Presentation from Drexel School of Economics / Econsult Solutions, Inc. Joint Conference on Urban Economic Policy April 27, 2016

1. 1
Why tax reform is key to job growth Philadelphia was a major manufacturing center
1906: 16,000 manufacturing plants
Spread across all older neighborhoods;
Unlike Pittsburgh & Detroit not a one-industry town
Highly diversified
A place that used to make Stetson Hats

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Baldwin Locomotives Atwater Kent radios
Military equipment at the Frankford Arsenal Huge garment industry

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Gave life to our neighborhoods & waterfront Manufacturing tied to fix assets, rail & river
Changes in transportation technology,
growth of sunbelt & global economy
Accelerated immediately after World War II
Factories were moving out the city

4. 4
Long-term loss of manufacturing jobs
23,000
3.5%
2015
1880 - 2015
Red blighted areas = old manufacturing areas
Residential abandonment: inner city
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2008
Declining share of regional residents
Suburbs
City
2.1 million

5. 5
Municipal tax policy responds to decline
• Philadelphia introduced 1.5% “temporary” wage tax:
1939 when industry was tied to factories, railroads & ports
& Philadelphia was the only employment center in region
• As jobs & population declined in 1960s & 1970s, wage
tax is increased, reaching 4.96% by 1990- levied on all
employees in Philadelphia, living in city or suburb.
• In the 1980s Philadelphia introduced “business privilege
tax” levied on both gross & net business revenues
• Philadelphia carefully avoided raising resident property
tax, until it was ordered by the courts to carry-out a
comprehensive re-evaluation in last 5 years
1950s & 1960s extensive renewal
1953: the demolition of “Chinese wall” Penn Center

6. 6
Building a post-industrial city Similar process of renewal in University City
View across Walnut St bridge, 1920s
Transformed into dynamic, growing district A center for research & health care

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Global center for education
Center City + University City = 8% of city’s land area
53% of city’s jobs;37% all in-movers to city 2010-2014
40% of downtown jobs are in the office sector
Footloose tenants, highly cost sensitive
80% of University City’s jobs are in eds & meds

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More tied to fixed assets; labs, beds, technology, classrooms Usually exempt from real estate & business taxes
Major wage tax payers
But the renewal of Center City & University City
Is simply not big enough to offset industrial decline
Outside of major employment nodes,
jobs quickly thin out

9. 9
2011 Regional Job Share
188,000 Philadelphia residents (40% of workforce)
Reverse commute to suburbs each day
Growing ½% annually since 2002
By contrast
only 15.3%
of NYC
residents
commute to
suburbs
By contrast
only 15.3%
of NYC
residents
commute to
suburbs
27%
Educational requirements in the suburbs are no
different from those in the city
Suburbs have simply grown more jobs than Philadelphia
Our peer cities: Boston, New York & Washington DC
All lost 85%-90% of manufacturing jobs they held in 1970

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But since 1970 they recaptured lost jobs
while Philadelphia is down 28%; similar to Detroit
One of the highest poverty rates among major cities
City % Below Poverty Line
Philadelphia, PA 26.0%
Baltimore, MD 23.6%
Boston, MA 22.6%
New York City, NY 20.9%
Washington, DC 17.7%
Uneven job growth: Eds & Meds + 50.5% citywide since 1990
Leisure & hospitality + 51.2%.
But office industries down 23% in the last 25 years
2003 & 2009 tax commissions both concluded:
Local tax policy: major cause of decline
If you over-tax what can move (wages & business revenues),
it will!

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Wage tax dependency: Detroit
20% PHL from RE TAX
41% NYC
36% Washington DC
Philadelphia excessively dependent on
wage & business taxes
“Only by making a wholesale shift & lowering the burden on
people & businesses & placing a greater emphasis on land
& improvements can we guarantee a future of growth.”
20% 26%
Both 2003 & 2009 Tax Commissions:
shift burden from taxing what moves (wages & business revenues)
to taxing what is fixed & stable: land & improvements
2016 2026
Both RE tax
Sustained period of job growth,
added jobs for 9 of the last 10 years

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But…we’re in the midst of an urban led
national economic recovery
Cities are growing fast everywhere
25 largest cities all grew faster than Philadelphia 2010-2014
Nation grew at 2.1%
25 largest cities 2.7%
Philadelphia 0.9%
Philadelphia has rebounded from Recession
But not yet regained private sector job levels of 1990
Philadelphia has strong entrepreneurial culture,
even among those with limited education

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But in the absence of a growing economy,
entrepreneurs can’t secure enough work to add employees
% of sole proprietors taken on employees to work for them
Occupied office supply is identical to 1990;
New supply offset by conversions to housing
As a result, rents are far below comparable cities
Philadelphia’s diminished commercial tax base
= insufficient to support schools
Source: Pew Charitable TrustsSource: Pew Charitable Trusts

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We have a highly successful, walkable downtown
With a diversity of uses
Thriving with day & nighttime activities
Mixed-use walkable places prevailed in recession
Fastest growing residential section of Philadelphia
+17% overall since 2000 = 185,000
25% of those who moved to PHL between 2000-2014 moved to downtown
We have attracted the highest concentration of
educated workers in city & region
57.7% of all downtown residents have at least BA
30% have advanced degrees

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So there ought to be a rent-premium for locating
in the employee & amenity rich downtown
National average = 25%; PHL rent premium= 4%
112%
75%
Low rent = low assessed value = insufficient funds for schools
Philadelphia commenced tax reduction in 1996
Suspended in 2008
Goal: Restart tax reduction to induce job growth

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Regional tax competitiveness
• Philadelphia wage tax is almost 4 x regional median.
• BIRT has no counterpart & adds 20% to 30% premium
• Property tax is 66% of suburban Pennsylvania median
The theory of reform
• Taxing salaries & revenues discourages small business
formation, weakens demand for commercial office space,
depresses rents & reduces share of real estate taxes local
government derives from business properties across city.
• As the burden of wage & BIRT (the cost of working & doing
business in the city) goes down, the demand for real estate
here will go up, increasing the RE tax base & the share of real
estate taxes that can be derived from business properties.
• It is the RE tax, not the wage tax, which supports schools
Job growth means rising commercial office rents:
Beneficial to owners & the City
Increasing average Class A rents just $1 per square foot
— from $27 to $28 per square foot for occupied space —
would equal $8.2 million more each year in real estate
taxes from the CBD.
An increase in rent to Cira levels— $37 to $38 per square
foot —would equal $87 million more each year in real
estate taxes from the CBD.
At Boston levels, $56/sf - over $100 million more to City
Job growthJob growth
Every 500,000 square feet of
occupied office space:
Provides 3,333 office jobs,
5 building engineering,
18 cleaning and 12 security
positions.
• Every time tenants turn
over, construction trades
renovate space.
Supports 11,000 hotel rooms
filled with business travelers.
Generates $2.8 million in
retail demand.
Adds 2,333 riders to SEPTA.

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How to achieve tax reform?
• Cut 5% from City’s budget, so municipal government
needs less revenue. In a city with huge social needs &
county functions, like courts & prisons to support, that
seems unlikely.
• Reduce City’s need for taxes by selling a large public
asset to pay down pension liabilities which are eating our
municipal budget.
• Raise RE millage rate for all real estate taxes from 1.39 to
1.60 & use new revenues both to achieve reduction in
wage tax & BIRT, while generating substantially more
funds for School District. History of AVI.
Hardest path: modification of Uniformity
Seek approval from the Commonwealth for only
Philadelphia to assess business properties at 15% more
(1.39 residential; 1.61 commercial).
15% differential (not actual rates) locked in by state law.
Revenues generated from differential are dedicated by
state law to reducing wage & business taxes.
Dedicated modification not open-ended modification
Goal: Reduce wage tax below 3% over next decade &
cut net income portion of BIRT in half over same period
Up-front increase in commercial RE taxes
to insure no gap opens in City’s budget.
Modification of Uniformity
Analysis by major accounting firms show a positive
impact on tenants as taxes on their revenues &
employee wages go down more than RE tax pass-
through increases; creates incentives for growth.
Similar analysis for small business owners

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Council reduced number of U&O payers in 2014 to 12,841
tax payers by exempting the first $177,000 in income.
Council exempted the first $50,000 earned by a business
from Business Income & Receipts tax (BIRT). Exemption
increased to $75,000 for tax year 2015 & $100,000 for Tax
Year 2016 & thereafter.
This reduces the number of BIRT payers to 45,000
By contrast, there are currently 90,000 properties that pay
commercial real estate taxes
Why this works The impact: Econsult study:
80,000 jobs added over next decade
25,000 jobs downtown means building, leasing & operating
4 Mellon Bank Centers or 5 Cira Centres
70
•It will stimulate substantially more job creation &
economic activity within Philadelphia than the City’s most
recent Five-Year Plan: 80,000 jobs over the next 10 years.
•It will produce more tax revenues than the City’s most
recent Five-Year Plan (it is “revenue positive”), because it
pays for wage and business tax reductions with an
increase in the commercial real estate tax rate.
•It generates $362 million more for the School District
over the next ten years than the City’s Five-Year plan. It
will also, will generate additional tax revenues for the
School District from the use and occupancy tax, liquor
tax, and school income tax.
A broad coalition of supporters

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Importance of business leadership
Business community leads with investment in growth
All citywide residents & small businesses see their
wage tax & BIRT go down (required by state law)
Whole city benefits from job growth: Econsult analysis
suggests an addition 80,000 new jobs over next decade
www.PhiladelphiaGrowthCoallition.com
HB 1871 has been introduced with bi-partisan
support & backing from Mayor Kenney