At the first hearing of the Philadelphia Tax Review Committee, business leaders testified that Philadelphia’s combination of business taxes is so high that it stops businesses from moving into the City and prevents entrepreneurs from opening up. As a result, the business community claims Philadelphia is losing population and that a large percentage of Philadelphians are living in poverty.
Lost in the business community’s testimony were some crucial facts: There are almost two dozen programs that exempt businesses from paying taxes; there are 287 “zones” that eliminate all taxes; there are no business taxes on the first $100,000 in revenue; and all new businesses locating in Philadelphia, under the “Jump Start” program, are exempted from all business taxes for two years.
A recent report by the Pew Charitable Trusts studied the Business Income and Receipt Tax, often called “BRIT, and the City’s “Net Profit Tax“
The study, researched and written by Thomas Ginsberg, a senior officer with The Pew Charitable Trusts, found that while business taxes provided 16% of the City’s revenues, “Only around a quarter of the City’s businesses—35,500 a year on average—file a BIRT return and owe any BIRT tax. The other three-quarters don’t make enough money to be taxed under the BIRT, although many are still subject to the NPT”.
Many Philadelphians who see businesses closing and living wage jobs leaving believe the argument that the problem is business taxes. The complexity of the business taxes underlies many misguided beliefs. The City is well aware that it fails to explain the business taxes to the public and aspiring entrepreneurs. The City writes the taxes are “part of a unique tax structure, which can sometimes confuse business owners and self-employed individuals.“ https://www.phila.gov/2019-11-25-birt-and-npt-philly-business-taxes-explained/
There are really four business taxes. The “BRIT,“ a tax on what is sold in Philadelphia and a tax on a business’s profits; the Net Profit Tax” which taxes the profits after expenses on “the operation of a trade, business, profession, enterprise, or other activity.” Corporations do not pay the net profit tax. It is only paid by “sole proprietors, partnerships, associations, LLCs and Estates or Trusts.
The fourth tax on real estate used for business purposes is the “Use and Occupancy tax,” which the Pew Study does not examine.
One of the reasons for the different taxes is businesses have been successfully avoiding taxes at all levels for many years. An internet search engine will provide link after link of news stories outlining how many major, profitable corporations avoid paying taxes, often legally. As big businesses can hire lawyers and accountants to discover legal ways to avoid tax liabilities, the government changes its tax codes and what government taxes. Added to that is the Pennsylvania Constitution’s “uniformity clause” that requires the government to have “flat taxes,” which creates the reality that the less one makes, the harder it is to pay taxes and have enough left over to pay for living expenses.
The “BRITT” taxes the “gross receipts” and “net profits.” The gross receipt tax taxes what is sold in Philadelphia at a meager rate of 0.1415%, or .001415. For every $ 100,000 in sales, the business pays $141.50. The “net profit” tax is higher at a rate of 6.2% or .062, a few percentage points higher than the wage tax. However, unlike the wage tax, which taxes the same amount regardless of one’s expenses, the net profit taxes only taxes what is left after all the costs are paid. And that is only if the lawyers and accountants haven’t found a way to show a loss; the business doesn’t have one of the many exemptions, and it isn’t a new business that pays no taxes.
The median business tax bill was $1,315. The median Net Profit tax paid by unincorporated businesses and partnerships was even less, at $360. The chart below, created by the Pew Trusts, shows the median tax due and which companies are paying higher tax burdens.
The chart doesn’t include which businesses are receiving any of the almost two dozen different tax exemptions the City has created, which companies are in one of the 287 “Keystone“and other tax-free zones that dramatically limited business taxes, or which businesses are “new” and paying no taxes at all.
The City’s Tax Review Commission is tasked with making recommendations to the Mayor and City Council. Its challenge will be to sort through the rhetoric of lobbyists, lawyers, and those who make campaign contribution investments to find the truth. The Pew study points out just how wide the difference is between the facts and the business community’s public relations campaigns.
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