FUMO INTRODUCES BILL TO CUT PHILADELPHIA WAGE TAX
HARRISBURG, March 26, 2001 – Citing the need to retain and create jobs in Philadelphia, State Senator Vincent J. Fumo, along with 9 Democratic and 8 Republican co-sponsors, introduced legislation today to reduce the city wage tax.
Under the proposal, the wage tax rate would decline from its current level of 4.54 percent to 3.5 percent for city residents, and from 3.95 percent to 3.04 percent for non-residents. Both reductions amount to 23 percent.
"Clearly, our goal is to lower the enormous tax burden on Philadelphia area taxpayers and to reverse the continuous job losses that have plagued the city for 40 years," said Fumo, a Democrat from Philadelphia.
Fumo also offered 12 painless suggestions for the city to offset the revenue it will lose from the wage tax reductions.
The measure (SB1372) calls for rate reductions to begin with the start of the 2002-2003 fiscal year on July 1, 2002. They would be phased in over an expected period of five years.
The rate of reduction would be based upon earnings growth in Philadelphia during the preceding calendar year, as computed by the federal Bureau of Economic Analysis. If growth is more than 3.1 percent, the reduction to the tax rate would be .21% for residents and .1806% reduction for non-residents in each of the next five years. (Since the resident rate is higher these two reductions are proportional.)
In the event annual growth in earnings is less than 3.1%, the reduction would be .1% for residents and .09% for non-residents. Under this scenario, the reductions would continue for longer than five years until the target rates of 3.5% for residents and 3.04% for nonresidents are reached.
"Our bill is a significant beginning to solve the problems of Philadelphia taxation," Fumo said. "It is a drastic step for the state to step in and do this, but it has become necessary. After this plan has been implemented, we hope the positive benefits will be apparent, and it will embolden city officials to launch their own campaign to finish what is being started here."
Fumo noted that both the Philadelphia Chamber of Commerce and the Philadelphia Bar Association have recently called publicly for a reduction in the wage tax.
In addition, in its January 2001 A Philadelphia Report Card, the Federal Reserve Bank of Philadelphia said: "The city is near its peak of revenue-generating capacity – that is, raising taxes shrinks the city’s economy and tax base so much that revenue will not rise significantly. On the positive side, this implies that while lowering taxes will reduce the city’s tax revenues, it will increase economic activity in the city. Thus, in the long run, the annual revenue loss will be less than the initial loss in taxes."
Since 1992, Philadelphia has lost almost 20 thousand jobs, dropping from 695,700 to 676,000, a decline of 2.83 percent. Over the same period, Pennsylvania’s overall employment grew by 11.49 percent.
For a resident wager earner with annual income of $20,500, the plan would mean tax savings of $43 in the first year and $213 by the fifth year. Someone with income of $50,000 would save $104 in the first year and $519 in the fifth year. Someone with annual income of $100,000 would see the tax burden reduced by $208 in the first year and $1,039 in the fifth year.
To help the city balance its budget while the economic benefits of wage tax reductions take effect, Fumo proposed 12 items to pay for the cuts. These include controls on the hiring of new employees, the sale of Philadelphia Gas Works, reductions in debt service payments, caps on the growth of the city’s prison population, enhanced collection of fines for municipal code and vehicle code infractions, new revenue initiatives, and changes in pension fund amortization.
(A complete list, along with an explanation of each item, is attached to this news release.)
" I hope that after five-years, as the city’s job market stabilizes, that the city will lower rates further to become even more competitive with the surrounding region," Fumo said.
How to Pay for the Wage Tax Cut
(Cumulative Savings Over 5 Years)
1. Economic Stimulus, $25 million – The city currently spends $5 million per year on economic stimulus programs that have a negligible impact alongside the $300 million that the state spends annually on economic development throughout the commonwealth. The benefits to the economy of a lower wage tax would be significantly more effective than this $5 million in discretionary spending.
2. Complement Control, $176 million – This assumes a one percent annual reduction through attrition in the city workforce beginning in FY 2004, or between 250 and 275 employees annually for the three year period ending in 2007. That figure represents about one-third of the employees who must retire by then under the DROP program, and who would not be replaced. It also assumes that additional savings would result from the lower cost of replacing the other two-thirds of the retirees with lower-cost employees. The estimate includes a one time $40 million cost in 2004 of higher leave payouts for these retirees. At the close of fiscal year 1999, the city had 24,391 employees. By the end of this fiscal year the city expects to have added 442 new employees to its payroll. Next year’s budget assumes the hiring of an additional 607 employees. The proposed five year plan for 2003 would cost the city more than 218 million in additional wages and benefits above FY 1999.
3. Health/Medical Savings, $20.8 million - These savings result from maintaining employee benefit cost increases at 7 percent above the prior year, as negotiated in the current contract for non-uniform personnel.
4. Debt Service Reductions, $75 million – This plan was recommended in the City Controller’s Tax Structure Analysis Report. It would revise debt service payments based upon the city’s actual current debt plan.
5. PGW Sale, $112.5 million – This assumes the sale of the Philadelphia Gas Works for an estimated $1.2 billion. Of that amount $949 million will be necessary to retire existing PGW debt, and $45 million must be used to repay a loan to the city. This analysis also assumes that the terms of the sale must include a mechanism to continue the $18 million annual payments to the city general fund budget.
6. Human Services, $13.5 million – This spending reduction assumes that Human Service spending will only rise at a three-percent annual rate. The city budget currently projects a much greater annual growth rate, assuming increased costs due to federal welfare reform. In fact, those costs are not likely. Even during the current economic downturn these costs have not risen substantially.
7. Prisons, $45.3 million – These savings result from limiting next year’s growth of the city’s prison population to 250 inmates above the current-year level, and to a total of 500 additional inmates by 2007, mainly for two reasons. 1.) While prison population growth has leveled off or even begun declining throughout most of the rest of the country, Philadelphia is still projecting that the 2003 prison population would increase by more than 20 percent above the 1999 population. The city’s proposed prison spending plan for next year would increase costs more than $21 million above actual expenditures in 2001. Those projections are outdated. 2.) Approximately one third of the assumed reduction in the city’s prison population would result from the enactment of state legislation mandating state sentences for more serious offenders. Senate Bill 1323, sponsored by State Senator Jane Earl (R-Erie), would require that all prisoners sentenced to terms above two years be confined in state prisons.
8. Live Stop, $53 million – The city will realize additional revenue from greater enforcement of traffic laws.
9. Increased Fines, $105 million - Beginning in the 2004 fiscal year, it is assumed that the state legislature will increase the current cap on fines for municipal code enforcement violations from $300 to $1,000 and enact vehicle code changes to allow larger fines for many offenses.
10. New Revenue Initiatives, $45 million – The city could raise money through aggressive efforts to sell advertising space in public spaces, lease rights of ways, lease rooftop spaces for telecommunications, and sell exclusive rights for concessionaires, etc. By comparison, last year SEPTA raised nearly $25 million in non-farebox revenue, including $13.3 million in advertising and rights of way leases.
11. Stimulus Effect, $52.2 million – This is an estimate of the money the city would realize, beginning in the third year of wage tax reductions, from retaining jobs that otherwise would have left the city because of the higher wage tax. This assumes a .75 percent increase in the wage tax base (more workers and higher wages) during 2005, a 1 percent increase during 2006 and a 1.25 percent increase during 2007.
12. Pension Amortization, $77.367 million – Current state law only allows the city to spread the cost of meeting its unfunded pension liability over 10 years. A more flexible 20 or 30 year time frame would allow the city to more gradually payoff these rapidly escalating costs. The recommended savings plan would still allow payments to increase by 7.5 percent each year. This change, advocated by the city in its most recent five year plan, but not assumed in its proposed spending plan, would require state legislation.