Welcome to Monday Morning Quarterback, a deep-dive into prominent issues facing Philadelphia and the Commonwealth.
This week, we’ll talk about how a provision in Pennsylvania’s Constitution keeps the City from enacting progressive tax reforms and why recent attempts to change it have failed.
🗳️ City Council Recap: April 22, 2021
Thursday’s Earth Day edition of City Council was relatively routine and subdued. The Mayor’s office transmitted a number bills to Council that appear to be aimed at cracking down on dangerous construction excavation practices. As the City’s real estate boom continues, older homes are being torn down and replaced at a rapid clip. The Administration appears to be seeking to create a new type of contractor license, an “excavator license,” to provide further oversight over this aspect of the construction process.
Council also passed a bill that would prohibit employers from requiring marijuana drug tests from prospective employees as a condition of employment. The bill provides for a number of exceptions, including a general exception for positions in which “the employee could significantly impact the health or safety of other employees or members of the public.” The bill passed 15-1, with Councilmember Oh voting “no.”
Council’s full attention soon will be occupied by the City budget, with hearings scheduled to kick off on May 3rd. The current budget schedule can be found below in the “Upcoming City Council Public Hearings” section.
🧜♀️ The Siren Song of Tax Reform
We’ve spent the last couple of weeks discussing the City’s less than rosy financial outlook, including how close we came to seeing a doomsday budget scenario that would have gutted city services, pools, recreation centers and libraries. This lack of resiliency is our achilles heel and one that will continue to hold us back from making real progress on the numerous issues facing our city.
Countless studies, commissions and reports all point the finger of blame at Philadelphia’s tax structure for the reason why we fare so poorly when compared to our peer cities in things like job creation, employment and poverty rates. We tax things that can easily move, like jobs and businesses, while receiving only a small portion of our tax revenue from real estate, which isn’t going anywhere.
If everyone knows that our tax system isn’t optimized to promote economic growth or weather economic volatility, why do we continue to do the same thing over and over again, expecting a different result?
The answer lies buried in the Pennsylvania Constitution, with a dash of politics as usual, as usual. The PA Constitution contains a provision that hamstrings any ability to enact meaningful and progressive tax policy reforms providing:
All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.
This is known as a “Uniformity Clause” and it is relatively common across state constitutions. What makes Pennsylvania’s Uniformity Clause particularly unique and restrictive is that the Pennsylvania Supreme Court has interpreted this clause to prohibit the “imposition or adoption of a graduated income tax.”
Many other states have identical or similar language, but “the Pennsylvania Supreme Court is the only state high court to declare that this verbiage prohibits the legislature from enacting a graduated income tax.”1 Practically speaking, this is a court-mandated regressive tax structure, one that sees the working poor bearing a heavier burden than that of high-income earners.
The PA Supreme Court interpretation extends beyond wage and income taxes, to real property taxation. Residential properties are taxed at the same rate as commercial properties - a basic necessity taxed the same as a revenue generating, income producing property. As the Pennsylvania Bar Association points out, “This fiscal arrangement creates an extraordinary real estate tax burden for residents in many school districts.”
It is an issue which has long hindered our ability to reform our tax structure, a finger trap which keeps us from effectively meeting the critical needs of our residents.
Fiddling Around the Edges
Philadelphia’s elected leaders have done what they can to work around the restrictions imposed by the Uniformity Clause to bring some semblance of progressivity to our tax structure. The Philadelphia Homestead Exemption allows homeowners to reduce the assessed value of their property by $45,000 for tax calculation purposes - an option not available for commercial properties. The City also has a tax on the books that is essentially a Uniformity Clause workaround designed to raise tax revenue from commercially used properties - the Use and Occupancy Tax.
Countless other exemptions and tax credits litter the pages of the Philadelphia Tax Code, but wholesale reform has proven a hill to high to climb, despite high public support.
In 2003, the citizens of Philadelphia voted to create the Philadelphia Tax Reform Commission to “recommend methods to reduce the taxes of Philadelphia residents, workers and businesses. The Commission recommended a comprehensive overhaul of the city’s tax structure, including:
Elimination of the Business Income and Receipts tax
Reductions to the wage tax
Phased in land-value taxation
Actual value assessments of properties, rather than fractional assessments
While a handful of recommendations were implemented, the “comprehensive overhaul” never occurred, in large part because of the fear of opening a hole in the City budget through the elimination or reduction of taxes.
A second major effort at reform attempted to address both the Uniformity conundrum as well as the budget hole fears. The Philadelphia Job Growth Coalition proposed an amendment to the PA Constitution that “would create an exception to the uniformity clause that allows only Philadelphia to impose a commercial property tax rate that is up to 15 percent higher than the residential tax rate — as long as they city reduces wage and business taxes so that it is not getting new revenue.”2 (Full disclosure: I was a hired consultant and worked on the Job Growth Coalition’s reform efforts.) The proposal would have accelerated wage and business tax cuts, but avoided the feared budget hole by requiring commercial property owners foot the bill for the reductions.
Despite a broad coalition of supporters including unions, small and large business owners and many local chambers, after a six-year effort the proposal failed to gain the necessary support required to amend the Constitution. Local elected officials balked at the restrictive provision requiring that the supplemental commercial tax revenue be dedicated to funding the tax reductions, a provision necessary to garner support from the tax-averese, GOP controlled General Assembly. No meeting of the minds, no Constitutional amendment.
As we head into this year’s budget and once again prepare to do the same thing over again and wait for a different result, I hope that Uniformity reform might get brought back from the dead. Is it a steep hill to climb? Absolutely. But if the solution were easy, we would have fixed it by now. Small tax reductions might help generate some much needed economic activity, but if we want to truly change the trajectory of the City’s future we need to be willing to fight that boss battle. Who knows, with a much more progressive Pennsylvania Supreme Court, maybe now is the time to revisit the Uniformity Clause and bring it in line with the rest of the country.
This Week’s Poll - Sheriff’s Sales Moving Online?
Last week, City Council held an extensive public hearing on the Sheriff’s office recent announcement that it has hired a company to move Sheriff’s Sales online. Council criticized the Sheriff’s office decision as one that would accelerate gentrification, invite out of town property speculation and result in less money going to the property owners. The Sheriff’s office defended the decision stating that the online sales were an innovative safety measure, made necessary by Covid and argued that they had a legal duty to conduct the sales, notwithstanding requests for a moratorium.
What are your thoughts on the decision to move Sheriff’s Sales online?
Last Week’s Poll Results
You guys called it by a landslide - no tax increases in this year’s budget.
🙋❓ Question of the week: Why do we call it Gerrymandering?
With the release of the 2020 Census data, all eyes will soon turn to City Council as it will undertake the once a decade task of redrawing District boundaries to account for population shifts in the City. In 2006, Azavea named Philadelphia’s 7th District the “most-gerrymandered municipal district in America.” The 5th Councilmanic District came in third in the gerrymandering derby.
But why do we call it gerrymandering?
The term gerrymandering is named after American politician Elbridge Gerry…who, as Governor of Massachusetts in 1812, signed a bill that created a partisan district in the Boston area that was compared to the shape of a mythological salamander.3
http://www.pabar.org/crc/taxation.asp
https://www.inquirer.com/philly/opinion/editorials/uniformity-clause-philadelphia-tax-reform-uniformity-clauseeditorial-20181015.html
https://en.wikipedia.org/wiki/Gerrymandering