November 27-December 3, 2003

slant

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The Tax Reform Commission should have done better.

by Jon Stein

Despite some excellent recommendations of the Tax Reform Commission, this commissioner has dissented because the commission has failed the tests for tax equity, objectivity and transparency.

The Commission turned its back on impoverished wage taxpayers, and chose not to embrace a simplifying and progressive city income tax. It was biased in assuming that taxes primarily impacted population and business growth, and is pressing its own agenda of tax increases to meet the multi-hundred-million-dollar budget gap its recommendations would create. Finally, it has withheld the true costs of its tax-cutting recommendations so that we might worry less about the future loss of essential city services.

The unfairest aspect of the regressive city wage tax is that it hits the working poor struggling just to stay alive. Yet the Commission failed to recommend an exemption for workers in poverty despite the mandate to the Commission that it be guided by principles of progressive taxation ("tax equity in apportioning tax burdens").

Protecting the poorest wage taxpayers is not an idea from some Marxist manifesto. The existing Pennsylvania Tax Forgiveness Program and federal Earned Income Tax Credit show that liberals and conservatives all agree that basic fairness and making "work pay" requires that the taxpaying working poor should be protected. A local wage tax exemption, pressed by Councilman David Cohen, is before City Council.

Steven Herzenberg, director of the Keystone Research Center, offered the Commission an additional economic rationale that an exemption for working poor, in contrast to the Commission-recommended across-the-board wage tax cut, means more money will be spent by city residents and more will be spent on Philadelphia businesses. (About 40 percent of an across-the-board wage tax cut goes to suburbanites.) A working poor exemption implemented incrementally, at lower eligibility levels, reduces its fiscal impact.

The Commission's recommendations thus help keep the working poor in poverty. And, surprisingly, the Commission also failed to fully study and embrace a new city income tax to replace the wage tax, net profits business tax and school property tax. A city income tax could achieve much needed simplicity and efficiency, and by broadening the tax base to include some untaxed, unearned income, allow for a more progressive tax at a lower rate.

The most significant bias of the Commission's recommendations for tax cuts was its swallowing of the optimistic predictions of 47,000 new jobs, new tax revenues pouring in and no harm to essential city services that support residents and businesses. Econsult, the Commission's researchers, always qualified this rosy future by holding that if tax cuts reduce city services all bets were off -- a qualification lost in the drumbeat for tax cuts.

Econsult also admitted that other factors that influence population and business, and which tax dollars support, like schools and work force quality, public safety and public transportation, were ignored and might be more important than tax cuts. The recent Philadelphia Inquirer pre-election poll of likely voters showed that unlike this Commission's tax tunnel vision, voters ranked improving public education, promoting economic development, reducing crime and neighborhood redevelopment and housing above controlling taxes.

The Commission could have, like the recent District of Columbia Tax Revision Commission, sought the truth through new research to compare all variables, tax and non-tax, affecting business and population. The D.C. group did not find empirical support for cutting taxes as an inducement of economic growth, finding labor force availability and quality more important. Our Commission refused to obtain this research, and thus missed a historic opportunity to cut through the populist rhetoric of the tax cutters.

The Commission's bias extended to withholding from the public the true costs of the tax cut proposals. It cited for the wage tax cut and the total elimination of the business tax only losses of a total of $192 million for fiscal years 2004 to 2008, and $142 million for fiscal year 2009. It refuses to make public the budget-busting, multi-hundred-million dollar further shortfall through fiscal year 2015. These shortfalls would be in addition to $364 million in cuts Mayor Street has already planned, and could be devastating to essential city services.

Our Commission did manifest some skepticism of the rosy, supply-side, new-revenue predictions by admitting that tax cuts would create a "fiscal gap" and to "finance" this gap, compiled a long list of tax increases, such as increased or new municipal user "fees," and real estate and sales tax hikes.

The property tax increases might be the worst. These would make the city less attractive and affordable to new and current residents and businesses, and would inflict greater pain on the 70 percent of homeowners and renters with incomes below $20,000 who already pay 50 percent or more of their income on housing.

The Tax Reform Commission should have done better.

Jonathan M. Stein was a member of the Tax Reform Commission and is general counsel at Community Legal Services, Inc. If you would like to respond to this Slant or have one of your own (850 words), contact Howard Altman, City Paper editor in chief, 123 Chestnut St., third floor, Phila., PA 19106 or e-mail altman@citypaper.net.