A wealth tax doesn’t make sense in Philadelphia | Opinion

It’s budget season in Philadelphia, and local lawmakers are considering new measures to raise revenues and shore up the city’s finances. Unfortunately, they’re reaching for the bottom of the policy toolkit with the latest proposal: a wealth tax.

Councilmember Kendra Brooks has proposed a tax focused on stock and bond ownership that would raise an estimated $150 million to $400 million per year. While her motives may have merit, this policy initiative would increase the already-high tax burden for locals, discourage long-term investment in the city, and ignore the reality of Philadelphia’s financial position.

Nationally, wealth taxes have gained traction as a progressive policy measure aimed at reducing rising economic inequality. By taxing the wealth of those at the top and redistributing those gains in the form of tax credits and expanded social programs to those at the bottom, proponents hope to narrow the gap.

Today, when an investor buys shares in Apple and sells them after a rise in share price, she is taxed a portion of those realized capital gains. Wealth taxes, on the other hand, typically seek either to tax unrealized gains (the theoretical profit before an investment has been sold) or, more severely, to tax an asset’s overall value, even if it has incurred losses.

To be sure, targeting unrealized gains would increase fairness by taxing billionaires who regularly pay lower tax rates than the average American. And doing so would put unused capital resources to better use. However, there are serious issues with wealth taxes that economists on both sides of the political aisle have raised. Two primary causes for concern have been 1) implementation and 2) unwanted consequences.

When it comes to implementation, critics often cite challenges in calculating the value of certain illiquid assets, like paintings or vintage cars, to levy taxes. That shouldn’t be too much of an issue with the Philly Wealth Tax, which would tax Philadelphians “a rate of up to 0.4% of their direct holdings in stocks and bonds.” Still, enforcement would be a tall order when the wealthy inevitably hide their investments.

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Brooks’ proposal rightly steers clear of retirement accounts and mutual funds. It does, however, target individual stock and bond holdings. This makes implementation easier: City Hall would not have to worry about possible recourse for taxes on gains that later become losses.

It also makes unwanted consequences worse.

Critics of Brooks’ proposal have already sounded alarm bells about capital flight from the city. They argue that wealthy Philadelphians will take their money elsewhere, as some New Yorkers have done in Florida.

Yet the tax would also be levied on middle-class investors, who should be encouraged, not discouraged, from investing. And if 0.4% doesn’t sound like much, it’s important to remember that a safe, ten-year Treasury bond currently yields just 2.3%. In order to pay this tax, ordinary Philadelphians would either dip into their already-taxed wages, or worse, sell off other investments (triggering traditional capital gains taxes).

The greater issue, however, is not who will leave Philadelphia but rather who won’t come.

Two things are true at once: Philadelphia is the poorest big city in America, and it has one of the country’s highest tax burdens. Local policymakers should increase competitiveness and attract wealth, not tax and scare it away. Wealth brings expenditure (sales tax revenue), investment (real estate tax revenue), and innovation (jobs — and, thus, wage tax revenue). If a startup darling like GoPuff goes public, should local employees really have to pay taxes on their individual stock holdings? Don’t we want more GoPuffs in Philadelphia?

Unwanted consequences aside, there is another issue at stake: Does Philadelphia actually need more tax revenue?

The size of the City’s budget has ballooned in recent years. On a per capita basis, nominal General Fund spending has risen 34% since 2008. Thanks to a recovering economy and significant federal relief, the City’s coffers have never been fuller. The last time lawmakers raised hundreds of millions of dollars in new tax revenue via the controversial beverage tax, they were unable to spend it properly. Does Philly need more revenue, or does it need to manage its money (a lot) better?

In his latest budget proposal for the nation, President Biden unveiled a wealth tax alongside an implementation scheme that partly addresses wealth-tax critiques. The “Billionaire Minimum Income Tax” would target unrealized gains of the ultra-wealthy with a payment system designed to smooth fluctuations in asset values. The added revenue would help to bring down the ever-climbing national debt. The proposal deserves serious consideration.

“Does Philly need more revenue, or does it need to manage its money (a lot) better?”

Unlike the federal government, Philadelphia does not have a deficit problem. Moreover, the Philly Wealth Tax goes farther than the White House proposal, taxing those at the bottom and the top, regardless of whether they’ve seen gains. That’s regressive.

We cannot count on a city with a history of fiscal mismanagement and repeated deficiencies in financial reporting to levy new taxes efficiently, effectively, and equitably.

Philadelphians are struggling in large part because policymakers have failed them with decades of misguided ideas that discourage private investment, squander precious resources, and bow to special interest groups. It’s time to find better uses for existing dollars.

Matthew Jeffrey Vegari is a writer and economics researcher who previously worked for the City of Philadelphia as a policy associate.