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.

6 replies on “Why city taxes should be no excuse for your startup in Philadelphia”

  1. Keeping them, yes, you are correct, is the difficult part. We’ve had a business in the city for 8 years, and never received a tax credit or benefit, regardless of the new, up and coming neighborhoods we’ve moved to. Also, as a resident, the city’s overall issues with collection of taxes, appropriations of taxes, assessment of properties, and yes, the city wage tax, (which is a big deal), are all negatives against the city. Rent and the general cost of living in Philadelphia is much lower than many cities, which is a major benefit for sure. Although I wouldn’t be so quick to let the city and the it’s decision makers off the hook so easily, as we still have many shortcomings that are holding us back.

  2. I couldn’t disagree more. The tax we paid to the city for FY 2013 (not including employees’ city wage tax) was enough to hire another full-time employee if we existed just feet outside of Philadelphia – which is why you’ll notice many roads with Philly on one side and a different municipality on the other are severely more built up on the non-Philly side.

    I also find it weird to espouse that taxes aren’t a burden, and then sentences away note the insane 25% drop in available jobs over the past ~40 years. There is no incentive to own a business in Philadelphia, and plenty of disincentive. Yes, rent is cheaper, but not enough-so to cover the burden of BPT + City Wage Tax. But take that slightly cheaper rent, add on high tax burdens, and then top it off with a corrupt government and public schools that rank at the bottom (and that almost didn’t even open in 2013.) The cheaper rent – especially for entrepreneurs with kids they need to send to school – isn’t so much of an incentive anymore.

    Lastly, I would argue against the amount of local talent this article ascribes. We have had significant difficulty finding employees in Philadelphia – so much young talent bolts the second they graduate, for many of the reasons outlined in this article – high taxes, and businesses that aren’t in the city, but just outside of it. While there are outliers like First Round Capital and Ben Franklin Technology Partners, is it any wonder kids move to NY or San Fran or Boston or any other number of cities, when investment money is so much more readily available there? There is no reason for them to start their businesses here or be employed here.

    Plus – WebLinc already hired everyone local 🙂

  3. Yo Dave,
    Though your overall spirit I’m with, I’d take issue with some of this — Philly remains a good place to start a business, or at least as good as its peer big cities, given its own mixture of cost/access ratio and profit-focused taxes and, I mean, just factually, the Philly brain drain story is a largely diminishing one (https://technical.ly/philly/2010/12/10/philly-brain-drain/)

    But that’s not to say the Nutter administration’s return to wage tax reductions isn’t a vital move. This article doesn’t say taxes aren’t a problem. It says they aren’t as painful to a certain class of venture-backed pre-profit tech startups that we hear a lot of complaining from.

    And on the talent glut: eh, there’s a national conversation about a shortage of tech talent. They talk about that in NYC and San Fran and Boston too. Absolutely we need to do more work on that college talent retention front but a considerable amount has moved here in the last 10 years. More pushing is good though

    -cgw

  4. Yo Chris! Long time 🙂

    Put aside City Wage Tax for a minute. I think Philly is a decent place to start a 1-2 person business… but in spite of – not because of – Philadelphia. It’s mostly because of the community that’s built up *despite* Philly’s tax policies. I suppose there’s room to move the conversation between bootstrapped, profitable businesses vs. venture-backed pre-profit startups (I know and deal mostly with the former). But when you get to that 4-6 person size, where we find Flyclops these days, I wasn’t joking when I said we could hire another person full-time for the taxes we paid to Philadelphia this year.

    I get the chicken-and-egg problem – the BPT is a (shrinking) cash cow for the city. I would argue all day long that eliminating the BPT would make mid-to-large sized companies look at locating in Philadelphia again, easily replacing lost BPT income with revenue from new jobs and a newly-growing employee base. But what happens in the few years it would take for new business and new job tax revenue to replace the BPT spigot??

    As for the talent glut, I think that’s a different conversation, since the topic here is taxes. But I’d love to have it some time.

    I’m not arguing for no local taxes. I’d love none, but I get it. And I was a huge fan of BPT Reform via city councilmembers Bill Green and Maria Quiñones Sánchez’s plan to move to a 1% GRT across the board at the elimination of the BPT. http://www.forwardphiladelphia.com/

    Place my final salt at the one-year tax prepayment requirement of the BPT, and I feel like the grass is greener in a whole lot of other places – not NYC or SF, but just a couple miles from my front door. Even many of our region’s biggest success stories, like Monetate, are close enough for employment by Philadelphia residents, but far enough away to save on Philadelphia taxes. It’s an odd thing to be a city where a lot of people commute OUT of it for work, but it’s the reality, and I think it could be reversed.

    We should get beers 🙂

  6. We are not venture-backed, we are run entirely on our own revenue, and employ 3 — and the taxes are pretty damn ridiculous. I paid significantly less in taxes, on more personal income/pass-thru LLC “profit”, when I lived in Maryland, in several different counties and also in Baltimore, and Maryland overall has superior roads, superior schools, and, overall, superior infrastructure.

Comments are closed.