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Law360 (June 26, 2020, 7:42 PM EDT) -- Philadelphia's mayor signed the city's budget bills into law Friday, halting scheduled rate reductions to business taxes and resident wage taxes while increasing the nonresident wage tax rate to offset a drop in revenue amid the novel coronavirus pandemic.
Philadelphia Mayor Jim Kenney and the City Council negotiated tax changes to counter the effects of the coronavirus. They will go into effect on July 1. (AP)
Additionally, the budget will freeze the resident wage, earnings and net profits tax at its current 3.8712% rate instead of it being reduced as previously proposed, increase the parking tax to 25% from 22.5% for one year, and do away with a 1% discount for paying property taxes early.
The new tax rates will go into effect on July 1, the start of the city's fiscal year. Altogether, the budget's tax provisions are projected to raise $35.5 million in the next fiscal year, according to past statements and budget documents issued by city officials.
In May, Kenney revised his original budget plan to account for COVID-19, the respiratory illness caused by the virus. At the time, he proposed raising the parking tax to 27% without a one-year sunset, and keeping the higher nonresident wage tax rate through fiscal year 2023. The council later tweaked the spending plan to instead increase the parking tax to 25% and return the parking tax and nonresident wage tax rates to their current levels on July 1, 2021.
The budget will also cut revenue to certain agencies, which is projected to lead to hundreds of layoffs. Kenney's office referred questions to a statement the mayor issued Thursday, after the council passed the budget bills, saying that the last few months were "the most difficult budget process I have ever experienced" and that the spending plan still prioritizes core services.
The pandemic compelled the city to pivot away from its recent efforts to reduce its wage taxes, which are among the highest in the nation, and its business income and profits tax, Jennifer Weidler Karpchuk of Chamberlain Hrdlicka told Law360.
All of the budget's tax provisions "are certainly attempts by the city to weather the storm," she said.
"With the drop in tax revenue due to COVID-19, the city has to make some changes to account for the shortfalls," she said.
Karpchuk said city officials have been cutting the business income and profits tax and wage taxes in recent the years amid concerns that they "both stifle growth." She said that the high wage taxes can deter individuals from both living and working in the city, and that the business tax, which is also levied at 1.415 mills on gross receipts, can drive some businesses out of Philadelphia.
The city's future budgets after the pandemic, she said, might explore creating a friendlier tax climate to businesses and workers if the health crisis spurs "a mass exodus to the suburbs." In that scenario, "the city would need to draw people back in — likely with tax incentives, not disincentives," Karpchuk said.
In a statement to Law360 on Friday, Council President Darrell L. Clarke, a Democrat, said the spending plan's tax measures played "an important part" in eliminating the revenue shortfall that resulted from the virus.
Together with Kenney's administration, the council "fashioned a budget that eliminates that gap, reduces funding for policing, supports additional police reforms, and still includes $45 million to fund essential anti-poverty, affordable housing and other initiatives to address the disparities magnified by the pandemic," Clarke said.
Council Members David Oh and Brian J. O'Neill, both Republicans, were the only members of the 17-member council who voted against the budget's tax provisions. Neither council member responded to requests for comment Friday.
--Additional reporting by Daniel Tay. Editing by Joyce Laskowski.
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