One of the major problems with politics in Philadelphia is that it is focused just on Philadelphia. However many of the most important problems we face are regional in nature. Our public transit system is clearly a regional problem. So is economic development and job growth. It is not just Philadelphia but the whole region that has been growing slowly. And many environmental problems, especially the loss of open land, are regional as well.
Why Regional Cooperation is So Hard
Solving these problems requires regional cooperation. But regional cooperation is tough. The only government capable of leading the way to solutions is the 800 pound gorilla of the region, the City of Philadelphia. A critical barrier to such leadership—aside from the inability of our political elite to lead on any issue, is that suburbanites will not trust leadership from the city until we reform our politics. (That is not to say that pay to play and other forms of corruption are never found in the suburbs. They certainly are.)
As a first step towards a more regional economy, I want to propose a package of tax policies that might go a ways towards improving the regional economy. I do so tentatively, as the ideas I put forward require a great deal of further thought and need to be spelled out in detail. But I do want us to start thinking of ways to knit this region together.
Towards a Tax Swap
In brief, my suggestion is that we create a tax swap. On one side, we institute three regional tax funds, one to pay the local share of public transit costs, one to subsidize local arts, cultural, and entertainment institutions such as museums, theaters, the Kimmel Center, and the sports arenas, and one to support our existing parks and new, open spaces initiatives. These three regional taxes would take a significant burden off the city, which now pays 80% of regions local share of SEPTA costs, which has borne all the burden for subsidizing local arts, cultural, and sports institutions, and which spends far more on parks than other local governments.
In return for these three new regional tax funds, I suggest that, depending upon how much money the regional transit and culture taxes save us, the city should substantially reduce and gradually eliminate the wage tax for suburbanites who work in the city.
Transit Funding and the Tax Swap
Now is the time to consider such a tax swap because a central part of the Transit Reform Commission’s proposal is to create new regional tax dedicated to public transit. As I will explain in a moment, there is a good argument for this proposal. But I am afraid that it will go nowhere unless the suburbs receive something in return for agreeing to the tax, such as a reduction in the commuter wage tax. And while we are going in that direction, we might as well be bold and create three regional tax funds in return for substantially reducing the hated commuter tax
Why the Suburbs Should Subsidize Transit, Culture, and Parkland
The rationale for subsidizing both transit, and art and culture, and parks with a regional tax is fairly straightforward. Public initiatives in all three areas benefit the entire region. Transit provides the means by which hundreds of thousands of people not only get to work, but get to work where their skills are most needed by employers. The large, mobile labor market created by our public transit system—and by the roads that would be inundated if the transit system collapsed—increases the productivity of most businesses in the region and thus spurs development in both the city and suburbs. For that reason—and because it reduces pollution and suburban sprawl throughout the region—public transit benefits everyone, whether they use SEPTA or not.
Much the same could be said for our arts, cultural, and sports institutions. They obviously serve all of us for whom a concert or a visit to an art museum is a source of joy and spiritual enrichment. But they also serve everyone else as well, because they bring new businesses, new residents, and millions of visitors to the region. One of the great attractions of the Philadelphia region is our increasingly vibrant arts and cultural scene. The Greater Philadelphia Cultural Alliance has projected that cultural organizations bring more than $1 Billion to the regional economy each year. And that, of course benefits both the suburbs and the city.
Parks and open spaces are also critical to the entire region. While some parks serve people in one municipality, people travel in from suburbs to city and from city to suburbs to enjoy the parks and open land in the region. Preserving our park lands and creating more open space helps protect the water we all drink and the air we breathe. And preserving open spaces in the suburbs will help concentrate development in established communities and direct more development to the city, which as explain below, will benefit the whole region.
Given that arts and culture, public transit, and parks and open sapces benefit the whole region, they should be paid for by the whole region. It is unfair that Philadelphians pay the lion’s share of the local costs of SEPTA as well as all the costs of subsidizing the Art Museum, the Kimmel Center—and the Linc and Citizen’s Bank Park as well. Those costs should be paid by everyone in the region. And, if they were spread across the whole region, then the cost per household would be relatively minor.
What’s Wrong With the Commuter Wage Tax?
But why, in return, should we Philadelphians give up the wage tax on commuters? The answer is that it is unfair to suburban commuters, harmful to the economy of both city and the region.
The rationale for the commuter tax is that commuters benefit from many city services—from the streets we build to the health inspectors that (occasionally) visit our restaurants to the snow removal that enables people to get to work and so on. Since they benefit from city services, commuters should pay some part to maintain them.
The Commuter Wage Tax is Unfair
This is a reasonable proposition, up to a point. The trouble with it is that, as we have just seen, it is not just commuters from the suburbs who benefit from the city but all suburbanites, including both those who come into the city for recreation and those who never come into the city, but benefit from the economic activity that would not occur without the city and its services. It is fairer to tax all suburbanites for these benefits than to tax only commuters.
The Commuter Wage Tax Harms the City and the Region
The commuter wage tax also harms the economy of both the city and region because it discourages businesses from locating within the city as opposed to the suburbs (as does the BPT, but that is another story). Now it is obvious why we in the city want businesses to locate here: they pay taxes and create jobs not just for suburbanites but for residents in the city.
What might not be so obvious is why the suburbs should want businesses and residents to locate in the city as well. But, in fact, they should want that. The explanation has to do with what has historically made cities important engines of economic growth. I don’t want to go into all the gory details here. But the basic argument is fairly simple.
Why Cities Still Matter
Cities have always been centers of economic energy because innovation tends to occur when businesses in a group of related fields locate in one area. This is true for many reasons. But the basic idea is that innovation, which most often takes place in small businesses, is spurred when these businesses are close to their competitors, their suppliers, the businesses to whom they sell their products, and the providers of business services on which they rely, including lawyers, accountants, real estate developers and architects.
Agglomeration Economies
Economists call the efficiencies that come about when businesses that need each other are close by agglomeration economies. And, while some folks think that internet communications can replace personal meetings in the business world, businesses in the most innovative fields prefer not buy from suppliers—or even hire providers of ancillary services like legal work or advertising or architectural work—when they have only internet and phone contact with these people. (Would you go to a doctor or lawyer or an architect with whom you only communicated by email and phone?)
Agglomeration economies explain why the software industry is concentrated around route 128 in Boston and Silicon Valley and why so many teaching hospitals and pharmaceutical companies are found in the Philadelphia region. It explains why we have so many major law firms concentrated in Center City. And, on a smaller scale, agglomeration economies explain why jewelers like to locate on jewelers row.
A Strong Central City Creates a Strong Regional Economy
The concentration of businesses and their suppliers in one area tends to make them all more productive. That allows them to develop new products and reduce prices on old ones. It thus drives sales and profits up and allows businesses to expand and add jobs. At the same time, agglomeration efficiencies keep prices down for consumers, especially within their own region. (Think how much more many goods would cost if we could not buy them from a number of suppliers in the Philadelphia area.)
Detailed studies of the economic life of cities, including Philadelphia, suggest that a strong central city economy tends to make regional economies more efficient. This reduces the cost of living in the whole region without sacrificing wages. It encourages people to move into the city and region. And it also tends to lead to higher home values—which is a good thing for most people in a growing economy (although the poor have to be protected from increasing property taxes.)
So reducing the commuter wage tax is likely to encourage businesses to move into the city, providing tax revenues for the city and, hopefully, making our regional economic more productive.
(I first learned the argument I’ve sketched above about the importance of agglomeration economies from reading Jane Jacobs, The Economy of Cities and Michael Piore and Charles Sabel, The Second Industrial Divide. The argument that reducing the commuter wage tax would spur economic growth in Philadelphia was, to my knowledge, first put forward in an important article by Robert Inman, “Should Philadelphia’s suburbs help their central city?”
Some Numbers
How much money could the city save, and how much could we reduce the commuter wage tax, if my tax swap proposal were adopted? The city’s budget documents are so lacking in detailed, transparent information, that it is not easy to answer these questions. We know from SEPTA documents that the city’s share of the annual local cost of SEPTA is $55 million. The city remains responsible for cleaning some transit stations at a cost I cannot find in our budget documents.
I am told by a reliable source that the city spends about $25 million per year for debt service and other costs related to the Linc and Citizens Bank Park. (That number cannot easily be found in any official documents, by the way. There is also the cost of all those police officers who regulate traffic going to and from the sports arenas. They should be paid by the regional fund as well.
The amount the city spends on the Art Museum or other arts and cultural institutions is also not easily found in city budget documents. I have heard that $2 million per year goes to the Art Museum but have no idea whether and how much the city spends to support other arts and cultural institutions and events each year. How much is the city subsidizing the move of the Please Touch Museum into Memorial Hall? How much do our various July 4th celebrations—which draw many suburbanites—cost? I do know that a recently passed bond issue to provide new capital funds for cultural institutions and commercial corridor improvements is going to cost the city about $11 million per year with, I believe, about 2/3rds of the money going for cultural and arts institutions. (I would argue, by the way, that it would make much more sense for the entire region to provide substantial new annual funds to the Art Museum and other cultural institutions rather than for Philadelphia to go deeper into debt by means of this bond issue.)
Just to continue the conversation, let’s assume that in total, the city spends $150 to $200 million on public transit and on arts, cultural, and sports institutions and events, and on parks. According to a report by Larry Eichel in the Inquirer (April 24, 2006), the commuter tax wage tax brings in $520 million. So swapping the city’s spending on transit, arts, and sports for a commuter tax reduction would allow that tax to be reduced by almost 40%. Gambling revenues are supposed to be devoted to reducing the wage tax in Philadelphia. When they kick in—and remember that we get those revenues whether there are casinos in Philadelphia or not—we might be able to reduce both the resident and commuter wage tax by another 20 to 30%.
That is a start, although I suspect that much deeper reductions in the commuter wage tax would help both the city and the entire region.
In the article I mentioned above, Robert Inman argues that the entire region should take on much of the burden of coping with the huge costs for the city created by our extraordinarily high poverty rates. The United States is the only major liberal democracy that puts this kind of burden on local governments. Reducing that burden by having the state take over these costs would more than offset a complete elimination of the commuter wage tax. And that, Inman claims, would benefit the whole region a great deal. I think Inman is correct, but right now I don’t see the General Assembly agreeing with the idea.
A Possible Objection
One possible objection to my proposed tax swap is this: If commuters do not have to pay the wage tax when working in the city, while city residents do, won’t this give employees who work in city businesses a reason to stay in the suburbs? Or, even worse, won’t some city residents leave the city and commute to work?
While this problem is of some theoretical concern, I don’t think it is a real issue. First, most economists believe that, at least at the upper ends of the wage scale, a significant portion of the wage tax is paid by businesses who have to adjust their wages to compensate workers for the tax. So workers in businesses located in the city tend to receive higher salaries than workers in business located in the suburbs. In addition, some of the suburbs have wage taxation now, albeit at no more than a 1% rate and, as I mentioned above the city wage tax will drop as gambling revenues come in.
Second, businesses right now tend to have a number of economic incentives for leaving the city or not locating here in the first place. These include not just business and wage taxation but other factors that our government should address, such as the red tape that stands in the way of opening a business and the uncertain and the often glacial pace of real estate development. But residents do not have the same incentive to live in the suburbs as opposed to the city, especially if they work in a business located in the city. That is especially true for homeowners. When taking into account property taxes, which are higher in the suburbs; the cost of housing, which is also higher in the suburbs; and the cost of time and money commuting to work from the suburbs to the city, city residents who work in the city are not really at much of a disadvantage as compared to suburbanites. The quality of schools is, of course, the one area where city residents suffer. But the amenities of living in the city—and especially the proximity to our arts and cultural institutions and our restaurants—to some extent make up for our less attractive schools. And our schools are not an issue for singles and couples before and after they have school age children or for those whose incomes are high enough that they can afford the wonderful private schools found in the city.
Taking all of this together, there is little reason to think that many city residents will flee to the suburbs if their jobs remain in the city. There is good reason to think that if businesses move into the city, some of their new employees will locate within the city. And if the tax revenues new businesses generate help us improve city services, and especially our schools, this result will be even more likely.
Conclusion
So a tax swap along the lines I’m proposing might be a tremendous benefit to the city and its suburbs. It would give us the funding we need for our public transit system and arts institutions. And it would encourage businesses to move into the city.
Can we make this happen? Only if leadership comes from Philadelphia. Perhaps our next Mayor will put this idea on his agenda. I do know of one candidate for City Council who will take it seriously.
Some further thoughts in 2019
I wrote this piece thirteen years ago. I think the argument of it on the whole still stands up. But aside from trying to better estimate some of the tax numbers, I’d revise it in a number of ways today.
First, I’ve come to have more doubts about the impact of taxes on business location than I did in 2006. There is a great deal of evidence, which I’ve looked in things I’ve written for the Pennsylvanian Budget and Policy Center, that suggest that taxes play far less of a role in business decisions than I believe 13 years ago. (When you recognize that labor and material costs are far more important than the costs of taxes to most businesses, this becomes fairly obvious!) So I would not emphasize the impact of taxes on business location decisions as much as I once did. I have especially come to doubt that business taxes pay a substantial role in those decisions. (And, while conventional wisdom in the city, even on the left in 2006 was that the gross receipt part of the business tax was especially burdensome and the net profits tax much less, I think Stan Shapiro and I were right to argue that the reverse is true especially once the exemption of the first 500,000 in gross receipts, which we called for, was instituted.)
Second, having said that, I still think the best evidence we have is that the wage tax and especially the commuter portion of it does influence business location decisions more than business taxes. Given the rising population of professional-managerial workers in our city, it no doubt does not matter that much…indeed as I’ve pointed out elsewhere, to the extent that our reliance on the wage tax rather than property taxes helps keep rents and housing prices lower in Philadelphia than in other major metropolitan reasons, it’s quite likely that our wage tax contributes to making the city more attractive to both educated workers and the businesses that rely on them. At any rate, there might be a marginal incentive to encouraging businesses to locate in the city if we reduce the commuter wage tax and replacing it with a regional tax. And, I as argued a regional tax would be fairer than the commuter wage tax and reducing the commuter tax could be the carrot that encourages the collar counties to embrace regional taxes.
Third, and most importantly, if I were writing this essay today, I would focus much more on tax equity than I did thirteen years ago. In particular, I would argue that our regional tax should primarily be a tax on capital in the form of a either a wealth tax or some variant of the Fair Share Tax I have proposed for the state as a whole. And I would use some of the revenues from a regional tax on capital to make progressive reductions in the wage tax in both the city and counties, perhaps by creating a regional earned income tax credit based on the federal EITC. (We at PBPC will be proposing such a tax credit statewide in January.)
There are limits to how much cities and regions can tax capital. Any good Marxist would tell you that because capital is mobile, it is harder to tax it locally than national wide. That was the basic theme of James O’Connor’s important book, The Fiscal Crisis of the State, which at time made him sound like a right-winger until you realized that his response to the threat of a capital strike was not to reduce taxes but to have the state intervene much more dramatically in the process of capital formation. That’s not on the cards for the Philadelphia region at the moment, so a large tax on wealth or a high tax on income from wealth if it is too high could be problematic. But relatively low tax rates on wealth or income from wealth generate a great deal of revenue and, as we have shown at PBPC, even an increase in the statewide tax on income from wealth from the current 3.07% to 6.5% would leave the effective income tax on the top 1% in our state far below that of New York and New Jersey. We could add a 1-2% regional tax on income from wealth and still have an effective income tax rate be below those two states while raising a substantial amount of money.