Support for business side of city tax plan appears wobbly

Posted: June 13, 2012

A proposal to increase the use-and-occupancy tax on businesses to raise money for the Philadelphia School District has been under assault from business leaders, who are making dire predictions about the increase's impact.

Last week, City Council gave preliminary approval to a bill that would raise $45 million through the tax, levied on business tenants. The bill was offered to ease the impact on homeowners of both a new property tax system and a sizable increase in school funding.

"To raise U-and-O 50 percent in itself is kind of indicative of the problems with our city," said Robert A. Zuritsky, president of Parkway Corp., the parking management and real estate development company. "If you need to raise a tax 50 percent, there's not going to be too many businesses left to pay it."

The increase is about 42 percent.

Zuritsky predicted the increase would cost the city from 10,000 to 25,000 jobs in two years.

He was not alone in warning Council.

The Greater Philadelphia Chamber of Commerce and the Center City District have urged Council not to pass the increase, which could come up for a final vote Thursday.

"Tenants remain mobile and react swiftly to price changes in this environment," chamber president Rob Wonderling wrote in a letter to Council.

The Center City District focused its opposition on the number of downtown office jobs — nearly 54,000 — held by city residents.

"By adding to the occupancy cost of business, we undermine a major source of employment for our neighborhoods," said Paul Levy, president of the district.

The bill, coupled with a second proposal that would raise $40 million through the change to a new property-tax system, would generate $85 million for the schools.

That's short of the $94 million Mayor Nutter wanted to raise through his property-tax reform effort, the Actual Value Initiative (AVI), which would tax properties based on their actual market values.

AVI also complicates use and occupancy calculations, because a property's assessed value is part of the formula that determines how much a business pays in use and occupancy taxes.

Under the new AVI system, most assessments are likely to rise — some significantly — but the administration planned to use a formula that would have collected the same amount in use and occupancy in the next fiscal year as this year — $108 million.

Whether individual tax bills went up or down would have depended on how much a business' assessment changed. The tax is calculated by a formula using the property's square footage used for business, the assessed value of the property, and the use-and-occupancy tax rate, which is 4.6 percent of assessed value.

The biggest impact could be felt in neighborhood commercial corridors, where businesses could face a double tax hit from AVI and the use-and-occupancy tax.

"If their intent is to drive out every small business, then they're moving in the right direction," said Al Taubenberger, president of the Greater Northeast Philadelphia Chamber of Commerce.

Taubenberger, a former Republican mayoral and Council candidate, said uncertainty surrounding the taxes had created "the perfect storm for panic" among small businesses.

He said the messy debate also could prevent businesses from locating in the city.

"There are no statistics on that," he said.

Final approval of the use-and-occupancy tax increase is far from certain.

Finance Director Rob Dubow said the administration's goal was to raise money for the schools, but doing so through the use-and-occupancy tax is "our second choice."

"But the overall objective is important enough that I think we could accept that," he said.

Compared with other Northeastern cities, Philadelphia businesses pay a disproportionately low share of property taxes. That's mostly because Pennsylvania does not allow cities to tax businesses and homes at different rates, according to the 2009 report from the Mayor's Task Force on Tax Policy and Economic Competitiveness.

That share is expected to decrease further under AVI. The use-and-occupancy tax is an indirect way to make businesses pay a bigger share of property taxes, as they do in cities including New York and Boston, according to the task force.

In Council, support for the measure appears to be vulnerable. Bill Green, who first raised the possibility of increasing the use-and-occupany revenue $94 million, now opposes a tax increase.

Other Council members who support collecting more revenue for the schools, such as Maria Quiñones Sánchez, oppose raising the use-and-occupancy tax because it would be a "double whammy" for small businesses.

Council President Darrell L. Clarke, who introduced the $45 million version of the tax increase as an alternative to Green's initial proposal, said he did not know what would happen.

"It was never set in stone, in my perspective," he said. "It could potentially be less than that or not happen at all."

Contact staff writer Troy Graham at 215-854-2730 or tgraham@phillynews.com or follow on Twitter at @troyjgraham.

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