The "Truth" on Taxes

Does Nutter have science on his side?

by Isaiah Thompson

THE BELIEVER: Nutter has opposed raising wage and business taxes since he looked like this.

[ boring stuff made interesting ]

When it comes to taxes, Mayor Nutter is a man of conviction. We might even call him a man of faith, so strong and unwavering is his belief that Philadelphia must not, cannot, shall not raise its wage and business taxes to help plug the great gaping $2 billion hole in Philadelphia's five-year budget.

He practiced this faith recently by proposing a budget that would raise property taxes almost 20 percent (temporarily), and leave wage and business taxes untouched.

The mayor's rationale is relatively straightforward: He believes that high wage and business taxes discourage growth and kill jobs, that these taxes have long been stifling the city, and that the economic progress we've made in the last decade or so is thanks to the gradual reduction in the wage tax that's been going on since Ed Rendell was mayor.

Nutter doesn't see these views as mere articles of faith. He sees the dangers of raising wage and business taxes as facts of science.

"Study after study," Nutter said during his March 20 budget address, "have shown us that over the last 50 years, wage and business tax increases have exacted a terrible price on the city's economy, driving population, business and investment outside of our city."

"There are numerous studies," Nutter told The Daily News later that day. "You can talk to anyone who has looked at the tax structure in Philadelphia."

In budget hearings, when City Council questions the administration on its tax philosophy — something it's been doing more and more lately — the administration has deflected the questions by citing studies, studies, studies.

So what are these studies? How many of them are there, exactly? Are there other studies that disagree with them? And, most importantly, are they right?

In his budget address, Nutter referred by name to professor Robert Inman, an economist at the Wharton School of Business, who has studied Philadelphia's tax structure since the '80s and who has published at least a half-dozen studies on it. In all of them, he argues that a high wage tax has historically meant the loss of jobs for the city, and that by lowering the tax, the city has saved jobs it would otherwise have lost. (His work also supports — and, indeed, informs — the mayor's position on business taxes.)

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Inman has, by the way, addressed the possible impact of property tax hikes. In a nutshell, he says they're bad, too: For every 10 percent increase in property taxes, he figures, the value of the property goes down about 5 percent. 

Reading Inman's work, it's all but impossible for a layman to get a sense of which taxes are worse for Philadelphia. But Inman says Nutter has it right: While raising the property tax would hurt, he believes Nutter should "[pick] taxes that do the least damage to the residents of the city —my instinct is to think ... the property tax."

Another study that's central to the administration's position is a report prepared for the Tax Reform Commission in 2003 by Econsult Corp. The report concludes:

"From a purely economic point of view, the city economy would expand by shifting tax collections away from the gross receipts and wage taxes and shifting toward property taxes."

God, it's like Nutter wrote the report himself (he didn't, but he did briefly work for Econsult after resigning from Council).

So is that it? Does Nutter have science on his side?

Not so fast. Nutter has indeed found almost unanimous support for his tax plans among local academics, a useful group, since they're the same people the Inquirer and Daily News turn to for expert opinions.

But if you call outside the city, you can find dissenting voices. In 2003, Stephen Herzenberg, executive director of Keystone Research Center, a think tank devoted to equitable policy, wrote a report challenging some of Econsult's recommendations. He argued that Econsult had correlated Philadelphia's decline with taxes, but hadn't proven causation.

"[These studies] don't include a lot of other factors that are clearly important," Herzenberg says. "They don't include crime rates. They don't include quality of schools ... the models leave out most of the factors that the Philadelphian in the street would think explain most of the loss in city tax base and in city population."

The result, Herzenberg says, is "an exaggerated sense of the importance of taxes."

Indeed, the Econsult report itself concedes, "one never has good measures of all possibly relevant factors in any policy analysis."

Another challenge comes from Michael Mazerov, senior fellow with the Center on Budget and Policy Priorities, a think tank in Washington, D.C. In City Council hearings on reductions to the wage tax in 2002, Mazerov testified that the benefits of tax reductions are often over-hyped, particularly by powerful business interests.

"The business community has a simple story to tell," he said at the time. "Philadelphia is losing jobs and people while its suburbs are gaining them. ... What's wrong with this equation is that it ignores the fact that the vast majority of central cities have been declining relative to their suburbs for decades."

Over the phone, Mazerov cautions that he hasn't followed Philadelphia politics since then, and is unfamiliar with any new work by Inman. Still, he maintains that taxes are just one factor determining who stays and who goes.

"This obsession with [regional tax differences] is just not justified by the research — that's the lesson," says Mazerov. "Governments should focus on providing high-quality public service and not constantly be looking to tinker with their tax systems and search for a magic bullet for economic development."

Now it's Council's turn to make a move. It's by no means clear that studies, rather than politics, will carry the day.

"You can get experts to say whatever," Councilman Darrell Clarke recently said to the Inquirer, ready to throw the mayor's studies down the toilet.

But studies will likely play a role in the argument. Councilman Bill Green's staff has been reviewing the administration's favorite research. Green says he's not convinced the mayor's interpreting it correctly. He points to Inman's finding that raising property taxes immediately decreases property value.

"We're talking about decreasing wealth in the city of Philadelphia by $8 [billion] to $9 billion," he says.

Green also points to a 2002 Econsult report which states that "changes in property tax rates have considerably larger effects on the property tax base than the wage tax has on the wage tax base in the near term."

"The academic research makes clear that raising the wage tax versus the property tax will have the least negative impact in the short term and, as long as it is temporary, it will have the least negative impact in the long term," Green asserts.

Nutter's unlikely to be swayed by this — he's been an opponent of wage and business tax hikes for years. Whether the mayor has reached a scientific conclusion, or given himself over to faith, we couldn't tell you.

(isaiah.thompson@citypaper.net)