What you need to know about the Philly business ‘double tax’ that some city leaders are trying to kill

When Philadelphians think about why their city is plagued with a persistently high poverty rate, frequent public safety crises, and often-deficient city services, the business income and receipts tax may not be top of mind for many.

But to hear some people in and around City Hall talk, reforming or eliminating Philadelphia’s unique business tax, known as BIRT, could be the key to revitalizing the city.

That hypothesis will be hotly debated this spring, thanks to a report released Tuesday by the Philadelphia Tax Reform Commission convened by City Council President Kenyatta Johnson that calls for the elimination of the tax over the next eight to 12 years.

» READ MORE: No tax on businesses? The Philadelphia Tax Reform Commission is calling for a major change

The commission — a pro-business group with appointees from Mayor Cherelle L. Parker, Council, City Controller Christy Brady, and local chambers of commerce — contends that getting rid of BIRT is necessary to provide relief for businesses big and small, fuel job growth, and unleash Philadelphia’s economic potential. Opponents of cutting the tax, especially progressives and municipal unions, have already begun countering that the city should instead focus on growing its revenue to improve services and shield local tax coffers from potential federal funding cuts under President Donald Trump.

Love it or hate it, the BIRT will be a major issue of debate as Parker and Council negotiate the next city budget, which takes effect July 1. Here’s what you need to know about Philly’s business tax.

Businesses that make $100,000 or more in a year from transactions within the city pay the tax.

In a study published last year, the Pew Charitable Trusts found that about one-quarter of city businesses meet that threshold. The study analyzed BIRT returns from 2017 to 2021 and found that an average of 35,500 firms paid the tax per year during that time.

The median tax bill for businesses subject to BIRT was $1,315 during the study period.

BIRT is projected to bring in $617 million in this year’s $6.7 billion city budget, according to the latest quarterly city manager’s report.

The business levy is the third-largest source of city tax revenue behind the wage tax, which brings in $2.6 billion, and the property tax, which is projected to produce $930 million for the city this year.

BIRT is often criticized as a “double tax” because it has two components and many businesses have to pay both.

First, companies must pay 0.1415% of the value of their gross receipts, or sales, even if they didn’t make a profit that year. Companies that do have a profit, or net income, must additionally pay 5.81% of their profits.

This makes Philadelphia highly unusual. Many cities have no business tax, and almost all of those that do have only one form of taxation.

“Philadelphia is an outlier, and everybody knows it, because there are two components,” said Jonathan Liss, a former city Department of Revenue official who now teaches at Drexel University and Villanova University.

Over the last decade, city politicians have worked to steadily lower the net income portion of the BIRT — from 6.5% in 2007 to 5.81% now — while leaving the gross receipts tax rate unchanged since 2008.

The commission appears to have similar priorities because it recommended that lawmakers first eliminate the net profits levy, then work to cut the wage tax, and finally, circle back to reduce and eliminate the gross receipts portion of the BIRT.

The origins of the current version of Philadelphia’s business tax lie in the early 1980s, when Mayor William J. Green III was attempting to get Philly’s fiscal house in order following a spending spree led by his predecessor, Mayor Frank L. Rizzo.

Green at first raised several taxes to balance the books but received pushback from the business community. So he asked his critics to come up with a better plan and formed the Business Tax Committee, which included the chamber of commerce and other business groups.

Up until that point, Philly could only tax corporations’ gross receipts due to a state law prohibiting the city from duplicating state taxes, including a state business tax on net income. But city leaders convinced Harrisburg to give them the green light to tax both gross receipts and net income, leading to the creation of the BIRT tax in 1985, early in Mayor W. Wilson Goode Sr.’s administration.

The Business Tax Committee viewed the net income tax as a better policy than the gross receipts levy because it only applied to businesses that turned a profit and could afford to pay it. The committee expected that City Hall would phase out the gross receipts portion, according to a 2003 report by an earlier iteration of the Tax Reform Commission. But that never happened, and Philly has had a double-tax on businesses ever since.

To follow through on the Tax Reform Commission’s recommendations, Council members and Parker would have to agree to a series of steep annual cuts to the BIRT net income rate. The commission proposed three possible schedules for rate cuts over the next five years.

The least aggressive option, which would take longer to eliminate the tax and would only lower the rate from 5.81% to 4.96% in five years, would cut BIRT revenue by $417 million during that time.

The most aggressive would completely eliminate the net profits portion in five years, and would cost the city nearly $1.4 billion in lost revenue during the period when the levy is winding down plus at least $464 million per year after that.