6,000 a year in savings. Many small-business owners found their tax liability removed entirely.

The plan ensured that most of the roughly $600 million generated yearly from the business tax still found its way into city coffers by shifting the burden toward bigger corporations. However, that’s exactly why the deduction was eliminated.

Massachusetts-based Zoll Medical Corp. sued the city, alleging that the program is a violation of the Pennsylvania Constitution’s uniformity clause. The clause bans progressive taxation, removing the ability for tax-raising authorities to charge different rates to different taxpayers based on income. The city’s Law Department determined that a defense of the exemption was likely to fail.

» READ MORE: Why a popular tax break that helped Philadelphia’s small businesses may be going away

The wage and business tax relief included in the budget could have been more aggressive to soften the blow of the lost exemption and help promote growth, but Parker’s proposed long-term strategy — with a modest decrease upfront and larger cuts to come — makes sense given the uncertainty in Washington.

Still, Philadelphia’s business tax structure is rare among large cities. Places like Boston and Chicago do not impose a local tax on corporate profits or receipts at all, while others, like Atlanta, charge relatively nominal fees.

While potential federal cuts are a good reason to exercise fiscal restraint, they are also a reminder that Philadelphia needs a stronger local economy, including a stronger tax base, to become more resilient against the changing tides along the Potomac and Susquehanna Rivers.

After all, while Philadelphia brings in $633 million in business taxes, it also has significantly fewer businesses per capita than peer cities with lower or no local corporate taxes. According to research from groups like the Pew Charitable Trusts and the Center City District, Philadelphia has low business density, particularly for small and midsize businesses.

By simply moving across City Avenue, any local business with a regional customer base can save thousands of dollars per year without sacrificing much of its local clientele. Residents who spend their time working and shopping outside the city often end up moving. In the end, these choices cost the city much more than a marginal decrease in tax rates.

Multiple studies have shown how the city’s onerous tax burden has been a job killer.

After leaving tax rates unchanged in her first year in office, Parker should be commended for working with Council to deliver lower business taxes and more affordable housing for Philadelphia.

Editor’s Note: An earlier version of this editorial misidentified the source of a research study about the composition of Philadelphia businesses. The report was produced by the Pew Charitable Trusts.