Philly’s wage and business taxes will be cut amid a big cash surplus for the city - Action Center on Race and the Economy

Philadelphia City Council members gave initial approval Thursday to a more than $6.2 billion budget deal in which lawmakers approved tax cuts for businesses and workers amid an unusual cash surplus.

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City coffers are flush after a year of stronger-than-expected tax revenues and more than $800 million in unspent federal pandemic aid. The strong financial outlook led to a feeding frenzy during negotiations between lawmakers and Mayor Jim Kenney’s administration as varied interest groups pushed for tax cuts or increases in funding to services like jobs programs and quality-of-life initiatives.

This year’s deal marks the end of an era for Philadelphia, as Kenney, who is term-limited, and Council President Darrell L. Clarke, who did not run for reelection, are both leaving office in January. Together, they have 77 years of government service.

The budget will take effect July 1, and will cover the last six months of their tenures as well as the first six months of their successors’ terms. The city’s financial position is good news for Cherelle Parker, who is likely to become the next mayor after winning last month’s Democratic primary and should have plenty of money to fund first-year priorities. It’s unclear who will replace Clarke as Council president.

Clarke characterized the budget as one that prioritizes public safety and investments in neighborhoods while ensuring the city sends a message that it’s “committed to making this a more business-friendly climate.”

“While still remaining fiscally prudent,” Clarke said, “we did make some significant investments.”

After a series of procedural moves late Wednesday, Council members gave the budget preliminary approval Thursday afternoon, putting the legislation on track for final passage June 15.

Budget season began in March when Kenney proposed a largely status quo $6.1 billion plan with modest cuts to the wage and the business income and receipts taxes totaling about $28 million in lost revenue.

At the urging of the Chamber of Commerce for Greater Philadelphia and groups representing businesses owned by underrepresented people, some lawmakers pushed to reduce those taxes further, and the issue became the final sticking point before negotiations ended Thursday.

Business-friendly Democratic Council members, led by Isaiah Thomas and Katherine Gilmore Richardson, lobbied for more aggressive reductions, while progressive Councilmembers Kendra Brooks and Jamie Gauthier opposed cuts, as did some municipal unions. Clarke privately favored smaller reductions closer to what Kenney initially proposed.

In the end, they compromised to cut taxes about $4.5 million more than Kenney’s initial proposal, but not as much as the chamber had hoped.

Gauthier was the only member to vote against the budget. She and Brooks also voted against the tax cuts. Gauthier said the budget did not allocate enough money to address quality-of-life issues that she advocated for.

“We are putting millions back into the pockets of mega-corporations,” Gauthier said. “This budget is a slap in the face to our working-class Black and brown residents who begged City Hall for the resources they need to live in clean, green, and safe blocks.”

Tax cuts continue

Council voted to reduce the wage tax for city residents from 3.79% to 3.75% after Kenney in March proposed cutting it to 3.7565%. (The nonresident wage tax rate will remain flat at 3.44%.) They also lowered the net income portion of the business tax from 5.99% to 5.81%, lower thanKenney’s initial 5.83% proposal.

The tax cuts in Kenney’s plan amounted to about $28 million in projected lost city revenue, while the chamber encouraged lawmakers to adopt cuts totaling $63 million, or about 1% of the general fund.

The compromise plan amounts to about $32 million in tax cuts.

Will Carter, the chamber’s vice president of local government affairs, said it was important for the city to accelerate its practice of annual cuts to the wage and business taxes to encourage job creation.

“We rank very low in terms of job growth,” Carter said. “We hear from diverse members all the time that the cost of doing business in this city from these taxes is prohibitive.”

Carter said he encouraged lawmakers not to look at the tax question as a choice between better services or a more business-friendly tax environment.

“There are some entrenched interests who don’t believe it can’t be either/or,” Carter said.

Progressives argue that the city is already failing to provide basic city services and that more tax revenue is needed to address Philadelphia’s challenges.

“The Chamber of Commerce is trying to take a last giant chunk of funding that is meant to help communities and city services recover from the pandemic — money meant for spending on neighborhoods, not on business tax giveaways,” said Arielle Klagsbrun of the Action Center on Race and Economy.

Stan Shapiro, of the progressive group Neighborhood Networks, said the chamber’s plan ”enriches big corporations and rich CEOs while perpetuating the lie that tax cuts will trickle down.”

Gilmore Richardson defended the tax cuts Thursday, saying they are not connected to a lack of investment in other priorities.

“It’s disingenuous to say that the slight cut that I have offered today will have an impact on the overall investments that this budget has made,” she said.

Some new funding for basic services

Members approved a $55 million increase in funding to the Police Department, largely to cover contractually obligated pay raises and upgrades to the forensics lab. The department’s budget allocation will be about $855 million.

On top of Kenney’s initial proposal, Council added about $65 million in spending, most of which will fund initiatives members have championed in recent weeks, including hiring bonuses, illegal dumping enforcement, and youth jobs programs.

Council added more than $5.5 million to improve code enforcement and address illegal dumping sites. That is far short of what Gauthier advocated for — she called last week for the city to spend an additional $72 million on quality-of-life issues and said every member except Clarke supported the plan.

She’s not the only member who didn’t get all that she sought.

Councilmember Kenyatta Johnson, who is angling to be the next Council president, this week proposed to add about $40 million in new spending to expand existing programs for children and youth, including counseling, job placement, and school safety initiatives.

Council ultimately funded some of those programs, including allocating $5 million to fund a workforce development program in the Streets Department and $500,000 for PowerCorpsPHL, an AmeriCorps program.

Johnson said through a spokesperson that he will advocate for additional funding for youth programs during the mid-year budget transfer process, which takes place every fall.

Lawmakers also approved an additional $3 million to expand the number of mobile crisis units operating in the city, a priority for Brooks, who is a member of the liberal Working Families Party. The units are staffed by behavioral health providers and respond to some 911 calls with the goal of cutting down on the number of interactions police have with people in crisis.

Notably, Parker, who resigned from Council last year to run for mayor, won new funding for a policy priority.

Council members added $3 million to expand the PHL Taking Care of Business initiative, which Parker championed in Council and talked about frequently on the campaign trail. The program provides funding to community groups to clean neighborhood commercial corridors.

Clarke said the budget deal puts the next mayor in a position to “have resources to carry out their vision.”

Strong fiscal outlook

Council was able to add both tax cuts and funding increases to Kenney’s proposal thanks to the city’s unusually strong financial position.

Tax revenues are projected to be up about 4% over last year, or $167 million. Of that, the wage tax, which is the city’s largest revenue source, is projected to generate $151 million more than last year.

Additionally, the property tax is on pace to grow by $99 million over last year, due primarily to the Office of Property Assessment completing its first citywide property reassessment in three years. (The administration is freezing assessments for the next fiscal year, meaning revenue from the levy will be roughly flat.)

Heading into the fiscal year, the city still has not spent roughly $800 million of the $1.4 billion in federal aid it received from the American Rescue Plan Act of 2021. It’s required to spend all the money by the end of 2024.

“The economy is certainly doing well, and the conservative doomsday projections from the pandemic luckily have not come true,” said Nick Hand, director of finance, policy and data at the Controller’s Office. “It’s a good foundation for the next mayor.”