Last month Philadelphia provided a reminder of why it is trying to make itself more appealing to businesses. The Commerce Department announced a rent reimbursement worth up to $30,000 for companies headquartered outside of Philadelphia that agree to send at least 20 employees to work in city office space. The move coincided with coworking chain WeWork announcing a plan earmarking $1 million to cover half of clients’ wage taxes.
But the same news also provokes a question: Why in 2017 does Philadelphia, the fifth-largest city in the United States and one showing up on top 10 lists for its amenities, have to offer free rent to entice suburban companies to move employees here?
For Robert Inman, a Wharton professor of business economics and public policy and one of the first people to convince Philadelphia to enact tax reform in the 1990s, these moves are more examples that the city’s wage tax has been and can still be a drain on city business.
“That to me is sort of the best indication that the little theory that lies behind this story is more than a theory.” said Robert Inman of the tax credits for suburban companies. “It’s a reality.”
Despite recent efforts to lighten its tax load, Philadelphia’s business-related tax burdens have almost no peer in similar-sized cities. The big three taxes are the aforementioned wage tax and the Business Income and Receipts Tax, which is split up into a tax on revenue and profit. Other big cities either have less or none at all.
Cities that also rank in the top 10 in population, like Dallas, Houston, Phoenix, Chicago, San Diego and San Jose, have no business income tax, gross receipts tax or wage taxes. Los Angeles has a gross receipts tax, but it is about half as much as Philadelphia’s, which is 1.415 percent for every $1,000 in revenue (Philly’s net income tax for businesses is 6.39 percent). New York and Washington, D.C. have similar taxes but have less trouble keeping businesses, given their status as financial and government centers.
The wage tax, the most controversial of Philly’s business taxes, went into effect in 1939. At the time, Inman said, Philadelphia was suffering through the Depression years and needed money. The tax was first charged at about 1 percent of people’s salaries and gradually grew to be about 5 percent in the 1980s. It’s now at just under 4 percent.
“The big difference was in Philly’s economy back then everything was locked in the ground,” he said. “They were making train cars. They were making clothing. It was manufacturing. It’s hard for a firm to move manufacturing.”
So the wage tax was seen to be nearly as reliable as a property tax. Over the years, the economy became more service-oriented, with healthcare and finance and banking as pillars. Philadelphia now had an expensive tax, and moving a service-oriented business was a lot easier than moving the manufacturers of the ’40s and ’50s. In a 1992 study, Inman estimated Philly lost 100,000 jobs because of the wage tax. More importantly, probably, the study showed the job losses contributed to the gutting of the city’s population.
The hold of the wage tax and the other high business taxes is still real. Philadelphia is home to seven Fortune 1000 companies; another 23 are headquartered in the suburbs. Though the city’s job growth rate has been enough to get it back above pre-recession levels, major companies like Cigna, Sunoco and Dow Chemical have still been moving out in recent years.
When Philadelphia passed a salary history bill earlier this year, business leaders described it as “a straw that broke the camel’s back,” a gut-punch in an overall atmosphere that was bad for business.
“Philadelphia has a reputation around the country and world for having a high cost of doing business,” said Chamber president and CEO Rob Wonderling to the Inquirer. “With this bill, we have reinforced our unfortunate anti-business reputation of having a city government that tells companies how to run their business.”
Yvette Núñez, vice president of civic affairs for the Chamber, told Billy Penn that out of its thousands of members, whether they are new or established companies, many constantly have conversations about location and how it best suits their business.
Inman said the wage tax is particularly difficult because of the nonresident component. Residents pay 3.9 percent, but they get schools and other services from the city. Nonresidents have to pay 3.47 percent without getting many of those services in return (in New York, though it has a similar wage tax, nonresidents don’t pay it unless they work in city government).
“Here I am at Penn and there’s not a comparable research university in the suburbs so I won’t leave Penn,” he said. “But [what about] my secretary? If I want to hire a good person living in the suburbs I have to match their salary to account for the tax. So it shifts back on business. That’s why it motivates them to move out of the city.”
The tax credit for free rent isn’t the city’s lone attempt to lessen the severity of its business taxes. Mayor Jim Kenney’s latest budget called for a decrease of the Business Income and Receipts Tax and a reduction of the wage tax down to 3.7 percent for residents and 3.22 percent for nonresidents by 2022. An effort to reverse state law and untether Philly’s tax rate on commercial properties from residential properties is also seen as a catalyst for eventually lowering business taxes.
Besides, several challenges have recently been lodged against the wage tax’s constitutionality. It could take a while, but the tax’s 78-year grip could finally be weakening.