Welcome to Monday Morning Quarterback, a deep-dive into prominent issues facing Philadelphia and the Commonwealth. Apologies for the delay on today’s edition, I lost a couple hours retrieving my vaccinated parents from the airport.
For the next few weeks, MMQB will be dedicated to the City Budget in anticipation of Mayor Kenney’s expected budget address on April 15th. Last week, we covered how the City spends money and how an obscure state law handcuffs any attempts to defund the Police. This week we’ll discuss the vulnerability of Philadelphia’s fiscal future and whether the pandemic is an opportunity in disguise to address it.
🗳️ City Council Recap: April 8, 2021
In an otherwise routine Council session, Councilmember Allan Domb stirred things up by dropping in a package of tax reform bills that aim to overhaul the City’s much maligned tax structure. The bills would reduce the City’s Wage and BIRT taxes and attempt to simplify and reduce the tax burden on businesses by allowing businesses to pay the higher of Net Income or Gross Receipts – no longer having to pay both.
Councilmember Parker also introduced a resolution authorizing hearings on the recently announced Sheriff’s Office program which would move Sheriff’s Sales online. Council also cleared off their growing Second Reading and Final Passage calendar by passing dozens of the ceremonial resolutions that have been introduced over the last few weeks.
This week, the Mayor will present his belated budget address to City Council, formally kicking off the budget process and months of hearings on City spending.
💸 Budget Breakdown 🕺 Part III: A Storm on the Horizon
When the feds announced Philadelphia would receive $1.4 billion in funding, an audible sigh of relief could be heard echoing through the Municipal Triplex. This cash infusion will help the City avoid an austerity budget or drastic service cuts resulting from the budget deficit. However, despite the good news, Finance Director Rob Dubow cautioned that these resources wouldn’t be enough to fix the long-term systemic structural issues with the City’s finances.
In other words, don’t pop that Brut just yet.
When the Mayor delivers his budget address on Thursday, most of the focus will be on spending priorities and whether he will propose a tax increase (City Hall chatter suggests no). What might not hear about are those systemic structural problems with the City’s finances Dubow referenced- the millstone around our neck preventing the City from funding further significant investments in services and programs.
The existence and impact of these structural issues have long been known, with multiple attempts to fix them. But after decades of calls for reform, will City Council use the Covid crisis as an opportunity to fix these structural problems?
A Budgetary House of Cards
In recent years, the City has collected feedback from residents “to identify opportunities for improvement, reallocate taxpayer dollars to address newer priorities, and make changes to City practices, policies, and programs.”1 These surveys reveal that resident satisfaction with City services has gone down, despite steady and significant increases in City spending.
We all want to know - how is the City spending more than ever and providing fewer quality services?
The answer is the reality of responsibly managing a City budget burdened by enormous amounts of debt. It is one where an influx of tax revenue must be used to pay down past financial commitments like debt service and the pension fund, rather than invested in direct city services for its current residents.
The City pension fund alone is a voracious consumer of increased tax revenues. In 2014, the City’s contribution to the pension fund was $553 million. In 2020, the City’s contribution to the pension fund was $760 million. Despite these annual cash infusions into the fund, it is still less than 50% funded, the result of too little money being paid into the system over the last few decades. In an attempt to stabilize the health of the fund, the City has negotiated increased contributions from current employees and has been overfunding its obligation to make up for past underpayments.
The pension fund is just one of the mandatory obligations soaking up tax dollars - debt service, our status as a County-City and Act 111 of 1968 all create spending obligations that limit the City’s ability to invest in direct city services. Unfortunately, this isn’t the only structural challenge to the City budget.
An Achilles Heel
When compared to its peer cities across the US, Philadelphia comes out on top in a number of categories. We have the best mascots, the best public art, the best public market and the most historic square mile. But when you compare Philadelphia’s economy to other peer cities, we come in close to the bottom on job growth. One reason often cited for this is our non-competitive tax structure.
Unlike most other major cities, the majority of Philadelphia’s tax revenue comes from wages and business taxes, rather than the usual property tax. Put another way, we rely heavily on taxing things that can easily move to not-Philadelphia. Critics of the City’s current tax structure call it a “jobs killer” that prevents more companies from locating here. But there’s another downside to this reliance - it also makes Philadelphia incredibly vulnerable to economic downturns during which our tax revenue falls faster and harder and takes longer to recover than our peer cities.
The pandemic once again highlighted this weakness in our long-term fiscal stability, with Pew Charitable Trusts comparing Covid’s impact on 13 different municipal budgets. In brief, the article2 observed a negative correlation between the size of the city’s budget deficit and the amount of reliance on the property tax,
with those relying more on property taxes having smaller initial problems…because real estate tax revenues tend to be relatively stable from year to year, even during economic downturns, as opposed to revenues from sales or income taxes.
By way of a real life example, Philadelphia anticipated around a 15% budget shortfall, compared to 1.9% budget shortfall for “Boston, which relies primarily on property taxes for its revenues.”
As long as Philadelphia relies on the Wage tax as its primary revenue source, it’s ability to fund city services is subject to the ups and downs of the economy. This makes meaningful long term program investments and planning incredibly difficult as the City’s tax revenue in out years is almost impossible to predict. More so than any other city, Philadelphia’s budget is simply along for the ride - a Nantucket Sleighride tied to the health of the economy.
Multiple business community members and the 2003 Tax Reform Commission have urged the City to change its tax structure to derive a higher percentage of its tax revenue from property taxes, and to reduce wage and business tax rates. The thinking is two-fold, get rid of “job killing” taxes and shift the City to a more stable and predictable revenue source.
However, reform has proved incredibly elusive. While the City has made regular minor reductions to the Wage and BIRT taxes, the Mayor and Council have resisted larger cuts out of fear of creating a hole in the budget. Proponents argue the cuts will pay for themselves in the longer term by attracting new business and jobs to the City.
Councilmember Allan Domb echoed that sentiment on Thursday as he introduced a tax reform package that would cut Wage and BIRT taxes in order to make Philadelphia more competitive and foster job growth. With $1.4 billion in Federal funding to fill a $750 million budget deficit, the Mayor and Council will have significant supplementary resources to invest and some decisions to make:
Will they heed Councilman Domb’s call to take “bold action” and “change the trajectory” of Philadelphia and enact major tax cuts, using the pandemic funds to plug any budget holes in hopes of spurring sustained long term financial growth?
Will it be a return to the “message sending” regular incremental tax reductions spread out over decades?
Or will they side with opponents who contend that the tax cuts are inequitable and “a corporate giveaway” at the expense of the City’s residents?
What should not get lost in the inevitable “job growth v. trickle down” debate that follows any tax reduction proposal is that our current tax structure is a huge vulnerability to the City’s long term fiscal health and ability to serve our most under-resourced residents.
We judge the reliability of machines based on their downtime, and we should do the same with our tax structure. The merit of our tax structure lies not on the amount it collects during boom times, but on its resiliency during downtimes.
It shouldn’t need to be said, but reforming our tax structure in an equitable way that protects our most vulnerable residents has to be a prerequisite of any legislation enacted by Council. But it is that collective desire to lift people out of poverty and provide real future opportunities to our residents that should be the motivation for taking bold action, not a reason to continue doing the same thing over and over, hoping for a different future.
Stay tuned.
This Week’s Poll - What Will Jim Kenney Do?
Do you think the Mayor is going to propose a tax increase this year as part of his budget address?
Last Week’s Poll Results
What should be the City's top budget priority for this upcoming year?
🙋❓ Question of the week: Why do we call them Row Offices?
Pennsylvania law provides for a number of Administrative roles to be filled by elected individuals. In Pennsylvania, these elected officials include: Clerk of Courts, Controller, Coroner, District Attorney, Prothonotary, Recorder of Deeds, Register of Wills, Sheriff and Treasurer. (Note Philadelphia is a bit different as a Home Rule City).
According to county lore, the title of row officer came about in the early years of the constitution when the departments were first listed in a row on the election ballot.
2019-2020 Resident Survey: https://www.phila.gov/media/20200113092058/2019ResidentSurvey-FINAL.pdf
https://www.pewtrusts.org/en/research-and-analysis/articles/2021/03/30/how-the-pandemic-has-affected-municipal-budgets-in-philadelphia-and-other-cities