Recent announcements from the Kenney administration that it will resume reductions in the city wage tax — and continue for at least another five years — may seem odd to those who view our city and its obligations to be underfunded. A long-term commitment to reduce our income in the face of crumbled schools and hollowed-out health centers creates, for some, a troubling dissonance.
It's certainly true that, in 1995, we had the highest wage tax in the country and Mayor Ed Rendell believed it inhibited businesses from relocating here. Cutting the tax was supposed to create jobs by attracting new firms. Already, we've reduced the wage tax from 4.96 to 3.89, roughly 20 percent, but the data does not clearly record a corresponding increase in corporate relocations and job creation. It may be that this policy of wage tax cuts cannot compensate for a Philadelphia workforce created by an embarrassingly deficient public education system.
This experiment was never for the benefit of workers who, typically, realized a single-digit savings in a given pay period. The prime rationale was job creation. If that isn't happening, we need to know and change course.
In Philadelphia, there is a reluctance to revisit tax policy once it has been set and few matters illustrate this better than our real estate tax abatement, which provides a decade free of real estate taxes to buyers of newly constructed homes. Introduced in 1999 by then-Councilperson Frank DiCicco, it's undisputed that the abatement substantially increased the value of vacant lots and abandoned properties while jump starting development in a way not seen in decades. As its mission has been largely accomplished, perhaps we can scale the abatement back to a three- or five-year term so we can remain competitive with the surrounding counties and substantially speed the flow of cash into the city treasury.
We lack institutionalized triggers that initiate reviews when a tax no longer serves its purpose or becomes self-defeating. For example, in 2016, our cigarette tax (a classic consumption tax) created almost $60 million in new revenue for the schools. True to its name, that consumption tax reduced consumption and will generate almost $26 million less this year. That may be great news to the health commissioner, but it puts serious pressure on other revenue streams.
Our newly imposed beverage tax (yet, another consumption levy) has gained controversy for not meeting revenue expectations. Thus, the ice beneath pre-K and Rebuild bonds may be thinning.
Despite experienced staff in both the Kenney administration and City Council, Philadelphia suffers from an under-managed tax regime that does not securely provide for the conspicuous and expanding needs of our citizens.
With a 27 percent poverty rate, a $5.7 billion gap in our pension fund, and an immediate need for $3 billion to fix school buildings, the effectiveness of the taxes we impose must be a matter for continual concern. Ideally, this would be accompanied by increased sobriety in spending by elected officials who are still reluctant to end the $100 million annual expense of the Deferred Retirement Option Plan, for instance. But, that's a wholly different problem.
The good news is that, despite being based on consumption, our liquor tax has realized a $22 million increase over the last five years, stimulated by a welcome increase in tourism. In this, we "lucked out." Alcohol consumption, except to the portion of our population that is alcoholic, is an elastic demand that was suppressed by the tax. Fortunately, our city drew enough tourists to more than compensate for the depressed revenues that would otherwise have resulted.
The wage tax represents 70 percent of City Hall's income and, therefore, is the one with which to be most careful. Conditions are vastly different from 1995, and it is likely time to draw a curtain on a policy of reduction that cannot be proven successful.
As obligations mount and our tax regime falters, all who love this city and hope for its future would welcome much greater care in the management of our resources and revenues so our enormous promise can be realized for generations to come.