Philadelphia just reduced BIRT and wage taxes to the lowest they’ve been in decades. Who should care?

Philadelphians have long complained over the city’s wage tax — an almost 4% deduction from their paychecks for residents, or about 3.5% for non-residents.

About a third of states allow for this kind of tax, and for more than 80 years, Philly has taxed its residents who work and live here. In 2019, it carried the highest wage tax in the nation. But for the 2023 fiscal year, the City of Philadelphia is reducing that tax rate to the lowest it’s been in five decades.

On Thursday, Philadelphia City Council voted to reduce wage taxes to 3.79% from 3.87% for residents and 3.44% from 3.45% for non-residents. It also lowered the Business Income and Receipts Tax (BIRT) tax from 6.2% to 5.99%.

“While these changes represent significant progress, I look forward to continuing to work with City Council to further reduce the tax burden for workers and small businesses, and make our tax system fairer and more sustainable,” Mayor Jim Kenney said in a statement.

The move comes after months of lobbying in City Hall by business organizations such as the Chamber of Commerce for Greater Philadelphia. Outgoing Chamber CEO Rob Wonderling urged the organization’s members to voice their support for tax cuts in the days leading up to City Council’s vote.

“We know that regional and national competitors are outpacing Philadelphia when it comes to growing jobs and attracting new employers, which is in large part due to the fact that Philadelphia has the nation’s highest wage tax and is the only major city that double taxes it’s enterprises through a Business Income and Receipts Tax (BIRT),” he wrote in a message to Chamber members earlier this month. “These taxes are a major reason many employers and employees choose to locate just outside of Philadelphia while still enjoying the region’s abundant benefits.”

But the changes might not be felt too noticeably by business owners and workers alike.

Who will be affected by Philadelphia’s BIRT reduction?

Mike Shields, research director at Philly-based Economy League of Greater Philadelphia told Technical.ly that the average Philadelphia worker will see some difference — likely just a few cents per pay period, depending on their salary. Someone making $15 an hour would likely see about 64 cents more in their paycheck under the new tax rule, for instance.

And the average business owner is less likely to see the effects of lower BIRT, Shields said, since you have to have more than $100,000 in gross receipts in a year to be required to file BIRT. More than 80% of small businesses across the US don’t see that much in gross receipts, “so, I doubt it’ll translate as much,” he said.

“I think, too often, policymakers see taxes as ‘easy levers’ to addressing business and employment growth (i.e., lower the tax and they’ll be more businesses and more employment), but messing with taxes is sort of working around the edges of the structural issues — like investment in your future workforce” in the form of education, workforce development policy, and other skill development efforts, Shields said in an email.

“I’m not saying Philadelphia’s taxes shouldn’t be analyzed, scrutinized, and changed in some aspect,” he said, “but it doesn’t address the structural issues that will continue to be there no matter how low or high the tax rate is.”

What do business owners think of Philadelphia’s BIRT reduction?

Mark Constan, head of talent acquisition firm MTC Search Group, agreed that the day-to-day effects will be small. If you make $100,000, you’ll save $350 a year, he estimated. He said he currently pays 1% in wage taxes living in Delaware County, so not working in Philly does save him some money.

“So hey, take the savings where you can. Does that make people want to work for a place in Philly? I doubt it,” he said. “Unless coming from a place with a higher tax rate.”

It echos what one CEO of Center City dev firm told Technical.ly’s Chris Wink in 2014 when he dove into the history of the wage tax in Philadelphia — that controversy over wage tax reductions were “short-sighted” and “a silly issue,” and that they mostly benefit one group of people.

“People who care about wage taxes are already rich,” the CEO said then. “It doesn’t affect us, is barely a blip on our balance sheet and would not influence any of our decisions in the slightest.”

Of the $3.8 billion expected in city tax revenue in FY2023 — which starts in a few days on July 1 — a little more than half is expected to come from the wage tax. But from the average workers’ view, that CEO was right. The change will be minimal. Someone making the median annual household income for Philadelphia (about $49,000) will only see a difference of about 47 cents a week, Billy Penn reported. For a non-resident, it’ll be about 14 cents.

“While any cuts are surely a step in the right direction, before we get too excited about these tax cuts, let’s put them in perspective. They are paltry to say the least and will have little to no impact,” Glenn Blumenfeld, a principal at Tactix, told Technical.ly in an email.

What could be done instead of BIRT changes to bring Philadelphia revenue and workers?

Blumenfeld said the city is still in competition for talent and tax payers, and that those individuals and companies have lots of other choices.

“With the City now struggling to get workers back into town, we need to get creative,” he said. “Perhaps something like providing a credit against the BIRT based on the wage taxes paid by employees who are in the City more than three days a week would be interesting. Companies could then share the economic benefit of this credit with their employees who come into the office more often. A win win.”

Arcweb CEO Chris Cera also doesn’t think much will change for founders or workers in Philly’s tech economy. The tax structure is annoying to deal with as a founder, he said — but it’s one of many annoying things founders deal with. He admits that it’ll be a very different decision for CFOs of large companies who are considering a relocation in Philadelphia versus Conshohocken just outside its borders, or versus Boston, even.

“These changes do matter from a macroeconomic perspective for bringing jobs back to the city, but the reductions are so minuscule it won’t create any life changing event for a person working in tech or company,” Cera said. “I do think the positive signal from the government matters so I’m glad to see this happened.”

Cera feels Philadelphia taxes the wrong things — and taxes tend to be high with systemic side effects.

“The structure creates a lot of unnecessary work for both businesses and the government,” he said.

While the changes we see could be minimal, Brigitte Daniel Corbin, CEO of Wilco Electronic Systems, said there’s room for optimism.

“If executed well and opportunity, capital, and educational/partnership offerings are created for small and large corps to leverage these reductions for small businesses … it should create better margins for all,” she said in an email. “It should attract more talent to the city for all. And it should be a call to the world that Philadelphia is on track to becoming an economically equitable and intentionally diverse city of the future.”