Guest Post: How Philly’s Brutal Tax Policies Drive Away Jobs

Businesses and people vote with their feet. As a long-time Philadelphian, I have unfortunately witnessed my neighbors taking their livelihoods to the suburbs—or beyond.

Politicians cast the blame here and there, but as a real estate investor, I’ve seen the truth firsthand: Philadelphia has been left behind by America’s economic boom because its tax policies seem to bilk  businesses.

Unlike any other major city in the country, Philadelphia levies two taxes on business income, the Business Income and Receipts Tax (BIRT) and the Net Profits Tax (NPT). That’s right, there are two separate taxes individuals must pay on the same type of income.

The BIRT taxes gross receipts at 0.1415 percent and net profits at 6.3 percent. Adding insult to injury, the gross receipts portion is owed regardless of whether the business activity makes any profit, a big burden for small businesses. But one feature that makes this tax particularly pernicious to Philly’s entrepreneurs is this admonition from the Dept. of Revenue (emphasis added):

The BIRT must be filed and paid by April 15 of each year, for business activity from the prior year. With each filing, an estimate for the following year’s BIRT must be paid in full.

Yes, you read that correctly. Businesses must pay the entire next year’s estimated BIRT by April 15. So, in addition to your business needing money for day-to-day necessities like inventory, paychecks, and working capital, you need to turn over your entire estimated city tax on income and sales that haven’t yet occurred—and might never occur. Contrast this with the federal government and Pennsylvania, which allow businesses to pay estimated income taxes in installments over the course of the year.

But we’re not done yet. Individuals or pass-through entities must also pay the NPT. The NPT taxes income at the same rate as the city wage tax and serves to capture income otherwise exempted from the BIRT. It’s one more tax, one more form, and one more impediment to doing business in Philadelphia.

By now you’re probably thinking, Wow! They sure make it hard to be a successful business in Philadelphia.

But we’re still not done. New businesses must apply for a Commercial Activity License. On the application you’ll see this in bold:

Do not use a Post Office Box number as your business address. Indicate if you own the property. If you own the property used for business purposes and it is located within Philadelphia, you will also be liable for Business Use and Occupancy tax.

The Use & Occupancy (U&O) tax is 1.21 percent of the value of property used for a business and is based on the same property value used for real estate taxes. Given that the real estate tax is 1.4 percent, the U&O tax nearly doubles the real estate tax cost for the “privilege” of doing business and hiring people in Philadelphia. If you don’t own the property, your landlord will owe the U&O tax and will add that cost to your rent.

So, why should Pennsylvanians care if Philadelphia overtaxes businesses? Two reasons:

  1. Pennsylvania jobs are being lost. Philadelphia is not an island, and businesses will find friendlier climates in neighboring counties or states. We see this in Philadelphia and Pennsylvania's decades-long stagnant population growth. With so much business being done online today, why would anyone locate where the tax regime puts their business at a competitive disadvantage?
  2. People are bearing the cost. Business don’t pay taxes, they collect taxes that the owners, landlords, employees, or customers pay. Economists disagree about which group pays how much, but they are all people.

Philadelphia’s business tax structure is the biggest factor pushing employers, jobs, prosperity, and progress away from this amazing city. Let’s start by at least matching what every other major American city does by eliminating the onerous Business Income and Receipts Tax.

Andrew Terhune lived in Philadelphia over 30 years and has studied the city’s arcane tax system since he began paying its wage tax in 1985. He has an MBA from Columbia University.