Reduced role for taxes in the race

The most taxed city in America. Or the second-most.

Even after cutting its wage- and business-tax rates for 12 consecutive years, Philadelphia still competes with New York to avoid being called the city with the highest local tax burden.

And yet, largely due to the public's overwhelming concern about violent crime, taxes haven't been much of an issue in the campaign for the Democratic mayoral nomination.

Regardless of what happens to the homicide rate, the next mayor's approach to taxes will surely affect the city's economic-development prospects and its ability to pay for needed services.

All of the major contenders in the May 15 primary say they want to keep reducing wage and business taxes. They differ, though, in terms of the priority they place on doing so.

Three candidates, Bob Brady, Tom Knox and Michael Nutter, approach tax-cutting with zeal, saying lower taxes are necessary to keep people and businesses in the city and encourage others to move here.

"We cannot grow, or even preserve, our revenue base unless we cut taxes," Nutter said. "The status quo will lead to less revenue" - and, as a result, he said, fewer city services.

Dwight Evans and Chaka Fattah, while supporting some tax cuts, talk more about how they would put tax revenues to use.

"We will do what we can afford to do," Evans said of future tax-reduction efforts, emphasizing the need to make investments that improve public safety. "I'm not in favor of accelerated tax cuts with the challenges we face in the next five years."

Voters are hardly pressuring the candidates to promise big tax cuts. In a Keystone Poll published last week, a mere 1 percent of likely primary voters listed taxes as the most important issue; 72 percent chose crime.

"Taxes are only an issue this spring when candidates are talking to businesspeople and trying to raise money," said Philip R. Goldsmith, former managing director under Mayor Street.

Brett Mandel, executive director of the tax-reform group Philadelphia Forward, said the subject actually comes up at candidate forums all over the city.

"Unlike so many of the other tough issues facing the city, this is within the mayor's power to control," Mandel said. "The mayor can't do anything he's sure will cut the murder rate. But working with Council, he does set tax rates."

Another reason taxes aren't generating much heat is that one enduring piece of the conversation seems resolved, at least for now: the piece about Philadelphia's wage tax.

Under state legislation enacted last year, projected casino revenues will be used to reduce the wage tax beyond the cuts already scheduled by the city - on the condition that the city sticks with its own schedule of reductions through 2009.

So on that score, City Hall has no decisions to make, at least for a few years.

For city residents, the wage tax stands at 4.26 percent, down from 4.96 percent in 1995, the year the cutting started. For nonresidents, it is 3.76 percent, down from 4.31 percent.

Then there's the business-privilege tax.

A lot of voters don't care about it; they don't have to pay it. But economists say the tax is a big drag on economic activity in the city, due to its bite and its peculiar structure.

It has two portions - a levy on net income and another on gross receipts, which businesses must pay even if they don't make any profits.

On this tax, the candidates have disparate views.

Nutter wants to phase out the gross-receipts piece in five to seven years and gradually reduce the net income tax, now 6.5 percent, until it matches the wage-tax rate.

Knox takes a similar position, although without a timetable and with a caveat about protecting city services. He said: "The gross-receipts portion of the BPT is onerous and particularly harmful to small and new businesses."

Brady would eliminate the gross-receipts portion in eight years and seek to get rid of the net-income tax as well. In terms of taxes, he called the gross-receipts levy his "number-one concern."

Fattah proposes the immediate elimination of the business-privilege tax, but with a catch: He wouldn't reduce business taxes as a whole.

Rather, he would create a "net-profits charge" that would apply to all businesses, including those currently exempted. This new tax, designed to raise as much money as the business-privilege tax does now, might require state approval.

"In the Fattah administration, all businesses in Philadelphia . . . will pay a fair share of city taxes," he said.

Evans says he would do what the city could afford.

The gross-receipts rate is now 0.154 percent, compared with 0.325 percent a dozen years ago.

If any tax matter is stirring the blood of voters these days, it's the pending shift (now scheduled for the 2009 tax year) to full-value assessment in the city. Under the plan, all 569,000 pieces of property in the city are to be assessed at market value, a dramatic change from the confounding status quo.

Property-tax rates would be lowered to offset the higher assessments, the intent being to produce the same amount of revenue for the city and school district as is generated today. But the change will cause some homeowners to pay less and some to pay more.

Likely taking the biggest hit will be owners of older homes in gentrified neighborhoods, where assessments haven't caught up with huge increases in value.

"We don't want to have our pockets picked," said Bob Falkowski, a retired teacher from Port Richmond, who attended a recent conference on the subject. "The change sounds fair, but that depends on a lot of things. We're going to vote in 2007, be in this new system in 2008, and won't have a chance until 2011 to say whether we think it's correct."

On this subject, Evans, Fattah, Knox and Nutter are in general accord: They support the shift so long as it's revenue-neutral, and so long as measures are enacted to cap how much a homeowner's tax bill can rise in one year and otherwise protect the poor and elderly.

Brady opposes the change, saying he worries that homeowners, particularly seniors, would be "unduly burdened."

Another sore point for some voters is the 10-year property-tax abatement on new residential construction.

The abatement is widely credited with having fueled a housing boom in Center City and other areas. But some residents despise it, saying the tax break mostly helps the wealthy and results in higher tax bills for everyone else.

"I understand that we have to create development," said Thekla Scott, a retiree from Mount Airy. "But those of us who grew up here - we never get a break. We're always paying."

None of the candidates want to do away with the abatement; all of them consider it a net plus. But they say they would consider making various changes.

On the general subject of taxes, the candidates say they want what the voters want: lower rates accompanied by improved city services.

In a city facing long-term financial and social challenges, delivering both will be a tall order for the next mayor.

Wage tax: Supports continuation of incremental cuts by the city, combined with the more substantial cuts from projected casino revenues.

Business-privilege tax: Wants to eliminate the gross-receipts portion over eight years, saying that doing so is his number-one tax priority. Promises to eliminate the net-income portion of the tax as well.

Full-value reassessment of property: Opposes it, saying he is concerned about burdens this change would put on homeowners.

Ten-year tax abatement on residential construction: Supports it and says he will work to improve it.

State Rep. Dwight Evans

Wage tax: Generally supports current schedule of reductions. Evans notes that he played a central role in Harrisburg in enacting the law that will direct slots revenue to wage-tax relief for city taxpayers.

Business-privilege tax: Favors continued cuts in the gross-receipts portion but only if he decides the city can afford them.

Full-value reassessment of property: Supports it so long as safeguards are in place to limit the size of year-to-year increases in tax bills and to protect the poor, elderly and disabled.

Ten-year tax abatement on residential construction: Wants it continued, but on a more limited basis.

U.S. Rep. Chaka Fattah

Wage tax: Supports continued wage-tax reductions.

Business-privilege tax: Wants to scrap the whole thing and replace it with a new net-profits charge that would have fewer exemptions and no tax on gross receipts. The new charge would be designed to produce the same amount of revenue from businesses as before. To make taxes less forbidding to businesses contemplating a move to the city, Fattah would let most of these newcomers pay either the city's business taxes or the taxes from the business' previous location, whichever is less.

Full-value reassessment: Would not try to block it but wants to make sure it does not unduly hurt homeowners. Supports efforts to ease its impact.

Ten-year tax abatement on residential construction: Favors continuing this, with unspecified changes. Would use the money from expiring tax abatements for affordable housing.

Tom Knox

Wage tax: Supports scheduled reductions; says he would try to speed up the cuts but not at the expense of critical city services.

Business-privilege tax: Favors eliminating the gross-receipts portion and reducing the rate on net income from current 6.5 percent to the wage-tax rate. Again, he says the pace would depend on the city's finances.

Full-value reassessment: Supports it as a move toward fairness, so long as the change is revenue-neutral and the city takes steps to cap annual changes in tax bills for homeowners.

Ten-year tax abatement on residential construction: Thinks the abatement has been good for the city but would convene a panel of experts to review it and consider possible changes.

Michael Nutter

Wage tax: Supports continued reduction in the tax rate. Nutter was the author of legislation in City Council in 2004, which set the current schedule for wage-tax reductions.

Business-privilege tax: Wants to eliminate the gross-receipts portion over five to seven years, and begin phased cuts in the net-income portion until it matches the wage-tax rate. Considers tax-cutting essential to the city's economic-development strategy.

Full-value reassessment: Favors, so long as it is revenue-neutral. Nutter proposes several measures to cushion the impact of this shift on homeowners, including a 10 percent cap on annual property-tax increases. Amounts above the cap would be payable when the property is sold.

Ten-year tax abatement on residential construction: Wants to reduce it to five years in neighborhoods where development is going strong, and expand it to 15 elsewhere. Would require developers to contribute an amount equal to one year's abatement to affordable housing.

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