Tuesday, April 12, 2005

Unraveling Library Debate Reveals BPT Elimination as Real Culprit

I am excited to make my debut here on Young Philly Politics by following up on some themes that Ben and Dan have been pursuing lately in regard to "vision". I’d like to focus on the lack of vision apparent in the hot-and-getting-hotter library debate in which Council is pitting library expansion against maintenance of current services, all the while ignoring the real culprit: business privilege tax reductions.

The main branch of the Free Library at 19th and Vine has plans to expand and renovate for the future. The Library is pursuing funding for a plan to expand its main branch to include tons more internet access, a new children’s section and other improvements to help it stay relevant. Relevancy is a concept often foreign to City Council which explains this priceless interchange between Councilman DiCicco and Elliot Shelkrot, Director of the Free Library as reported by the Daily News:

"If you had to make a choice, would you rather fund the Central Library expansion or keep the branches open,"Councilman Frank DiCicco asked Shelkrot.

"Now you're asking me to play Solomon," Shelkrot began.

"No. Solomon had to cut the baby in half. You get to keep the baby whole. Which baby do you choose?" DiCicco asked.

After a bit of evading, Shelkrot said that he considered the expansion and building of a new library at the Central Branch more important to the future of Philadelphia.

DiCicco’s line of questioning stems from his claim that a $30 million bond approved by Council just over a month ago will cost the city $3.5 million in debt service payments a year. The $3.5 million figure is derived from a memo from Controller Saidel written in December.

Although the city has approved $30 million in bond funding for the $120 million library expansion project, the initial bond bill approved by Council is only for $10 million. This bond will require debt service payments of about $1 million a year. The first payment will be made in 2 parts over FY 06.

A feasibility study commissioned by the library finds that the expansion project will bring in $1.9 million in city wage tax revenue from the creation of over 1000 new construction jobs and will also help spur new growth along the Parkway.

So, debt service payments due in FY 06 cost less than DiCicco claims and will be covered entirely by the wage tax revenue generated by the project. The library expansion will also generate almost a million additional dollars for new projects or future debt service payments.

Despite this, DiCicco is leading the charge to rescind the Council bill which authorized bond funding for the library expansion even though the bond has nothing to do with the revenue shortfall causing library service cuts in the first place.

The real cause of library service reductions is the elimination of the business privilege tax. City Council, the PA Economy League, Philadelphia Forward, Young Involved Philadelphia and other proponents of conservative trickle-down economic theory have beaten the drum for tax reform for so long that the Mayor included a 3.8% reduction in business privilege taxes in this year's budget. That reduction is worth $70 million in FY 06. The Mayor’s budget is revenue neutral so that reduction will be balanced by an increase in parking taxes from 15 to 20 %.

If even a small portion of the revenue generated by a parking tax increase were given to the Free Library rather than business privilege tax reduction, full-time week-day service could be maintained and all branches could be opened on Saturdays too (the Library says this would cost about $5 million, or about 7% of the amount of BPT tax reductions proposed). Instead, cuts are being made to basic services with the vague promise that business tax breaks will eventually generate economic growth.

The reality is that the jobs and economic growth that tax reform proponents have promised haven’t emerged so far and are unlikely to start any time soon. As Professor Robert Lynch pointed out in his paper, “Rethinking Growth Strategies,” local taxes are normally at the bottom of a list of criteria that businesses use when making decisions about where to locate their company. At the top of that list is location, quality of city infrastructure and service, access to roads and transportation and the quality and skills of the local workforce.

If our elected officials and city opinion leaders like Frank DiCicco, Michael Nutter, David Thornburgh and Brett Mandel can't understand what a real vision for change and growth looks like, eventually their grandstanding is going to be revealed for the political trickery it really is. We need to speak up and force City Council to stop pitting our present against our future.

Expanding the main branch of the library, maintaining current library services and maintaining fiscal flexibility to be able to adopt new ideas to generate growth (like Councilman Goode’s minimum wage increase bill) are the kinds of policies that will help make Philadelphia a world-class city in the 21st century. Eliminating business privilege taxes, which benefit only the wealthiest corporations, is a strategy that does nothing substantive to spur growth and will ultimately leave the average Philadelphian (including most small business owners) in the lurch.


At 5:06 PM, Blogger Friedman said...

Ray - your passion is admirable but you're wrong. Your assuming too much of a nexus between BPT elimination and funding for a particular project. In a $3 billion dollar plus government, you can have tax reform/reduction as well as a library expansion program. It's about prioritization and allocation of that huge pot of money the City spends. You're also dead wrong about BPT elimination helping wealthy corporations - ever talk to a small businessperson about it?

At 6:37 PM, Anonymous Lewis said...

Ray - Its great to have you on board the site. One of the most informative and thought-provoking posts I've read. However, I disagree as well. I don't see how local taxes wouldn't play an important role in determining where businesses locate...businesses have been flocking to the suburbs, not because of any of the things you mentioned, but for better taxes. Locating in King of Prussia makes it harder to attract recent college grads, makes commuting difficult, and puts companies farther away from the business community. However, taxes, taxes, taxes force them out there.

At 10:13 PM, Blogger DanielUA said...

A few things...

Ray, welcome aboard, and that is a great first post.

Some points:

1) Yeah, DiCicco is simply grandstanding here. Expanding the Central library and paying for regular libraries are not part of the same equation.

2) Taxes do matter it seems. Look at Delaware or North Dakota, two states owned by MBNA for some example of business location decisions. That said, and I think this is key, leads me to point #3....

3) Just having a business in your jurisdiction does not necesarily mean a positive gain for your city. Back to Delaware... has anyone been to Wilmington, Newark or Claymont lately? They are not exactly booming. Why? Well, maybe because the tax structure there is so friendly that benefits are not really accruing to the people in those places? Or how about Atlantic City, once you get away from the boardwalk? Or, how about the United States as a whole? We have record corporate profits, yet those profits provide less revenue as a percentage of GDP since the 1950's, the biggest reason why we run such a high defecit. Businesses and people may use taxes as one reason, but there are many others: how well educated the population is, location to mass transit, City services, etc. What is best for Philadelphia, in my opinion, is to divert more money into investing towards those pieces, which includes libraries, rather than thinking that nomatter what we do, no matter how the economy is doing, we cut taxes.

Now, to Jeff, where do you choose to cut? The reality is that, lets say I buy that lowering or eliminating the BPT will at some point lead to growth. But how long will that take? lets say more businesses eventually start in Philly, leading to more jobs, etc. But, in the first few years, all you really have are lower revenues. Where are you taking it from?

Tom Ferrick has shown pretty convincingly that it is generally Health Care costs which are killing the city, but contracts are not up for negotiation for a while, so that is of the table So, where else do we cut? Police? Rec centers? Trash? It may be a big budget, but again, it does have to come from somewhere.

At 8:50 AM, Blogger Friedman said...

Dan - thanks for the thoughtful reply. It's probably better to focus on jobs as oppossed to the more general "business", but it's really important for anybody who cares about the City and its long term economic and social vitality to realize that our tax structure/burden is a major source of our difficulties. We need to be an attractive place for businesses to come so that jobs are created. I am a government management consultant who does management and productivity work all over the country, so the "where to cut" question would take a really long time to answer. But the very general answer is that everything needs to be looked at, including police and fire, and opportunities for savings need to be exploited. One example; the fire station closures proposed by the City are great for politicians (e.g., councilpeople) to grandstand again, but our city has changed, fewer and fewer fires occur, and we don't need the same kind of fire dept. coverage that we had 50 years ago.

At 7:06 PM, Blogger BAM said...

If taxes mattered so much, and eliminating business taxes would lead to economic growth, why do cities with low or no business taxes like Detroit, Cleveland and Baltimore suffer the worst unemployment rates of major cities? And why is New York -- with the highest business taxes -- the corporate and business center of the world? Why is D.C. -- with their high business taxes -- achieving gangbuster job and resident growth? The answer is that business tax rates are not at the top of a firm's location investment decisions. Ask the site selection experts that advise companies on where to locate and grow. They admit that taxes are the tenth of ten items a firm will look at when deciding where to locate or grow. Instead, access to markets, available land, a skilled labor pool, quality of life, and the desire of the CEO to live in a particular neighborhood are among the biggest factors.

The image used by tax-cut proponents of City Line Ave and King of Prussia is frustratingly simplistic. First of all, yes, we have suburbs. And so does Boston, New York, Chicago, and (gasp) Phoenix. Second, a strong region is good for us. If our suburbs are struggling, there are fewer people to spend money at local establishments on their way to a sports game. Third, compared to the top ten most populous cities, our unemployment rate over a three year period (2001, 2002 and 2003) was mid-pack. Fourth, a look at job growth in the immediate suburbs around Philadelphia from 1990 to 2000 show their employment growth wasn't too different from the city's. Where we see big increases in jobs are much further out in the once-pastoral farmland of our neighboring counties. State economic development policies that encourage sprawl, coupled with residents' desire for good schools, low crime and a patch of green in the backyard do a lot more to suck growth out of our city than taxes do. It's also important to note that Philadelphia isn't losing more residents than most other major cities -- we're about mid-pack here also. Where we lack is attracting new residents to replace them. People don't decide to skip over Philly because of taxes (especially in light of how affordable the city is). They skip us over because they think Philly is dirty, unsafe and boring.

Not only is that not true (of course, as we have such enlightened and surely hip people such as ourselves calling this place home), but people are also starting to realize it. New home construction is booming, particularly luxury homes and condos. Tourism in the Philly area is also booming with double digit increases in visitors and spending in 2003, compared to national increases of less than 2% on both fronts. Tourists aren't coming here because of the promise of business tax cuts, and residents aren't building new homes here because of taxes. They come here because quality of life has improved in many parts of the city, particularly Center City. If we could just do the same for the poor folks in Strawberry Mansion, I'd call that progress. A very prominent business leader recently told me she'd rather pay taxes, and see the city do something with it to increase her sales by attracting customers.

Ray's point is getting lost in the shuffle. What he rightly argues is that when city leaders lack revenue for important public priorities, they are quick to cut public services that the community benefits from, such as libraries. And cutting business taxes further will lead to a further drain in city revenue at a time when the general fund balance is dwindling, and state and federal deficits (partly spurred by tax-cutting) will squeeze us further. Meanwhile, they give big breaks to profitable corporations that don't need our public welfare while closing rec centers and scaling back funding for health clinics. And this is key: when you cut services to pay for tax cuts, the effectivenes of the tax cuts is wiped out. Should our decison makers have the ability to make different priorities, such as telling Comcast to pay their own darn rent so we can make sure kids have books and lighten the tax load on the corner store? Yes. Will cutting taxes and tightening the belt suddenly change the way politicians make friends and get reelected? If you think so, I have a bridge in Brooklyn I'd like to sell you.

At 7:07 PM, Blogger BAM said...

By the way, that was my very first blog ever, anywhere. Did I do it right?

At 9:33 AM, Blogger DanielUA said...

You sure did, and great comment.


At 3:27 PM, Blogger Friedman said...

BAM - definitely a great comment - great discussion - thanks. Just a couple of minor points; a lot of the residential construction (new and conversion) is driven by the 10-year tax abatement ordinance, so clearly taxes matter with respect to this phenomenon. Also, I don't think that Ray's point is getting obscured; I thought he was saying that taxes don't really matter, when there's a consensus that they do.

At 3:28 PM, Blogger Friedman said...

This comment has been removed by a blog administrator.

At 4:26 PM, Blogger BAM said...

Friedman, you are right that there is a 10-year tax abatement on new home construction in the city. But wealthy people who can afford luxury condos on Rittenhouse Square don't build and buy homes here because of the tax break. They do it because those neighborhoods are great places to live. Sure, they'll take the tax break -- who wouldn't? But tax breaks themselves don't make the difference. It's just icing ont the cake. And now that you bring it up, if we eliminate the BPT and switch to a system in which property taxes are our main replacement of revenue, those wealthy new homeowners will not be taxable. So higher property taxes would fall on current residents, including many on limited or fixed incomes at least for the next decade or so. It's just important to keep in mind that we have lots of growth and wealth in places where taxes are high. People with money will pay for the good life. Where we have a problem is in neighborhoods where kids are afraid to go to school, mom's on welfare, and grandma's medicine is so expensive she has to eat dog food. If our opinion leaders and politicians attacked those issues with the fervor of their attack on taxes, we might just make the world a better place to live.

At 4:31 PM, Blogger Friedman said...

Point taken, but you're missing the middle/upper-middle class demographic who are neither poor nor rich and able to live the good life. Also, I'm pretty sure you're discounting the impact of the 10-year abatement; the explosion of residential construction has coincided with the abatement ordinance.

At 4:34 PM, Blogger Friedman said...

And another follow up - I know this blog is "young philly politics" and it's a great and passionate forum for discussion. However, if it was "middle aged philly politics" (maybe I should start that one) there'd be a greater understanding of the pocketbook issues that drive business and individual decision-making. Sure, taxes are only part of the picture, but they're a huge part.

At 4:44 PM, Blogger DanielUA said...

Sure, taxes are only part of the picture, but they're a huge part.

Here is the problem, BAM gave us an informed post saying tax burdens really are not a huge factor in relocation decisions, and why. You say, great post, but without disputing what she says, you just return to the "huge part" again.

I do agree with you that the ten year abatement does not neccesarily target only the rich, bc the condo boom is happening with price ranges that are not too far from the values of middle class homes. We hear about the million dollar condos, but, those are the exception, not the rule.

At 4:47 PM, Blogger Pat Evans/Butcher/Wicks said...

Well Friedman, to be clear my point was not that taxes don't mater. Obviously they do matter to some folks, namely those who don't want to pay them. My original point was that taxes are not the best way to generate jobs and economic growth in the city. I think Beth is right to point out that making Philly a fun and attractive place to live is one way of getting more people to move in to the city. I think an equally important way to generate economic growth is to raise the wages of people who already live here. This expands the revenue pie and ultimately improves neighborhoods that returning suburbanites will never live in no matter how far north, south and west Center City’s boundaries are pushed.

At 5:05 PM, Blogger Friedman said...

Research conducted by Dr. Inman at the University of Pennsylvania in the late 1980's suggested the wage tax was historically responsible for over 60% of the Philadelphia’s jobs loss, around 100,000 jobs between 1965 and 1985. Updated studies have corroborated these general findings. I'm not interested in a report-for-report joust - that can go on all day; I'm trying to respond to the general spin that BAM's putting on the tax debate which is, if you're concerned about taxes and think that the burden/complexity is a problem then you're a rich bastard who doesn't want to pay them. If that's the perception, you're missing a huge chunk of past, current, and potential Philadelphian's who are in the middle and upper middle class. I am also trying to to respond to the false proposition that we can't have it all - good services, a reduced tax burden, and a burgeoning economy. Of course, tough choices need to be made and people will be disappointed. Not every budget cut is necessarily a "cut" in service, although it might be perceived this way.

At 5:30 PM, Blogger Pat Evans/Butcher/Wicks said...

I brought up the business privilege tax originally because the Administration says that BPT cuts will cost about $70 million this year. Library expansion will cost about $1 million and service restoration is $5 million. Council is trying to rescind a bond bill that would help pay for library expansion in order to restore service cuts (even though that wouldn't really pay for the restoration). Can we at least agree that rather than pitting the library's future against its present, the BPT reductions can be slimmed back by at least the 7% necessary to fix the library situation? Beyond that I would like to see a cite for the Penn study even though common sense tells me 60% of Philadelphia’s job loss from 1965-1985 has as much to do with the closing of textile mills and other factories that occurred as a part of a wave of deindustrialization all over the US in the past 40 years. I know I am young and passionate, but the decline of manufacturing jobs in the US is something a little bit bigger than what we can blame on the BPT.

At 11:49 AM, Blogger Friedman said...

It's not $70 million this year; according to the City's five-year-plan, that figure is the estimate in revenue reduction from BPT cuts over the next five years. Relatedly, the Administration was planning on raising parking taxes to offset the revenue loss. The basis for the original post was incorrect; there's not a direct nexus between BPT tax cuts (which we need to be competitive to business) and the plans for expanding the central library (which is something we should be doing for our residents). In fact, there's not even a net revenue loss according to the City's plan, so the issue is moot.


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