Phila. tackling taxing options

With less than two months remaining before Mayor Nutter and City Council must agree on a budget, this much is clear: Taxes in Philadelphia are going up - a lot.

The rest is a muddle.

The mayor and Council are not close to an agreement on which tax or taxes to raise. Nor have they settled on what departments to cut, or by how much.

"We have a $150 million deficit. There's no one perfect way to take care of it," Nutter said. "We have a series of less-than-optimal choices, and the question is: Which one do you pick?"

In his budget address last month, Nutter proposed closing that gap with a new two-penny-per-ounce tax on sugary drinks, a $300 annual trash fee, and $33 million in spending reductions.

It did not take long for Council opposition to firm up against the proposed tax and fee, and both could be written out of the final budget, which must clear Council by the end of May.

But the alternatives Council is considering - most notably a real estate tax hike and an overhaul of the business privilege tax - aren't easy or popular, either.

"We know we're going to have to go into everybody's pocket," Councilman William K. Greenlee said. "We're just trying to find the fairest and least painful way of doing it."

Here is a look at the leading deficit-closing options being debated at City Hall.

Business privilege tax. Last week, a new proposal emerged: an overhaul of the $370 million BPT, a levy on all commerce conducted in the city.

Council members Maria D. Quiñones-Sánchez and Bill Green, the champions of this change, say they would collect more from big corporations headquartered outside Philadelphia while reducing - or at least not increasing - the overall tax burden on most small businesses in the city.

The BPT is really two taxes. The first is the net-income tax, 6.45 percent of reported business profits. The second takes 0.14 percent of gross receipts, or total sales; it applies whether or not a business has made a profit.

Conventional tax-policy wisdom has held that, of the two, the gross-receipts portion is more damaging to job creation. Quiñones-Sánchez and Green disagree. They propose eliminating the net-income piece of the BPT while jacking up the gross-receipts tax.

"Reforming the BPT would help small businesses, since the majority of their tax liability is on the net-income side," Quiñones-Sánchez said.

This plan would have such major implications for businesses of all sizes that it could prove politically difficult, if not impossible, to rewrite by the end of May. The plan is certain to face opposition from elements of the business community, factions of Council, and probably the Nutter administration.

"Studies have shown that if the gross-receipts side of the BPT goes up, we lose jobs," said Rob Dubow, the city finance director. "So we'd really need to understand why they think that won't happen."

It is unclear how much, if any, extra revenue a rewritten BPT would generate in 2011, even if it could be completed this budget cycle.

Real estate tax. Though hardly a done deal, a hike in the real estate tax is seen as much more likely than an overhauled business privilege tax.

Councilman Frank DiCicco has proposed a 12 percent increase - an extra $105 million a year for the city - as an alternative to Nutter's trash fee.

The property tax has two advantages over a sanitation fee, Council members contend. First, it is deductible for residents who itemize on their federal tax returns. Second, given that owners of pricier properties pay more, it is somewhat more progressive than a flat trash fee.

The chief objection is that higher property taxes would compound the inequities of Philadelphia's property-assessment system, which is among the least accurate in the nation.

Garbage fee. There is little, if any, support on Council for the $300 trash fee. But a few members have not given up on an alternative, per-bag ("pay-as-you-throw") sanitation fee.

The Nutter administration concluded that such a system would be too complicated and likely to lead to illegal dumping. But the mayor seems willing to negotiate. He'll have to, if the garbage fee is to have a chance of clearing Council.

Tax on sugar-sweetened drinks. Opposition to this tax - from bottling companies, Teamsters, retailers - has been intense, and seems to have convinced many on Council that the tax would cost jobs and shift the tax burden to a single industry.

Some on Council also worry that the levy would exceed the city's taxing authority. What if, they ask, a court declared the tax illegal?

Nonetheless, it is still strongly supported by some Council members, such as Blondell Reynolds Brown. Those who oppose it have not offered an alternative for the revenue it would generate: an estimated $38 million in 2011 (it would kick in partway through the year) and $77 million in following years.

Nutter seems hopeful that Council will approve at least some version of the tax, even if the rate is lower than his proposed 2 cents per ounce, which would be the highest in the nation.

Spending cuts. Both Council and the mayor appear willing to pare back spending a bit further, but neither side suggests cuts alone will close this gap.

Indeed, Green, who seems more willing than most members to reduce spending, says an additional $14 million can be slashed. That would help, but not nearly enough to avoid significant tax hikes.

Green contends that his targets, including $5 million in police overtime pay, would have little, if any, impact on "citizen level services."

Nutter, who has struck a conciliatory tone throughout this year's negotiations with Council, said he was willing to consider further spending reductions.

Councilman Darrell L. Clarke summed up the situation:

"At this point, there's no consensus on any of the proposals. Not the mayor's proposals. Not Council's proposals. We're not close.