Last Thursday, Mayor Parker announced that the City would not defend the best tool the City has for helping gig workers and small and start-up businesses, the $100,000 business tax exemption, against the lawsuit filed by Alcatel Lucent, a company worth over $ 1 billion. The result will be a large tax increase for all businesses with revenues and profits below 1 million dollars annually. A small company with $ 200,000 in revenues and $50,000 in profits will see its tax bill go from $1,409 to $ 2905—a $ 1,496 increase.
At the same time, the Administration is supporting significant tax cuts for multi-million dollar corporations.
As Councilmembers Brooks and O’Rourke stated: “Instead of fighting for small businesses in court, the Administration chose to give up on defending the BIRT exemption. Our City’s smallest businesses will pay the price.”
Because the City’s tax programs are convoluted and poorly explained, it is unlikely that the majority of Philadelphians understand that while the Mayor and her Tax Commission call for lower taxes, they are raising the taxes on small businesses to give large companies big tax cuts.
Like many of Philadelphia’s difficulties, the problem starts with Harrisburg. Pennsylvania’s Constitution requires that all taxes be uniform. The Pew Charitable Trusts writes: Efforts to change Philadelphia’s local tax system— whether to encourage economic growth, promote social equity, or simply raise needed revenue—often run up against a 19th-century section of the Pennsylvania Constitution known as the uniformity clause.
The clause, as consistently interpreted by the state courts, requires that all local and state taxes be flat, with the same percentage applied to all taxpayers or properties. That long-established interpretation limits city officials’ policy options and helps explain several distinctive features of Philadelphia’s tax system:
- An office building worth $50 million has the same 1.3998% property tax rate as a home worth $50,000. Different rates for various types of property, though commonplace elsewhere, are prohibited.
- Residents making $100 an hour have the same 3.8398% wage tax rate as those making the $7.25 minimum wage.
Over the years, the City has found ways to limit the problems the “uniformity clause” causes. Examples are the homestead exemption on real estate taxes and other programs to help people struggling to keep up with ever-rising assessments.
For business taxes, the City has established a Use and Occupancy tax that must be paid on real estate used for business. The effect is to increase the tax rate on business real estate, as residential real estate doesn’t pay the tax.
The other primary tool the City has used is exemptions. In real estate, the exemption is called the “Homestead Exemption.” “The property’s assessed value is reduced by $100,000. Most homeowners will save about $1,399 a year on their real estate tax bill starting in 2025.”
Using this tool makes the real estate tax more equitable, giving a larger discount for homes with lower assessed values. So, a home assessed at $200,000 gets a 50% reduction using the $100,000 exemption, while a property worth $ 100,000 only receives a 10% reduction.
To make the business taxes equitable and encourage new businesses to locate in Philadelphia, the City developed the Jump Start program, which reduces taxes for new businesses.A business’s first two years of operation are exempt from paying the Business Income and Receipts Tax (BIRT).
The City also helped small businesses by exempting the first $ 100,000 in revenue from the BIRT tax.
These programs allowed small businesspeople and “Gig” workers a chance to grow their businesses. They also saved them the time and expense of filing tax returns.
The City has announced it wants cuts in BIRT that will end with eliminating a portion of the tax rather than fighting for small businesses. The effect will be that small start-ups will pay more for years to come, while large multi-million dollar businesses will see annual tax cuts, while the City loses needed revenue.
No one knew if the City was going to win the lawsuit. Now, it will never be known. What is known is that the City is not attempting to find a way to make the policy of helping small businesses and start-ups exempt from taxes.
The Mayor has not announced a new program that would be legal or even asked the Philadelphia Delegation to Harrisburg to make the exemptions legal, as was done for the Real Estate Tax Homestead Exemption.
Instead, the Administration is using its decision to surrender the small businesses and gig worker exemption to argue for trickle-down tax cuts. The cuts’ across-the-board nature means the largest savings go to the biggest companies.
Sadly, this cynical approach may persuade the City Council to both attack the trickle-down tax system proposed by President Trump and support the same type of program being proposed by the Mayor of Philadelphia.
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