No tax on businesses? The Philadelphia Tax Reform Commission is calling for a major change

The Tax Reform Commission convened by City Council President Kenyatta Johnson is recommending eliminating the city’s business tax, a proposal that would reshape city government and could lead to an ideological clash during this spring’s budget negotiations.

The commission is also recommending trimming Philly’s highest-in-the-nation flat-rate wage tax and pairing those tax cuts with investments in workforce development and aid for small businesses.

“The way to take people out of poverty is to give them access to good jobs,” said Richard Vague, a venture capitalist and former state official who cochaired the commission. “It’s well-known that if you’re [a small business], you can stay in Philly, but once you get big, you have to move across city lines. That’s the story in a nutshell. We don’t have enough good jobs because we’re not a magnet attracting business.”

» READ MORE: Mayor Cherelle Parker didn’t want to talk taxes in her first year in office. That’s about to change.

The recommendations in the panel’s long-awaited report, which was unveiled Tuesday, will shape this year’s city budget negotiations and could influence policy decisions over Philadelphia’s unusual tax structure for years to come.

The commission proposed eliminating the business income and receipts tax, or BIRT, within eight to 12 years, and reducing the wage tax from 3.75% for city residents to under 3% in about a decade. It presented city leaders with three potential schedules for reducing tax rates over the next five years, with the least aggressive costing the city $498 million in lost revenue during that time and the most aggressive nearing $2.2 billion.

Opponents of tax cuts immediately condemned the report, including some members of an advisory committee designed to offer the commission input from leaders of community groups.

“With a president in control of the federal government who wants to take away our social safety nets, cutting vital programs that our city relies on, we should not be giving away money to mega corporations and the ultra rich,” said Erme Maula, an advisory committee member appointed by Asian Americans United. “We won’t let City Hall take us back to austerity budgets.”

The BIRT is projected to bring in $617 million of the $6.27 billion in expected revenue in the city’s current budget, which includes $6.7 billion in spending. The business levy is the city’s third-largest tax revenue generator, behind the wage and property taxes.

The commission’s recommendations are for the most part unsurprising given the pro-business tilt of the 15-person panel, with appointees from Johnson, Mayor Cherelle L. Parker, City Controller Christy Brady, and local chambers of commerce.

“Philadelphia’s economy is underperforming, and it’s driving many of our residents into poverty,” said Johnson, the driving force behind the creation of the commission. “Philadelphia’s tax structure is unlike any other system in the country. If we want to lift our residents out of poverty and create economic opportunities, we must change how we tax our people and businesses while still providing critical services.”

Parker, who pushed to keep all city tax rates flat in budget negotiations last year, “will have more to say about tax reform” when she delivers her budget address next month, Finance Director Rob Dubow said.

“We appreciate all the hard work that the Tax Reform Commission has done on a critical topic impacting our City: Making Philadelphia a more economically competitive city,” Dubow said in a statement Tuesday.

Blue-ribbon panels on Philadelphia’s unusual tax structure are nothing new. The latest iteration, although technically a revival of an earlier commission, is the fourth group that has set out to tackle the issue in the last 23 years.

The broad strokes of what past panels have recommended have been embraced by city leaders, such as the property assessment reforms championed by former Mayor Michael A. Nutter and the goal of continually reducing the wage tax through small annual cuts that has been shared by mayors going back to the 1990s. But the business community has complained that City Hall has not reduced taxes more quickly, and some have called for more dramatic change rather than incremental rate cuts.

The commission is cochaired by Matthew Stitt, a former Council chief financial officer who now works at the consulting firm Public Finance Management. The panel also includes former Council members and mayoral hopefuls Derek Green and Allan Domb; labor leader Ryan Boyer; and business community leaders like Brandywine Realty Trust’s Jerry Sweeney and the Center City District’s Paul Levy, who have championed past tax reform efforts.

The report’s recommendations are not binding and will instead serve as a resource for Parker and Council as they negotiate over the city budget that will take effect July 1. Parker will unveil her proposal for the city’s taxing and spending plans in an address to Council on March 13.

City leaders have for decades been focused on reducing the city’s wage tax and cleaning up the property tax rolls, two challenges with circumstances unique to Philadelphia and that did not fit neatly into ideological debates. The commission’s decision to zero in on the business tax is likely to produce a contest with clearer ideological lines, which in Philadelphia politics means a fight between moderate Democrats sympathetic to the business community and more progressive politicians and activists skeptical of trickle-down economics.

Kimmy Cook with the progressive Coalition for Essential Services and Tax Equity, called the recommendations “a complete giveaway of billions of dollars in city revenue over the next decade to big businesses and megacorporations.”

“At a time when President Trump and Elon Musk are trying to cut all federal resources to Philadelphia, this is an irrational plan, copy and pasted from the Big Business Chamber of Commerce’s same old annual talking points,” Cook said in a statement. “City leaders should consider long and hard what it means to give away billions of dollars in revenue and decide what essential public services they’ll cut. Will it be library hours? Trash collection? Pre-K? Health center funding?”

The business community has long complained that the BIRT applies to both business’ net profits and their gross revenue, creating what critics call a “double tax” and making compliance with the levy more complicated. Companies currently pay 5.81% of their net profits to the city as well as 0.1415% of their gross receipts. Businesses with $100,000 or less in annual revenue are exempted from paying the tax.

The report recommended city leaders prioritize eliminating the net profits portion of the BIRT, then turn to wage tax cuts, and finally circle back to reducing the gross receipts portion of BIRT.

For the last several years, several Council members have said that BIRT rate cuts are needed to help small and minority-owned businesses, and the commission appears to be embracing that rhetoric. But the commission’s initial report did not include a policy solution that would more directly benefit smaller firms than rate cuts: increasing the $100,000 threshold under which businesses are exempted from the tax entirely.

Vague said the commission plans to deliver more reports in the future and that the exemption could be tackled at that time.

In addition to major changes to the business and wage taxes, the commission proposed the creation of a new Office of the Tax Advocate “to support taxpayers in navigating the complexities of the tax system” as well as a new Jumpstart Fund that would provide funding for existing job training programs and others that offer low-cost loans to small and disadvantaged businesses. The report called for the city to make contributions to the fund in concert with tax cuts, with 10% of the price tag of the tax reductions going to the fund.

Other issues that the commission may tackle later include the parking tax, which Parker tried unsuccessfully to cut when she was a Council member, and the sweetened beverage tax, or “sugar tax,” that was championed by former Mayor Jim Kenney to reduce obesity and pay for rec center improvements, subsidized pre-K, and the city’s community schools initiative.

The commission said it may in the future call for a study to review “the impact of the tax on small retail businesses and the regressive nature of the tax on the low-income Philadelphians who do not have the resources to travel to neighboring counties.”

“Regardless of intent, the tax may have adverse effects that are worth reviewing,” the report reads.

The American Beverage Association, which lobbied against the adoption of Kenney’s push for the tax, applauded the call to reexamine a tax it said in a statement “has hurt Philadelphia’s working families, small businesses and their employees due to higher prices, decreased sales and lost jobs.”

The report also says the commission may later call on city leaders to come up with a plan to convince lawmakers in Harrisburg to let Philadelphia raise its minimum wage to $15 per hour and to exempt the city from the state constitution’s “uniformity clause,” which prevents the city from applying different tax rates to different types of taxpayers.

Not being able to tax commercial and residential properties at different rates is often cited as a reason that raising the property tax is politically infeasible in City Hall. But changing the state constitution is a major undertaking, requiring the partially GOP-controlled General Assembly to approve of the change in two consecutive sessions.