Why city taxes should be no excuse for your startup in Philadelphia

Next time some entrepreneur tells you that she is taking her small business to another city or to the suburbs because of the taxes, tell her she must not know what she’s talking about.

That’s because the impact that the burdensome City of Philadelphia tax structure has on startup businesses, particularly venture backed technology firms, is way overblown, said First Round Capital managing partner Josh Kopelman during ThinkFest this weekend. This is a place to start something, even if the later stage is something worth managing.

It’s something echoed by other business owners: for example, ecommerce company WebLinc has three buildings and more than 100 staff in Old City.

“Everyone complains about taxes, but if that’s what’s stopping you from building a business, you have a problem,” said WebLinc cofounder and CEO Darren Hill over coffee last week. “It could be better, but when it comes to talent and culture, you get something for being here.”

Think of it this way, as Kopelman described it during a Q&A session during the Philadelphia magazine event:

1. The most criticized city-specific taxes are those for revenue and profits, which startup businesses traditionally have less of, as they develop a customer base. Even a bootstrapped product-first company that eschews venture funding will still likely have less profit in the beginning than later on.
2. Nonetheless, the city’s revenue and profits tax structure is not far off from other cities like Chicago and New York, as we’ve reported before using PICA data. Update: To clarify, that doesn’t include the wage tax, which has been as much as double New York’s in recent years.
3. The hated city wage tax is still kicking, but if you’re also offering employees company equity, either through shared ownership or in a traditional venture-backed employee incentive arrangement, those returns are taxed through the state’s capital gains tax, which is actually lower than the perceived startup business magnets of California or New York state.

Meanwhile, the standard cost of living and recruitment benefits are low, something that Curalate CEO Apu Gupta has frequently cited as a reason he’s building a company here. Despite the wage tax, things have gotten better for individual residents of the city too, as Pew has reported.

That’s not to say there isn’t a challenge in tax structure. Startups that grow to 15 or more employees are less likely to go to other regions, Kopelman has said, but as businesses grow their profits and size, that’s when a city begins competing with its outlying suburbs.

That’s one big reason why since 1970, Philadelphia has lost a quarter of its jobs while Boston, New York and D.C. have seen an increase in real jobs.

Companies in the city apply for tax credits — the state has spent $4.8 billion annually since 2007 — and there are calls for more in the technology sector. That’s why Councilman Bill Green has been working to update the city’s tax structure, though his focus has been on these young startups that might not be the most affected.

Others have pointed to the idea that simply better collecting what money the city is already owed could be a big boon. But whatever the case, the struggles are likely not a core issue for all young companies.

“Starting a business in Philadelphia makes a lot of sense,” Kopelman said. The challenge is keeping them.