Philadelphia's Budget: Everyone's Right: An Alternative Financing Plan
Mayor Nutter's announcements and . . .
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Hard Times
offered solutions last week were understandable, yet also avoidable. Understandable because the traditional reaction to an economic downturn in government is to cut services, lay off workers and rethink taxes. Avoidable because all options should be on the table, but are not.
The Mayor has made the city and its citizens face hard facts: in a recession tax revenues, especially business tax revenues, decline. Along with the Business Privilege Tax, these revenues are based on the taxation of choices: renting a car, staying in a Philly hotel, buying something nice. Slackening tax receipts result in small but deadly holes in the budget.
There is a chasm dividing opinion on what a city faced by hard times should do. Advocates for safe and clean streets, libraries, fire stations, and culture stand for stable revenue streams to fund vital, often lifesaving, programs.
Tax reform advocates, argue against freezing the tax cuts in the name of inter-city competitiveness.
Everyone’s Right
Both positions are correct, but the false dichotomy of "either/or" prevents true common ground, and a solution to the crisis.
The Henry George Foundation agrees with the danger of budget cuts, but cannot agree that the only sources of revenue for these essentials are business taxes. Why? Who says?
The assumption that all business owners are 'rich' and ready to be plucked is a myth refuted through any newspaper's business bankruptcies listing. Why must business always be the "go to" source of city revenue? Isn't it time to look for new alternatives? Most employers in Philadelphia are small business owners. Again, look at the city’s tax receipts. Times are hard for them as well. Freezing tax rate reductions are more reflexive than reflective.
Many argue that tax cutting isn’t effective in attracting families and business anyway. That’s at least questionable. Yet, even if valid, cities and states are incredibly committed to tax subsidies.
For example, our Chamber of Commerce is all for shutting down business tax reduction, but I am confident they still support tax breaks for the "big dogs" while telling the neighborhood dry cleaner, tavern or bodega to pay their “fair share.” From Comcast to BlackRock, we suspect the goodies will still flow through givebacks, subsidies and abatements. “We got ours.” is not the best philosophy to follow, but that’s the script we’ve been given in this city for decades.
With small business being the engine of real job creation, the favorable tax treatment of large firms is all the more disquieting. There has to be a rethink of these freezes.
The Crisis IS real
On the other hand, the Mayor is not minimizing the cash crisis facing the city. But that’s because on the revenue side we still depend too much on the taxation of action.
About 6% of the budget a year is a lot of money, especially when a budget scalpel is wielded. The voiceless and the powerless are the first to be ignored, and their concerns shelved. Those members of Council who are trying for cost savings on the expense side are probably leading the first wave of truly effective action, sort of like battening down the hatches at the first sign of an approaching storm.
In a recession - especially in a city with lagging indicators on all sides – business and wage tax revenues are particularly liable to drop dramatically as businesses retrench and job losses mount. Revenue can slip even with rate reductions and a rate freeze can only exacerbate the problem.
The fact is Philadelphia relies on tax revenue from two things – labor and capital - that can be hidden, can vanish, or can flee. Both are being whipsawed by forces beyond Philadelphia’s control. There are few places to hide, especially from high tax rates on those two things.
Another Way
If all options are indeed on the table, then we'd suggest that the city can come together and ask that revenues be raised from the one resource that is barely nicked by taxation: land values.
The idea of a tax on land values is not new. In fact, in 1693, it was the first tax of Philadelphia. The idea of taxing land and reducing other taxes to attract scarce development capital and workers started with William Penn, was further developed by Ben Franklin and Thomas Paine and perfected as a message of economic justice by Henry George, Philadelphians all. The pedigree is impeccable, the theory is accepted by nearly all economists – liberal and conservative – and the implementation is possible, much like in hundreds of cities all over the world - and in Pennsylvania - big and small.
By reforming the property tax, we can create a tax on land value that’s stable, efficient and progressive. Again, no economist of any repute denies that a tax on land value makes the most economic sense.
Here in Philadelphia, Penn’s Professor Robert Inman has, for years, asked the city institute this simple, efficient and just tax. By removing the tax on buildings and improvements, the tax penalty for construction is removed without blowing holes in the budget.
The Henry George Foundation of America is able to provide comprehensive data, which prove that a land value tax, applied even with the current assessments would provide tax relief for homeowners in the most at-risk parts of the city, while providing a mechanism for revenue streams that can flow even in recessionary periods. For example, instead of 82.64 mills on land and buildings, we could bring in the same revenue with 54.22 mills on houses and other buildings and 173.68 on land values. It works where used, and Philadelphia cannot ignore an idea that can help us through hard times and beyond.
If business and citizen could discover a place where that rewards growth without favor or subsidy, we could see an inflow of wealth even in hard times. Why? As a city, we are locationally one of the most advantaged places in the US. With recession a long-term threat, people and firms in high-tax places like New York will seek an amenable outlet for their activities. Why not Philadelphia?
Economic Justice and Common Sense
To fill our budget hole, and then some, the city must recognize that there is community-created value, and privately-created value. Land values are the textbook case of community-created value. The more desirable we think a site is, the higher its value. We, the community need to keep that value for the services we need. Land values can pay for what our community wants.
Philadelphia primarily collects privately-created value: jobs, buildings, and commerce. Philadelphia is at a disadvantage because all other surrounding areas take less of it, and that’s why the current downturn is so problematic. It's that simple.
So, let's agree that everyone is right: advocates for city services, the Mayor and the tax reformers. We have to cut taxes on workers and production. We have to provide revenue so that essential programs are not cut; indeed many ought to be increased. The old dueling assumptions that our choices are either high taxes or low services are untenable as our society faces what is likely to be a long twilight period of little economic activity.
If all options are on the table, then the land value tax deserves a seat at that table. The gulf between "either/or" has to be bridged. We suggest a land bridge.
Henry George Foundation of America
1518 Walnut Street, Suite 604
Philadelphia, PA 19102
215.545.6004
manager@urbantools.org
