Workers commuting into Philly aren’t coming back. What does that mean for the city?

More than two years into the pandemic, thousands of employees continue to work remotely in the suburbs rather than commute into the city, according to a new report by Pew Charitable Trusts.

The permanent trend toward remote work is contributing to Philadelphia’s tepid economic rebound from the COVID-19 pandemic and a decline in the total workforce overall, Pew found. The full report, the latest in a series on Philadelphia’s Fiscal Future, published in partnership with the William Penn Foundation is available on Pew’s website.

The report raises concerns that Philly could experience an uneven, inequitable recovery inflicting particular pain on some of the city’s residents, especially people of color, said report coauthor Larry Eichel.

Amid the pandemic, lower-wage jobs in hotels, restaurants, and other leisure sectors disappeared, hurting already disadvantaged Philadelphians with lower incomes who held these service positions.

“For now, at least, many highly educated white-collar workers are benefiting from the increased flexibility of remote work, while some less-educated workers — many of them people of color — are not,” Eichel wrote in the report.

Philadelphia “now has a smaller economy than it did pre-pandemic,” said Eichel. Nearly every sector of Philly’s economy shrank between the fourth quarter of 2019 to the same quarter of 2021, with leisure and hospitality hit hardest, he said.

Philly’s once-vibrant downtown was decimated as tourism ceased and people stayed home, opting not to eat out or shop because of COVID.

The city’s smaller economy can be seen in Philadelphia’s new job numbers: Philly recorded a total of 713,000 jobs at the end of this year’s first quarter. That’s down 5.8% when compared with the fourth quarter of 2019, just prior to the pandemic’s onset, when the city had 757,000 jobs.

That’s better than New York City, which lost 7.7% of jobs, about even with Washington, which lost 5.7% of jobs, and not as good as Baltimore, where just 3.8% of jobs were lost in the same period.

When companies around the country sent workers home at the start of the pandemic in March 2020, no one expected that more than two years later, remote work would still be the norm — but for many, it is. According to the Pew report, by late May of this year, office occupancy in Philly’s metropolitan area fell to about 38% of pre-pandemic levels.

That’s somewhat higher than 25% occupancy in summer 2021 when employees first began to return to Philadelphia offices — but it’s not a full recovery, according to Kastle, an office security provider that tracks employee badge swipes in over 130 cities around the country.

Meanwhile, in February, a Center City District survey of 114 downtown companies and organizations found only 15% have staff working in-person five days a week; 25% have staff working fully remotely; and the rest work in the office part time.

That has acute implications for city finances, Eichel said.

Pre-pandemic, over 13% of Philadelphia’s general fund revenues — paying for a wide array of city services, from the fire department to libraries — came from wage taxes paid by nonresidents who commuted into the city. They’re now exempt from the tax if their employers require work from home.

In 2021, Philly’s wage tax collections were down $133 million, or 6%, from 2019.

Most of the decline — $105 million — came from white-collar sectors: finance and information, professional services, and education, all of which pay relatively high wages and employ a high proportion of nonresident workers, Pew found.

In health care and social services, wage tax revenues didn’t change. In finance and information, revenues fell by 25%, to $192 million from $255 million.

That said, “inflation and the move to remote work is a national phenomenon. That’s not in the control of local officials,” Eichel said.

Philly’s slow recovery is not unique. New York, Washington, and Baltimore have all lagged the rest of the country in job creation, and both New York and Washington have underperformed their respective regions. Midwest cities also haven’t recovered all the jobs since before the pandemic, Eichel said.

Mayor Jim Kenney has responded to the city’s economic issues by addressing Philadelphia’s long-hated double-taxation of businesses — a wage tax and a business income tax — in an effort to attract and retain business owners.

“We’ve made meaningful reforms to city business taxes, which have helped to grow small businesses and jobs, reduce barriers, and make Philadelphia a better place to do business,” mayoral spokesman Kevin Lessard said in an email on Wednesday.

Since 2016, the value of city wage tax cuts has totaled nearly $100 million, and rates overall are at their lowest level since the 1970s, according to Lessard.

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

Prior to 2016, about 130,000 businesses filed a BIRT return each year. But due to an exclusion created under Kenney’s administration, a business with sales of less than $100,000 annually pays no BIRT. According to the Department of Revenue, about 75% of Philadelphia businesses do not currently have a BIRT liability.

In May, Kenney proposed even bigger cuts in the wage tax after property tax assessments became available: The residential rate he proposed was 3.7% over two years, vs. the current 3.8398%. Last year, Kenney also proposed substantial cuts in the BIRT which were not adopted by City Council.

The mayor now is seeking state authorization to adopt market-based sourcing for service businesses, which include all businesses that are not manufacturing. Under this approach, all service businesses in Philadelphia will only be required to pay BIRT tax on sales delivered to customers within the city limits.

“This change in policy is meant to promote fairness by leveling the playing field for Philadelphia-based service providers with companies based outside of Philadelphia,” Lessard added. “It also will make Philadelphia business taxes consistent with Pennsylvania corporate income tax rules.”