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Philadelphia Tax Reform Commission Proposes BIRT Elimination

Philadelphia skyline highlighting economic reform efforts.

Philadelphia Tax Reform Commission

The Philadelphia Tax Reform Commission was established to evaluate and recommend improvements to the city’s tax system, with a focus on the Business Income and Receipts Tax (BIRT). Chaired by City Council President Kenyatta Johnson, the commission has historically advocated for phased elimination of BIRT to stimulate economic growth and reduce financial burdens on businesses. Since its inception, the commission has conducted extensive studies and proposals aimed at reforming the complex tax structure, including the gradual removal of BIRT’s components such as the gross receipts tax and net income tax. Its initiatives reflect a commitment to making Philadelphia more economically competitive, fostering job creation, and ensuring sustainable city revenue in the long term.

News Summary

The Philadelphia Tax Reform Commission has proposed a gradual elimination of the Business Income and Receipts Tax (BIRT) over the next 8 to 12 years to stimulate economic growth. This tax affects businesses earning $100,000 or more and has been a significant source of revenue for the city, generating $617 million this fiscal year. The recommendations aim to alleviate the financial burden on businesses, although they face opposition from some groups advocating for increased revenue for city services. The proposals will play a crucial role in upcoming budget negotiations.

Philadelphia Tax Reform Commission Proposes Elimination of Business Income and Receipts Tax

The Philadelphia Tax Reform Commission, chaired by City Council President Kenyatta Johnson, has proposed the gradual elimination of the Business Income and Receipts Tax (BIRT) over the next 8 to 12 years. This significant recommendation aims to stimulate economic growth and alleviate the financial burden on many businesses within the city.

Currently, businesses earning $100,000 or more from transactions conducted within Philadelphia are required to pay BIRT, which comprises two separate components: a gross receipts tax and a net income tax. A study conducted by Pew Charitable Trusts revealed that approximately 25% of businesses in the city meet the $100,000 threshold. From 2017 to 2021, an average of 35,500 firms annually paid BIRT, with a median tax bill of $1,315.

Notably, BIRT contributes significantly to the city’s finances, generating an estimated $617 million in the current fiscal year, making it the third-largest source of revenue after the wage tax and property tax. For context, the wage tax is projected to contribute about $2.6 billion, while property tax collection is expected to reach approximately $930 million. BIRT’s gross receipts tax is levied at a rate of 0.1415%, and the net income tax is set at 5.81%.

Context of the BIRT Structure

Philadelphia’s BIRT structure is considered an outlier compared to other metropolitan areas, many of which impose only one type of business tax. The net income tax rate has been progressively reduced from 6.5% in 2007 to the current level of 5.81%, while the gross receipts tax rate has remained unchanged since 2008. Following the municipal spending crisis of the early 1980s, former Mayor William J. Green III initiated the BIRT tax solution, establishing the framework that persists today.

Commission’s Recommendations and Economic Implications

The Tax Reform Commission has outlined a phased approach for reform, recommending the priority elimination of the net profits tax, followed by a decrease in the wage tax, and ultimately addressing the gross receipts tax. The report suggests that this reform could lead to significant tax relief for businesses, promote job creation, and unlock economic growth potential in Philadelphia.

However, the recommendations have met with some opposition, particularly from progressive factions and municipal unions who advocate for strategies aimed at increasing revenue to enhance city services rather than tax reductions. The commission’s interim report also explored various scenarios for gradual reductions of the BIRT net income tax, projecting potential revenue losses ranging from €417 million to nearly $2 billion over time.

Next Steps and Legal Considerations

As Mayor Cherelle L. Parker’s administration prepares for upcoming budget negotiations, the commission’s proposals will be key considerations. However, potential legal challenges may hinder tax implementation. A pending lawsuit concerning the BIRT exemption for businesses earning under $100,000 raises concerns about its constitutional validity.

The current BIRT exemption is utilized by roughly 75,000 businesses. To reduce legal risks associated with this exemption, the Parker administration plans to eliminate it, while also providing financial resources to support small businesses impacted by the changes. This initiative aims to ensure that the transition is manageable for businesses and encourages sustained economic growth.

Looking Ahead

The commission has emphasized that tax reform is crucial for enhancing Philadelphia’s competitiveness, both regionally and nationally. By addressing the complexities and burdens of the BIRT system, the commission believes it can lay the foundation for job growth and improved economic stability in the city.