From wage taxes to red tape, here’s why Philadelphia is one of the hardest cities to do business

Why would a company moving into a century-old building that’s never flooded need to cut a drain flap into its metal front door?

It’s the extra cost of doing business in Philadelphia.

Andrew Halladay, a production manager at Imperial Yeast, an Oregon-based brewery supplier, said the company loves the facility at the former Frankford Arsenal in Northeast Philadelphia. In establishing an East Coast outpost, the business landed on the natural-light-filled building, surrounded by neighborhoods full of breweries, and close to I-95, a key artery that connects Maine to Florida.

But it took months to win city approvals, and some of the requirements explain why businesses balk at setting up in Philly. Imperial couldn’t move into the former munitions plant until contractors designed and cut the doggy-door-like drain, said Matt Handel of Alliance HSP, the building’s manager. Although the building is in a floodplain, according to the city, the site has no history of floods, he said. “It is thick tape and a cumbersome process to get through, for stuff that felt unnecessary.”

Philadelphia ranks among the worst U.S. cities to do business, with high taxes and burdensome regulations. Most major cities face similar complaints. But Philadelphia is particularly unwelcoming to new and transplanted businesses, academics, business owners, and public policy experts said, helping to ossify Philly as the nation’s poorest big city.

Philadelphia boasts several strengths that should make it fertile ground for business. It’s at the center of the Northeast Corridor and home to top hospitals and universities. Compared with Boston, New York City, or Washington, the cost of living is more affordable. Philly is a biotech center, too.

But with influential unions boosting costs, ensnaring red tape, and a workforce sapped by intergenerational poverty, Philadelphia trails other big cities in the ease of doing business, undercutting efforts to attract and nurture employers.

“If you’ve got barriers to entry for new businesses or make it difficult to expand existing businesses, you’re by definition also restricting the employment prospects,” said Stephen Slivinski, an economist at Arizona State University and a senior research fellow at the school’s free enterprise-focused Center for the Study of Economic Liberty. Slivinski heads a project launched last year ranking major North American cities by how hard or easy it is to run a business. Philadelphia was among the lowest-ranked U.S. cities.

“We do not agree with the assertion that Philadelphia isn’t a favorable place for business,” said Lauren Cox, a spokesperson for Mayor Jim Kenney. “Philadelphia had been on a historic job-creation streak prior to the pandemic, with more jobs in the city than at any point since 1990, which is proof that businesses can and do succeed and thrive here.”

The city’s annual job growth in the decade after the Great Recession, however, was slower than the national average and 23 major cities, according to the Center City District, a business improvement zone.

Sherimane Johnson adopted a vegan diet a decade ago, hoping to avoid the fate of her diabetic grandmother. Johnson, an IT consultant, also loved getting creative in the kitchen. In 2010, she launched a vegan bakery, followed by Night Owl Vegan, a meal delivery service.

Johnson attends farmers markets and food festivals across the region. Nowhere has it been harder to set up a food cart or booth than Philadelphia, said Johnson, a New York City transplant to Philly. “It just seems like they make it so hard unnecessarily.”

Philadelphia makes food vendors set up their stations for inspection in a Medical Examiner’s Office parking lot, she said. After verifying that the fryers and water lines work -- and charging $150 for an annual license -- the city inspects vendors again at festival sites, Johnson said.

“I don’t understand why it’s so difficult,” Johnson said. Cox, the city spokesperson, said the initial inspection protects against vendors showing up to an event unprepared.

Researchers at Arizona State University agree overall with Johnson. In their 2020 report, ASU researchers ranked Philly 71st out of 80 U.S. cities in the ease of doing business.

The ranking assessed more than 100 economic and regulatory indicators and distilled the data into an overall score, with categories that include tax codes, zoning rules, labor regulations, and the ease of starting up a firm.

Similar research has ranked Philadelphia’s business climate near the bottom. Last year, Philadelphia finished 97th out of 100 large U.S. cities in starting a business, according to the personal finance website WalletHub.

The barriers in Philadelphia begin before a business opens. The city slowly processes paperwork needed to open an establishment, taking 10 days when other U.S. cities need just two to five days, Slivinski said.

A firm in Philly needs four governing boards to sign off on a building’s modifications, while businesses elsewhere must go through one or two steps, the ASU study found.

The extra steps might matter less for firms that can hire lawyers, said Ross Emmett, the research center’s director. But for small shops, it’s often the business owners themselves who must stand in line or wait in limbo for the next step.

“A week of waiting when you are not receiving any income and are incurring start-up costs can set many businesses back,” Emmett said.

But Philadelphia’s low ranking in the ASU study was impacted the most by its high taxes. Philly has the nation’s highest wage tax and stands alone in how it taxes business income. Just 11 of the nation’s 30 biggest cities imposed levies on either profits or revenue, according to a 2016 Pew report. Only Philadelphia taxes both.

Jerry Sweeney, CEO of Brandywine Realty Trust -- Philadelphia’s largest office landlord -- said he has the same conversation, over and over, with businesses considering a move to Philadelphia.

“Every lease transaction we go through, we’re always talking about how we can compensate those companies moving into Philadelphia, due to the wage tax and to the business tax,” he said.

It’s an issue Sweeney himself has tackled. Two years ago, when Brandywine moved headquarters from Radnor Township, about 18 miles outside Philadelphia, to the University City neighborhood, it had to increase salaries to make up for the wage tax.

The city’s Business Income and Receipts Tax (BIRT) uniquely imposes levies on both profits (6.25%) and sales (1.415% per $1,000), making it one of the most burdensome taxes. Firms must pay even if they suffer losses because the city taxes every dollar, even before the business accounts for expenses.

“If you have more things to spend money on in the course of your business, a gross receipts tax will never take account of that,” Slivinski said, adding that such a tax is especially punishing for start-ups.

In 2002, the German software giant SAP sought to locate a 1,000-person North American headquarters in the city. “We were close to a deal,” said Robert Salvucci, a city native and then-member of SAP’s site search committee -- until the company realized city business sales and income taxes would cost SAP about $50 million more annually.

SAP didn’t feel a Philadelphia address was worth such a fat premium. “We ended up in Newtown Square,” at the far end of suburban Delaware County, Salvucci said. SAP now employs more than 3,000 on that site.

Many business taxes were implemented when Philadelphia was in dire financial shape in previous decades. The city’s hands are tied by Pennsylvania’s “uniformity clause,” which requires Philadelphia to tax all property owners equally, whether commercial or residential. If the clause could be waived, the city would have more options to change its tax structure, Philadelphia officials contend.

The city has moved to ease the BIRT burden on new firms. Last year, city officials began allowing first-year businesses to pay their second-year BIRT liability in installments, rather than requiring two annual payments. The city also exempts the first $100,000 in revenue, so 75% of Philadelphia businesses don’t have a BIRT liability, Commerce Department officials said.

That still leaves Philly’s highest-in-the-nation wage tax, which is 3.8712% for Philadelphians and 3.5019% for nonresidents.

Taken together, these taxes keep companies in the surrounding suburbs, where local wage taxes are lower or nonexistent and there’s nothing like BIRT, according to Paul Levy, the Center City District’s president.

Philly is a dense city, but there are more businesses and jobs per capita in the lower-tax suburbs, Levy noted. That lack of nearby opportunities forces Philadelphians to commute outside the city for work, especially harming poor residents without cars, he said.

Acting Commerce Department Secretary Sylvie Gallier Howard said that business owners don’t dwell on the tax issue as much these days. The most pressing concern is finding workers, Howard said.

“Talent is the priority.”

In the summer of 1987, then 19-year-old Lou Rodriguez got a job clearing land on a construction site. One day, he saw a new group of workers fanning out across the site, slashing at brush with machetes and marking trees with ribbons. Rodriguez was fascinated. A coworker misidentified the land surveyors to Rodriguez as civil engineers. The mistake put Rodriguez on the road to an engineering career.

In 2007, Rodriguez launched his own engineering and land surveying consultancy. He was now looking to hire his own land surveyors. But he has run into a problem. He struggles to fill the crucial position.

“I could double my staff if they were out there because there’s that much pipe that needs to be replaced,” said Rodriguez, whose business employs about 25 people.

From Rodriguez to Amazon.com, a common complaint among businesses is the lack of available talent in Philadelphia. Some critics say the educational system has failed to prepare residents and is out of step with industrial needs. Others, like Rodriguez, point to workforce development efforts that are often focused on placing residents in construction union apprenticeships, not the nonunion design and planning jobs he needs.

The city “has a vastly under-skilled labor force, which is something that we all understand and accept as a reality,” said Joel Naroff, president of Naroff Economics, a consulting firm in Bucks County

Philadelphia trails other major East Coast cities in educational attainment. Fewer than a third of city residents aged 25 or older had a bachelor’s degree or higher in 2019, compared with more than half in Boston and Washington, according to Census estimates. More than 30% of city students don’t graduate from high school within four years, the School District of Philadelphia reported in May.

Talent was a top concern for Amazon when it hunted for a second headquarters. Philadelphia was among 20 finalists two years ago. But the e-commerce giant bypassed Philly and chose New York City and Arlington, Va.

The dig on Philly was that it lacked tech talent, say current and former officials from the Commerce Department and the nonprofit Philadelphia Industrial Development Corp., the agencies involved in the bid. A lesson learned from the Amazon sweepstakes is that the city must equip more residents with tech skills, they said.

“That’s what Amazon was mostly concerned about. Our ability to produce and attract the employees they would need,” said Harold Epps, the former head of the city’s Commerce Department, who was directly involved in the Amazon chase.

For years, the School District was too focused on getting students into college and not enough on other career paths, said Ali Robinson-Rogers, executive director of the district’s Office of Postsecondary Readiness. The district is developing a new program to better link education to workforce needs and plans to partner with employers to place students in internships and apprenticeships. She said an initial cohort could start this spring, but offered few additional details on the program.

“I think that sometimes it was like comparing apples to oranges,” she said of critics blaming the district for not preparing students for the workforce. “The skill set that’s necessary in the workforce was different than what was necessary to be academically proficient. They were two different things.”

City schools are no help in attracting skilled workers with children. Mahe Bayireddi is a cofounder of Phenom, a hiring-software maker that keeps about half of its 700 employees in Ambler, about 20 miles north of Philadelphia. While Bayireddi expresses admiration for Philly, a suburban base helps with employee recruitment and retention.

“The people who have kids and families, they are living in the suburbs. The schooling and the housing, it really does matter,” Bayireddi said.

And talent follows opportunity. The city’s inability to attract skilled workers can also be blamed on the failure to lure companies here, said Bruno Lanvin, who created the annual Global Talent Competitiveness Index issued by Adecco Group, a human resources provider. Talented workers won’t move to Philadelphia if job options are limited beyond the company recruiting them, he said.

The index ranked Philadelphia 42nd among 130 global cities, putting it behind New York, Boston, Washington, and Atlanta. The index found Philly was good at retaining the talent it does have thanks to a low cost of living, but weaker in attracting and growing it.

A decade before Derek Green joined City Council, he was another entrepreneur in Philadelphia.

Green and his wife owned a boutique in East Mount Airy where they sold trendy shoes next to his sister-in-law’s handbag store, appropriately named “This Goes With That.”

The experience showed Green how hard it is to run a retail business. The Great Recession slowed foot traffic and hurt sales. One night, someone broke their shop window.

The City of Philadelphia added its own hurdles. It took Green, an attorney, a month to get a tax account number to start his business. City officials sent him from office to office inside the basement of the Municipal Services Building.

“It was a very eye-opening experience, to see the challenges and complexities for small businesses in the city of Philadelphia,” Green said.

Green is now among those scrutinizing the 2,000-plus-page Philadelphia Code and department rules. He chaired a special committee tasked in 2017 with reviewing regulations and removing archaic laws.

Green’s committee pushed City Council to tweak BIRT, allowing new firms to pay their second-year liability in installments. And lawmakers approved 16 proposals removing outdated laws -- such as restrictions on the sale of pagers -- and streamlined processes, like the approval of some storefront signs.

But business owners and advocates say the city has just scratched the surface. “The ease of doing business requires a cultural shift” in city government, said Rob Wonderling, president and CEO of the Chamber of Commerce for Greater Philadelphia. He said the business community has clamored for an ease of business index to measure where the city comes up short.

The city does have a “Business Owners’ Bill of Rights,” a two-page document that says owners are entitled to transparency and timely responses from city agencies. But the document doesn’t have teeth. Anna Shipp, executive director of the Sustainable Business Network of Greater Philadelphia, said the city refused to collect more data on agency response times, so businesses would know how long city services could take. Cox, the city’s spokesperson, said the document will help departments set goals about time frames “in the future.”

Jezabel Careaga, who owns an Argentine cafe in West Philadelphia, said the city has made improvements in recent years. When she moved to a new location in 2018, she obtained all her permits online instead of in-person, as she did previously.

Still, city officials “get stuck on very tiny things,” Careaga said.

She said her landlord once handed her a city bill for three years’ worth of trash collection fees. But Careaga had already paid a private firm for the service. She used bank statements and copies of checks to prove her case, but the city wouldn’t waive the fees until they saw a contract. When she finally found the agreement, the city erased the $1,500 debt within minutes.

Cox said the city insists on contracts because it confirms the address where the trash is collected and how long the business should be exempt from the fee.

Some employers complain that Philly lawmakers add to business costs with expensive measures aimed at aiding workers. The ASU study dinged Philly for increasing labor costs by mandating one hour of paid sick leave for each 40 hours of work -- a measure hailed for helping low-income workers. By ASU’s estimate, Philadelphia’s paid sick-leave mandate is twice as high as the 80-U.S.-city average.

“All workers deserve the dignity of paid sick leave, and Philadelphia has proudly been a leader in the area of worker protections for years,” Cox said. “These laws make our city a good place to work, and we know many Philadelphia employers are happy to be part of that.”

In contrast, Philadelphia’s inability to boost the minimum wage -- Pennsylvania state law bars municipalities from doing so -- wins the city praise from hiring managers. But advocates say a higher floor than Pennsylvania’s $7.25 an hour would boost incomes and living standards for the poorest workers.

The same back-and-forth follows the debate over the city’s building trades unions, which spend big to elect allies to state and city posts. Although union and nonunion wages are similar, union contractors pay extra for their employees’ guaranteed pensions and more-complete medical plans. Developers have little choice: Union jobs account for most large Philadelphia commercial developments, said Tony Wigglesworth, director of Philadelphia Area Labor Management Committee, a labor management group.

Wigglesworth notes the building trades unions provide family-sustaining jobs in a city with high poverty and low academic achievement. A union laborer in Philly can make $25 an hour plus benefits, Wigglesworth said. Skilled tradespeople with experience can earn more than twice that, plus overtime in fat years.

“None of the major developers in Philadelphia have gone broke. They seem to find a way to make money and make a profit in Philadelphia,” said Ryan Boyer, business manager of the Laborers’ District Council of Metropolitan Philadelphia.

Still, there’s a deficit in the number of private employers creating permanent, family-sustaining jobs. Philadelphia had fewer businesses per capita than 11 other large cities studied by Pew -- and far fewer than the region.

The coronavirus has wiped out more stores. But the pandemic has also created new opportunities for some companies.

The wide adoption of remote work has helped firms find the talent they need -- but not necessarily from Philly. Marc Coleman, CEO and founder of the software firm the Tactile Group, said he struggled to get enough applicants for programming and project manager positions. Now he no longer needs staff to live in Philadelphia and received applications from as far as California. One job posting fetched 600 applicants, compared with just 80 for a similar one last year.

“Before we were restricted to Philadelphia,” he said. “We’re now doing a national search.”

The Future of Work is produced with support from the William Penn Foundation and the Lenfest Institute for Journalism. Editorial content is created independently of the project’s donors.