by Adam Lang
May 21, 2009

Taxes and the cost of doing business in Philadelphia are frequent topics within our city, around our city and nationally. It is nothing new for Philadelphians to be told they experience one of, if not the, highest tax burdens in the country and then don’t receive comparable services. What many residents may miss are the problems in Philadelphia that increase the cost of doing business that is not directly tied to the tax rate. I will be discussing three areas that I feel this committee should be looking into when preparing its analysis: tax burdens, regulatory processes and labor.

First, let’s talk about tax burdens. As I mentioned earlier, we all know we are taxed heavy and this is something the City was addressing before the current budget problems, so most people in City Hall already agree about the importance of this issue. What the committee is then free to do is concentrate on what competitive and fair tax rates should be as well as where to collect them. What the committee should keep in mind is the goal of government should not be to find ways to collect the most revenue as possible, but to collect what it needs to pay for the necessary services. Just because there may be a way to collect an additional $1 million in taxes, it doesn’t mean it should be done. There are real economic consequences of removing money from efficient areas of the private sector where people are employed and purchase goods and moving it into some inefficient areas of the public sector where they may not be getting the best value of the dollar back.

Another aspect of tax burdens is where the money comes from. Property taxes are a popular form of taxation because it is easy to collect and relatively stable. One of the large flaws of property taxes is that it is a tax on unrealized wealth. When someone’s house appreciates in value, they don’t have more money to spend unless they sell the house or take a loan out against it. If the goal of taxation is to tax wealth, we should be looking at keeping property taxes low and changing the direction of the Real Estate Transfer Tax. The seller should pay the tax on the difference between their purchase price and their sale price. This way a homeowner is predominantly paying tax on their realized wealth and not on unrealized wealth.

This now leads into regulatory processes. These can cost businesses money due to inconveniences as opposed to fees. One of the biggest inconveniences you will hear from business owners, especially small business and consultants, is prepayment of next year’s business tax. This is a process that requires businesses to pay taxes a year before they actually make any sales or income. This is an absurd practice that in of its self discourages many businesses from starting up and can aid in their early failure. The City should refine its tax collection process to make it easier to pay taxes. As the IRS has found, even though we all complain about paying taxes, the vast majority of us do pay them. The majority of errors they discover are from honest mistakes due to a complex tax code, not maliciousness. Even without lowering the tax rate, the City can lower the cost of paying taxes by making it easier to be done.

Two more areas of regulatory process that needs to be addressed is Zoning Code and L&I. Antiquated and inefficient rules and procedures involving these two groups can cost millions of dollars of lost productivity for businesses in Philadelphia without having to pay a dime to the City. Money can be lost on loan interest for projects that sit idle because every move on a building needs a variance. Money can be wasted by having to donate to a councilmember because somehow the legislative branch has control over some executive branch functions. To do business in the City, the owner shouldn’t have to be political or need to hire a team of lawyers to wade through piles of bureaucratic mess. Now, this does not mean regulations aren’t useful. It is much like taxation; the City needs to make it easy to follow intelligent, uniform and necessary regulations that do not require going to an elected official to get handled.

Even with a fair rate of taxation and efficient regulatory procedures, businesses still need employees and labor. One of the largest impediments to business in Philadelphia is lack of an educated work force. With near a 50% drop out rate and low competency of many that do graduate, it is not a surprise that many businesses relocate to the surrounding areas. It is cheaper to be near employees that don’t need special training than it is to be where such employees need to commute in, who we then add the burden of a commuter tax as well. Having an educated workforce is one of the top three points that needs to be addressed to better improve the business environment. The School District of Philadelphia has made some improvements, but it is a long way from levels to be considered acceptable and unfortunately children don’t have 5, 10 or 20 years to wait for things to turn around. One of the recommendations from the committee should be implementing a school choice voucher program similar to the one that was shown to be working in Washington, D.C.. The benefit is that we can immediately create a path for students to get into schools parents feel will better serve them and help bridge the gap until parents are more confident in the quality of the public school system.

In conjunction with K-12 education, adult education and training needs to be addressed. While it takes a several years for high schoolers to enter the workforce, those already out of high school are able bodied and ready. One way the City can address this is by partnering with businesses and implementing a wage tax program that can be modeled after how some municipalities implement Tax Increment Financing on property development. The way it would work for adult training is the City can issue a grant to a business to train an employee that was previously unemployed. The employer covers 25% of the costs and the City will cover the other 75%. In addition, the City marks the wage tax income from the employee to go into the training grant program. Once the grant is paid back, all future wage tax goes into the general fund like normal. It is a way the City can self fund adult retraining and getting people on the tax rolls. A possible name for this could be W-TIF for Wage Tax Increment Financing.

In conclusion, there are three points that need to be concentrated on to improve the business environment: tax burden, regulatory processes and labor. These are areas where reform, modernization and efficiency can yield positive results above and beyond any outlays necessary to fix the problems of doing business in Philadelphia.