Professional Documents
Culture Documents
OF
PHILADELPHIA
CITY COUNCIL
OFFICE OF THE PRESIDENT
DARRELL L CLARKE
PRESIDENT
ROOM 494, CITY HALL
Philadelphia, PA 19107
(2151 686-2070
Fax No, (215) 5633162
Wage Tax and Business Income and Receipts Tax- by an amount equal to the estimated
yield from the differential in the two real estate tax rates.
Again, I do not support that proposal. The Coalition has portrayed the proposal as
"revenue neutral" to the City in the first years of the program, and then as "strongly
revenue positive," based on certain assumptions. I have come to believe that that
portrayal is deeply flawed.
Shmily after I met with representatives of the Coalition, I asked the past long-time
head of Council's Technical Staff, Rick Auerbach, to evaluate the Coalition's proposal
and underlying work product. I am enclosing a copy of Mr. Auerbach's report (without
supporting spreadsheets, which I can provide upon request).
The bottom line is this:
The Coalition's math did not add up. Initial assumptions were erroneous. I quote:
"As the following table shows, under this apples-to-apples analysis, the Coalition's
proposal is in fact strongly revenue-negative to the City in years 3-10, and thereafter."
Correcting for the faulty initial assumptions, Mr. Auerbach found that, by the end of year
10, rather than a net revenue gain of$66 million, there would be a net revenue loss of$91
million.
The report also noted deficiencies in the Coalition's "elasticity" estimates - that
is, how a change in a given tax rate would affect the base of that tax. For example, the
Coalition evidently assumed that an increase in the real estate tax rate would have no
impact on the real estate tax base, despite the generally held consensus that increases in
real estate tax rates tend to depress real estate tax values. As a result, the Coalition's
projections overstate real estate tax collections if the commercial real estate tax rate were
increased.
I also asked Mr. Auerbach to evaluate the specific language of the Coalition's
proposal as then provided to me. The Coalition proposed amending the Pennsylvania
Constitution to provide that the General Assembly may, by law:
(vii) Permit a city of the first class to impose taxes on real estate usedfor
business purposes at a tax rate that exceeds the tax rate applicable to other real
estate provided that the rate applicable to other real estate shall not vary by more
than 15% from the rate applicable to real estate used for business purposes and
provided that the General Assembly requires the city of the first class to reduce
the aggregate revenues from other taxes imposed on businesses and any wage &
net profits tax by the amount of any real estate tax revenues attributable to the
variance.
I understand the Coalition may since have modified its proposal: the limitations
would remain, but instead of being in the Constitution itself, the General Assembly
would impose them. Nevertheless, the Coalition's proposed language is deeply troubling.
For example, the proposal seems to treat the real estate taxes in Philadelphia as a
single tax, with a single rate (1.34% at the time the proposal was issued). As you know,
however, this percentage in fact reflects the sum of two completely separate rates: one
that supports the City's municipal government; and one that supports the School District.
Why does this matter? As Mr. Auerbach explains:
"If any portion of the proceeds of an increase real estate tax on businesses goes to
the School District, then the proposal, while revenue neutral to taxpayers as a
whole, would be revenue positive for the School District and revenue negative for
the City. That is because the required concomitant reduction of wage, net profits,
and business taxes must all be taken on the "City" side, at least as long as Act 46
precludes reductions in School taxes." (Emphasis added.)
There are more problems and ambiguities; here are selected examples:
Who would decide, and by what method, how much revenue an increase of the
business real estate tax would generate, so that the City would know how much to
reduce the other taxes? Who would decide, and by what method, the revenue
reduction that would result from cutting the wage tax or the BIRT by a given
percentage?
The Coalition assumes that cuts to tax rates will increase the tax base and thereby
increase tax revenues. Must these "base growth" effects be considered in deciding
how much to reduce other taxes? If so, the City might be required to make even
larger cuts to other tax rates, since a given tax rate reduction will, under the
Coalition's assumptions, increase the relevant tax base and therefore have less of
a revenue-reducing effect. Could the City use a methodology that ignores the
"base growth" effects?
Could already-scheduled cuts in the BIRT or Wage Tax that are in the City's
Five-Year-Plan be considered as "offsetting" tax cuts to balance out a future
increase in business real estate taxes, or would only "additional" BIRT cuts
satisfy the requirement?
Would all rates have to be adjusted before the start of a fiscal year? If so, what
happens if the City's estimates prove to be wrong? Would the City be required to
make additional cuts in future years to remedy any "shortfall" in prior year tax
cutting measures. If a taxpayer challenged tax rates as not in compliance, would a
court defer to the City's calculations, or would it decide itself what method to
use?
DARRELL L. CLARKE
DLC/dmc
Enc.: Memorandum: Some Quantitative Issues Raised by the "Job Growth Proposal"
cc: Members of Council
MEMORANDUM
TO:
FROM:
DATE:
September 9, 20 14
I previously sent you a draft of this memorandum in advance of your meeting with Econsult. Please note
that the earlier draft included some analysis based on the first spreadsheet sent to you by the Coalition,
rather than the revised spreadsheet the Coalition submitted, and some of the differences between this
memorandum and the earlier draft are explained by those revisions (for example, the tables on p. 3 and p.
4 contain different numbers because of the spreadsheet revisions submitted by the Coalition).
Year Plan (again, that planned cut in the fifth year of the Plan is subject to
enactment of legislation by Council). The "baseline" revenues also assume that the
rate of the net income portion ofthe BIRT will decline to 6% in 2023, and remain
at 6% thereafter (those rate reductions have been enacted into law, per The
Philadelphia Code, 19-2604(1)).
The spreadsheet then calculates the revenue impact of the Coalition's
proposed rates (the increase to commercial real estate taxes, coupled with greater
cuts to wage, net income, and BIRT). However, in calculating those revenues, the
spreadsheet does not use the same tax base as used in the 5 Year Plan. Instead, the
spreadsheet assumes that the proposed tax rate changes will have the effect of
growing jobs and businesses, which will mean an increase to the bases of the
various taxes. The spreadsheet includes a tab that shows the various "elasticity"
effects of each tax cut on all tax bases (in some cases, the spreadsheet assumes that
a cut in one tax will increase the base of a different tax; e.g., it assumes that a wage
tax cut will increase the real estate tax base).
Under these assumptions, the spreadsheet concludes that the growth of the
tax bases (and the increase in the commercial real estate tax rate) will more than
offset the cut in wage, net income, and BIRT rates. As stated on p. 8 of its "Job
Growth Proposal," the Coalition believes its proposal will be "strongly revenue
positive to City in years 3-1 0."
I do not believe the spreadsheet makes an apples-to-apples comparison of
the Coalition's proposal to the baseline. As noted above, the baseline 5 Year Plan
also assumes that cuts will be made to the rates of the wage tax, net income tax,
and net income portion of the BIRT. Under the Coalition's assumptions, such
already-assumed cuts will have the effect of increasing the tax base and therefore
increasing revenues. Those increased revenues should have been included in the
baseline against which the Coalition's proposal is compared.
I have attached to the email transmitting this memorandum to
spreadsheet ("EHA 9-9-2014 - Tax Shift Model Five Year Lag") that I
provides an apples-to-apples analysis. 2 It uses the same methodology
Coalition's spreadsheet, but applies the Coalition's "elasticity" model
2
you a
believe
as the
to the
That spreadsheet follows the same analysis as the spreadsheet I emailed to you with the earlier draft of
this memorandum, but it has been revised to include the other taxes the Coalition included in its revised
spreadsheet {parking, amusement, school income, and liquor taxes).
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
1
0
(0)
5
20
33
46
59
66
0
(2)
(9)
(16)
(20)
(31)
(48)
(66)
(91)
(119)
(115)
(113)
(112)
(113)
(117)
(121)
(124)
(128)
(133)
72
106
134
156
169
174
179
185
190
196
201
(137)
5 Year Plan are independent of tax rates). Under this approach, baseline revenues
would be the same as calculated by the Coalition, but the projected "elasticity"
effects would be smaller (since the percentage decreases from the 5 Year Plan rates
will be less than the percentage decreases the Coalition computed from the 2015
base rates).
I have followed this alternative approach in a second spreadsheet
("Alternative 9-9-2014 apples-to-apples method") attached to the email
transmitting this memorandum to you. 3 That spreadsheet is identical to the one sent
to you by the Coalition, with one exception. Under the "RE Wage BIRT" tab, the
chart entitled "Alternative Percentage Change in Rates" is adjusted to show the
percentage changes not from 20 15 rates, but from the rates in the 5 Year Plan, as
projected (i.e., what the Coalition calls the "baseline" rates). As shown in the
"Total" tab, under this method the Coalition's proposal is more or less revenue
neutral during the first two years, but increasingly revenue-negative thereafter:
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
0
(2)
(9)
(15)
(17)
(24)
(38)
(51)
(70)
(91)
(82)
(75)
(71)
(70)
0
0
5
20
33
46
59
66
72
106
134
!56
169
174
(72)
Again, that spreadsheet follows the same analysis as the similar spreadsheet I emailed to you with the
earlier draft of this memorandum, but has been revised in line with the Coalition's revised spreadsheet to
include parking, amusement, school income, and liquor taxes.
2031
2032
2033
2034
2035
2.
179
185
190
196
201
(74)
(77)
(79)
(82)
(85)
Elasticity error
The Coalition assumes that increases (or decreases) in the real estate tax rate
wiii have no impact on the real estate tax base (elasticity= 0). However, I believe
there is a consensus that increases in real estate taxes depress real estate values,
and decreases in real estate taxes increase real estate values. If that is correct, why
is the elasticity of the real estate tax base to real estate tax rates zero? If the correct
5
I
I
lI
I
Ii
I
:i,,
estimate of elasticity is some number less than zero, then the Coalition's
projections have overstated real estate tax collections under the scenario of an
increase in the commercial real estate tax rate.
Also, please note that the Coalition does assume that the real estate tax base
will be positively affected by cuts to the wage tax rate (elasticity= -.26). Whether
or not that is reasonable is beyond my expertise. However, it should be noted that a
significant portion of the positive revenue effects shown in the Coalition's
spreadsheet are due to the claim that the real estate tax base will increase with
decreases to the wage tax. In fact, without that claimed increase to the real estate
tax base, Coalition's proposal would be net revenue-negative through 2025
(without any other changes being made to the Coalition's own calculations), and at
least 69% of the net revenue gains the Coalition estimates after 2025 are due to the
real estate tax base increase. The last tab (labeled "Effect of r.e. elasticity") of the
"EHA 9-9-2014 Tax Shift Model Five Year Lag" spreadsheet supports those
conclusions. 4
4. Other issues
a.
The Coalition states that the "the proposed increase in commercial
real estate taxes occurs up-front in years one and two in the model, whereas the
reduction in wage and BIRT taxes occurs gradually over 10 years" ("Assumptions
of Tax Shift Revenue Model8.18.14 (revised), p. 1.).
However, it is important to remember that under the proposed Constitutional
language provided by the Coalition, any increase in commercial real estate taxes
resulting from the higher rate for business properties must be fully offset by
reductions to wage and BIRT taxes, including in years one and two. Therefore, the
additional tax cuts proposed by the Coalition after year two are greater than the
minimum tax cuts that would be needed to offset the higher commercial real estate
tax rate, which does not increase after year 2. 5 That is not to say whether or not
those additional tax cuts are good policy or not. However, policy makers should be
4
When I sent you the prior draft of this memorandum, I included this analysis in a separate spreadsheet,
rather than including it as part of the larger spreadsheet.
The prior draft of this memorandum (and accompanying spreadsheet) included a discussion as to
whether the Coalition's proposed rates met the Coalition's proposed Constitutional tax cutting
requirement. I deleted that material because I was not sure whether and how to handle the "elasticity"
effects in determining the revenue impact of proposed rate cuts.
aware that the Coalition's tax rate proposals should be considered in two
categories: (1) those rate reductions necessary to offset the proposed increase to
commercial real estate taxes, as required by the Coalition's proposed Constitutional
language; and (2) those additional rate cuts the Coalition believes would be
beneficial to the City's economic growth.
b.
I had a few comments on the text of the "Job Growth Proposal"
submitted by the Coalition:
i.
Page 4 (assuming the cover page is considered p. 1) shows the
"outflow" of workers from districts (by the way, please note that the "old" districts
are shown, i.e., the districts from which members were elected in 2011, but not the
new districts from which members will be elected in 2015). It says that 37% of the
workforce commutes outside the City, but that seems to be low, given the
generally higher totals shown for each district (the discrepancy might be because
there are fewer workers in those districts showing the higher percentages). In any
event, this is not really relevant to any of the Coalition's quantitative analysis.
Page 6 claims that the 5 Year Plan assumes job contraction
ii.
because the growth of wage tax receipts is assumed to be less than the growth of
wages. I'm not sure if that is correct. The 5 Year Plan also assumes cuts to the
wage tax rate, and that would mean that if employment is assumed to be stable,
wage tax receipts will grow by less than the rate of wage growth. Again, this is not
really relevant to any of the Coalition's quantitative analysis.
Page 8 states that the Coalition's plan is to permit the
commercial real estate tax rate to be 15% more than the residential rate. That
statement is in conflict with the Coalition's proposed Constitutional language on
p.9, which states the residential rate can vary by no more than 15% from the
commercial rate (which would mean that commercial rate could be about 17.6%
higher than residential; e.g., 1.0 commercial, .85 residential). The rates proposed
by the Coalition are 1.34 residential and 1.54 commercial. Under those rates, the
commercial rate varies from the residential rate by a little less than 15%, while the
residential rate varies from the commercial rate by about 13%. Please note that
assuming the residential rate is fixed at 1.34, then, under the Coalition's proposed
Constitutional language, the maximum commercial rate could be set as high as
1.34/.85, or a little more than 1.57.
111.