TCB May 2025
On February 25, 2025 the Tax Reform Commission (TRC), chaired by the dynamic duo of Richard Vague and (Economy League Board member) Matt Stitt issued its report and recommendations, which included the elimination of the net income portion of the Business Income and Receipts Tax (BIRT), lowering the wage tax rate to less than 3%, and making targeted investments to intended to enhance business and job growth. The report is entitled Jumpstarting Jobs: A Report on Investing in Tax Reform and Inclusive Strategies for a Thriving Philadelphia and it is worth a read. (City Council has also set up an excellent site full of useful reports from the TRC.)
Due to the charter amendment that established the initial TRC in 2003, about 2 dozen organizations, including the Economy League, were offered seats on the adjacent Tax Reform Advisory Committee (TRAC), which is entrusted with ensuring that the TRC’s recommendations are cognizant of the equity issues that underlie most tax policies in Pennsylvania, a ‘flat tax’ state due to its courts’ idiosyncratic interpretation of the state constitution’s uniformity clause. The TRAC issued a dissenting report, calling into question many of the TRC report’s assumptions and assertions. (TRAC resources can be found on Penn Policy's page devoted to tax reform.)
There is a lot in both group’s reports to like: since before the 2003 TRC, the Economy League has called for responsible cuts to levies that make Philadelphia’s tax structure particularly weird and uncompetitive, like the Net Income side of the BIRT. I also believe strongly that low-income Wage Tax rebate ought to be made ‘auto-enroll’ since like all regressive taxes the Wage Tax hits low-income Philadelphians the hardest and the rebate has had particularly low uptake; a similar argument can be made for auto-enrolling every Philadelphian into the $100,000 Homestead Exemption.
Without wading too deeply into a policy debate with either the TRC or the TRAC’s positions, at this particularly fraught and uncertain moment in the economic history of the country, with way too many ‘unknown unknowns,’ the prudent course for the mayor and city council to take, in my opinion, is for the City to basically keep doing what it has been tax doing since the 1990s: making incremental cuts that keep the city’s overall fiscal position on its current upward trajectory without too much upside risk.
However, given the Economy League’s mission of fostering equitable and inclusive economic growth, I am more interested in a tax policy proposal that was not part of the TRC report but that was mentioned in Mayor Parker’s budget address, namely the elimination of the $100,000 BIRT exemption. Enacted into law in 2011, the BIRT exemption is arguably the most progressive policy we have for supporting the viability of small and diverse firms in the city, and its elimination would be severely damaging. While the mayor has claimed that she’d like to keep the exemption but seems sure that it violates the state constitution’s uniformity clause, and that she has been told that the City should expect to lose the Zoll case currently wending its way through the courts, I’ve reached out to independent tax law experts and they disagree – as does the City’s Law Department in its brief arguing the case.
But even if the Zoll case were to be on a losing trajectory, we need to protect our small businesses. The legal eagles with whom I have conferred agree that even if the City loses Zoll, it is not on the hook for past collections, so there’s not a lot of risk to be borne in continuing the fight. In the meantime, we need to pursue a backup plan, and thankfully, my clever TRAC colleagues have proposed one: a tax rebate for small businesses that on its face seems to evade the uniformity clause’s strictures.
Next, as we read about SEPTA’s looming fiscal apocalypse, I will float an idea: let's create a new dedicated SEPTA funding stream via our imminent sales tax windfall. As the Mayor noted in her 2025 budget address, and as verified by the City Controller, in 2033 the City will be the beneficiary of a tremendous windfall as our municipal pension fund achieves ‘full funding,' which means our obligatory annual contribution to the fund will drop by as much as $500 million. How did this come to pass? During the Nutter Administration, the City asked for and received an extra 1% sales tax increment, which allowed it to make enhanced ‘catch up’ payments to the then-woefully-underfunded Rizzo-era legacy pension plans. It was a great policy decision.
In my view, we ought to be consider devoting at least a portion of the sales tax windfall to SEPTA – but if and only if our colleagues in the collar counties agree to implement a similar levy upon themselves. As Economy League research from 2013 as well as more recent federal data demonstrate, SEPTA’s funding model is a bit of an outlier compared to peers like DC, Boston, NYC, and Chicago in the relatively low level of both operating and capital expenses shouldered at the local level and the high level by the state. While we ought to continue pushing the state for more transit funding, due to the incredibly high ROI provided by SEPTA to the Commonwealth, our argument will be bolstered if we are able to contribute more locally by repurposing an already existing revenue stream. (We should also seek to raise fare revenue, the proportion of which is also quite low at SEPTA, by concerted adoption of SEPTA's Key Advantage by employers.)
And one final thought: the Mayor, whose policy mind (and policy staff) I deeply admire, at long last called for implementation of mandatory fiscal notes on every piece of legislation in front of City Council. While I applaud this step, which will provide legislators, the press, and citizens an "estimate of the impact legislation has on the City of Philadelphia’s revenues and expenditures," like that offered as a matter of course in Congress, every state legislature, and some peer cities like NYC and DC - and is something for which I have long advocated - I am sad to say I cannot fully endorse the Mayor's proposal because the notes will be prepared by her office and not an independent body, such as the Controller, PICA, or an arms-length research organization like the Economy League or Pew.
Thanks for listening!
Jeff Hornstein, Ph.D.
Executive Director
Economy League of Greater Philadelphia