City officials in Philadelphia were recently told to reduce their politically popular but economically destructive taxes on nonresident workers. The Philadelphia Tax Reform Commission received expert testimony at a public hearing in October 2003.
The National Taxpayers Union’s director of government affairs, Paul Gessing, summarized a study he conducted this summer for the group’s research arm, the NTU Foundation. Gessing testified that wage-based taxes targeting nonresidents who work in Philadelphia are economically self-defeating.
“Too many elected officials assume that imposing a tax on commuters who can’t vote them out of office is a simple solution to budget ills,” testified Gessing.”The trouble is, taking workers for a ride hasn’t helped city officials pay for their fiscal baggage as painlessly as they had hoped.”
Nonresidents Already Taxed
In 1939, Philadelphia became the first U.S. city to levy a tax on everyone earning income within its limits. Since then, according to Gessing, at least 13 states have permitted localities to charge wage, payroll, or per-employee taxes regardless of residency. Several cities, including Atlanta, Indianapolis, New York, and Washington, DC are actively considering such taxes.
Philadelphia currently levies the highest wage tax on commuters in the nation, nearly 3.9 percent. Since its population peaked in 1950, Philadelphia has lost 500,000 people, 280,000 of whom left in the past decade alone. Those former residents took with them jobs, purchasing power, small businesses, and other economic activities. The total value of property in Philadelphia is less today than it was in 1970.
Gessing found that Birmingham, Detroit, Louisville, and Philadelphia–relatively high-tax cities that also tax commuters–have lost more than 1.35 million residents between 1970 and 2000, even as other cities rebounded toward the end of that period.
Gessing acknowledges some may argue that commuters who use a city’s resources should be expected to contribute. He responds that commuters already do their share by shopping, patronizing restaurants, paying tolls, filling up at local gas stations, and participating in other after-work activities that add to the local tax base. Most cities spend half or more of their budgets on education and social services, he notes–services that are rarely, if ever, used by commuters.
“‘Voting with your feet’ is a phrase economist Charles Tiebout uses to describe the public’s response to high taxes, and it is a phenomenon that commuter-taxers should note,” Gessing concluded. “Whether they’re in a car or on foot, people simply won’t stand still for taxes that punish them for working in a city and living someplace else.”
In November 2002, Philadelphia voters approved a ballot measure allowing for the creation of an independent body, the Philadelphia Tax Reform Commission, to recommend ways to reduce taxes to make Philadelphia more competitive with other jurisdictions in attracting and retaining residents, businesses, and jobs.
The commission has been conducting a comprehensive analysis of the current tax system and will make specific recommendations for reducing taxes in a final report that will be submitted to the mayor and city council before the end of the year. Recommendations expected to be in the final report include:
- Reduce the current wage tax for residents and nonresidents.
- Eliminate the business-privilege tax within 10 years and changes to other business taxes.
- Create a separate appeals board for property-tax assessments and a taxpayers’ advocate to represent property owners.
John Berthoud is president of National Taxpayers Union. His email address is [email protected].
For more information …
Paul Gessing’s testimony to the Philadelphia Tax Reform Commission, and his Policy Paper 141, “Commuter Taxes: Milking Outsiders for All They’re Worth,” are available online at http://www.ntu.org.