Whither Taxation

by David Thornburgh

High taxes have been an albatross around Philadelphia’s neck for a long time. The 4.5 percent wage tax for residents forces a typical family to pay $2,400 more per year in state and local taxes to live and work in Philadelphia than in the Greater Philadelphia suburbs. A law firm pays almost twice as much in state and local taxes to expand in the city than it would in the Greater Philadelphia suburbs. Not surprisingly, the city has lost more than 225,000 jobs since 1970. After adjusting for inflation, city property values have declined since then as well. But when the talk turns to cutting taxes, questions arise. How many jobs will tax cuts produce? How long will it take? Which taxes should be cut? What tax revenues would the city have to forgo before it added new jobs?

To provide some answers to those questions, the Pennsylvania Economy League recently released a detailed analysis suggesting that tax cuts could produce major economic growth in the city. How much? Well, for example, cutting the wage tax to 3 percent would create 110,000 net new jobs by 2007, or 15 percent more than today. If that were the only benefit, it would still be a no-brainer, but this cut is a twofer. A wage tax at that rate would also increase the value of residential and commercial property by $4.2 billion, or a 14 percent increase over current levels.

To build the Taxes and Growth (TAG) model used in the analysis, the League hired the Econsult Corporation, a nationally recognized economic consulting firm. Richard Voith, who recently joined the firm after 14 years as an economist at the Federal Reserve Bank of Philadelphia, led the project team at Econsult.

Without additional tax cuts, the TAG model concludes, the city's economy will continue its steady decline -- losing jobs and wealth to the rest of the country. However, the model suggests that significant cuts in city taxes could increase jobs and property values in the city within a five-year time span. The model also suggests that cuts in Philadelphia's wage tax will have the most powerful effect on the economy. The model determined that lowering the gross-receipts tax or property-tax rates have lesser impacts on both wages and property values.

Voith and Econsult were careful to build this model using 30 years of data obtained in close cooperation with the Philadelphia Revenue Department. They used the standard statistical techniques and built their analysis on the foundation established by Robert Inman at the Wharton School. All models have limitations, and they acknowledge that this one does as well, but they are confident in the magnitude of the results it suggests.

The TAG model takes a five-year look at Philadelphia's economy and examines four different alternatives: 1) no further tax cuts; 2) reducing the gross-receipts tax only; 3) small reductions to the wage tax and gross-receipts tax; 4) broad tax restructuring; and 5) more aggressive wage-tax reductions (using a blended wage-tax rate of 3 percent).

This is an incredibly important tool to use as we look for ways to make the city competitive once again. It suggests that cutting taxes may be the most significant investment we could make in the economic future of the city. Major tax cuts seem to have major potential to grow both jobs and property values in the city. We hope this new analysis helps build momentum in that direction.

While all of the scenarios examined bring about a city tax-revenue gap (ranging from $120 million to $491 million) through 2007, the model reveals that a 3 percent wage tax, the most aggressive scenario explored, would actually bring in more tax revenue by 2006, thanks to its positive effect on the city's economy.

So, how big is the $491 million the model estimates would be necessary to fund a 3 percent wage tax? About 3 percent of all projected city government spending in the next five years, measured in today's dollars. In comparison, the convention center cost $560 million, the Kvaerner deal cost $450 million, the sports stadiums cost $380 million, the Neighborhood Transformation Initiative $300 million. In the last decade, the Pennsylvania Intergovernmental Cooperation Authority raised $256 million to cover the city's deficit, and now the city is contemplating issuing nearly $300 million in bonds to cover a school-district deficit that shows no end in sight.

This work is compelling evidence that even modest reductions to Philadelphia's wage tax will have a positive impact on our local economy, but not enough to combat years of decline. In other words, we'll survive. However, Philadelphians must demand more -- we must choose to thrive.

For more information or a complete copy of the report, go to www.peleast.org or www.metropolicy.org.

David Thornburgh is executive director of the Pennsylvania Economy League’s eastern division. If you would like to respond to this Slant or have one of your own (850 words), contact Howard Altman, City Paper interim editor, 123 Chestnut St., Phila., PA 19106 or e-mail altman@citypaper.net.

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