Philadelphia Bar Association
City Council Tax Hearings: Reduction & Eventual Elimination of Business Privilege Tax
November 17, 2005
Good afternoon, Council President Verna and members of City Council. Im Alan Feldman, Chancellor-Elect of the Philadelphia Bar Association. I will serve as Chancellor of the Association during 2006.
First of all, I want to thank the City Council for this opportunity to testify on tax reform. I also want to commend City Council for passing legislation cutting the net income portion and the gross receipts portion of the Business Privilege Tax in the next five years with the possibility that that the tax would eventually be eliminated. I think its a healthy sign that City Council has approved such legislation and its also a very encouraging sign that additional Council members have joined to co-sponsor other bills that will make cuts to the Business Privilege Tax in the coming years.
It seems that we have turned a corner and I hope that going forward discussions can focus on HOW we can phase out the Business Privilege Tax rather than IF we need to phase out the tax.
So on behalf of the 13,000 members of the Philadelphia Bar Association I want to thank you again for your leadership and your commitment to our city. The issue of the Business Privilege Tax is an issue that goes back over several years and indeed my predecessors have been here to testify in font of you from the very beginning of this process.
I want to simply reiterate today that generally we support the recommendations of the Tax Reform Commission and we certainly support the eventual elimination of the Business Privilege Tax. Studies have time and again shown that the Citys tax structure is one of the principal reasons why businesses leave Philadelphia, do not expand here, or never locate here. These studies are confirmed by our own experience as well as those of our clients. In dealings with business clients in the region lawyers have repeatedly heard businesses express their concerns with the citys tax structure. And we understand those concerns.
Regrettably, the current tax structure actually encourages lawyers to follow their clients out of the city. And over the past fifteen years our surveys show that Philadelphia law firms have been opening satellite offices in surrounding counties at an accelerating rate. Yet, incredibly the areas major law firms (including many national and regional powerhouses) have continued to maintain their headquarters offices in the city. They have done this despite the unfavorable tax climate. They would not do this if they did not want to try to stay here if they did not feel some commitment to the city.
But how much longer can this last?
The time has come to signal through tax policy -- that we want these firms to make a long-term commitment to our city and that we value the Philadelphia legal community.
For too long city businesses have paid the nations highest local business tax. We must reverse this trend.
We also urge the city to address the inequality that is inherent in the Business Privilege Tax and correct the over-taxation of professional firms that are organized as partnerships.
Specifically, the City effectively taxes partner income at a combined rate of at least 6.7% but taxes compensation paid to employee owners of businesses operated as corporations or sole proprietorships at rates ranging from 3.9127% for nonresidents to 4.5% for residents. This discrimination against service partnerships, and the extremely high 6.7% rate of tax, is, we believe, a major factor in the large shift of service sector jobs from the City to the suburbs.
I know this first-hand because my law firm is organized as a professional partnership. There is no reason why partners in a firm such as mine should have to pay a higher tax rate than those in businesses organized as corporations.
A 2003 study by the Central Philadelphia Development Corporation shows that Pennsylvanias suburbs have enjoyed a robust 34% rise in professional services jobs between 1990 and 2000. The study goes on to note that Philadelphia added no new commercial office buildings in the 1990s. By contrast, the Pennsylvania suburbs have added 12 million square feet of space, the equivalent of 10 Liberty Place Towers, surpassing Center City in total space in the process.
If Philadelphia had added just half this amount of office space, the City would have realized over $100 million annually in new tax revenues.
The top 22 Philadelphia law firms employ at least 8,500 people in Philadelphia and pay nearly $44 million annually to the city in taxes (including net profits, wage, business privilege, use and occupancy and real property taxes). These same firms pay nearly $70 million annually to lease 14% of all office space in center city.
Most of the law firms in the city are not big firms. They are small and medium-sized. So, when we add in these small and medium -sized firms, the figures that Ive quoted you are actually much higher. We are now in the process of conducting a broader economic study of our law firms so this figure will be updated and reflect the fact that a large majority of our lawyers, while operating small businesses, make huge contributions to Philadelphias tax base. The citys tax structure greatly impacts on these small and medium-sized firms as well.
Taxes affect everyone: small business, large businesses, families, laborers, professionals. It makes no sense to pit one group, one class or one segment against another. A lower Business Privilege Tax and robust economic growth will help everyone. It will give true new meaning to Philadelphias proud new title which National Geographic Traveler magazine recently bestowed on us: Americas next great city.
On behalf of the Bar Association I thank you and say once again: We resolve to work with you and provide whatever help we can as Philadelphia addresses this important issue.