Philadelphia Metropolis

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Empty Tables

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Empty 2.jpgWhen it comes to economic development, Philadelphia is like a restaurant that has undergone a major re-do. New top-flight chef, classy new menu, a million spent on redecoration.

What's missing from this happy tableau?  Customers.  They still aren't flocking to eat there.  A look at the menu explains why. The entrĂ©es are pricey: scallops for $40 are the cheapest; veal chops at $85 the top item. And all side dishes cost extra.

With so many other restaurants to choose from, diners are taking their business elsewhere.

It's the same with the city. As we reported in a recent Cover Story, the city has made major improvements in its zoning and planning codes and in the speed which L&I handles permits.  The object is to make the process of development smoother, simpler and quicker.  This is good news.

As the Center City District showed in its annual report last week, Center City and environs is a booming, lively place, with excellent transportation, lots of amenities and a growing population -- all of which enabled the downtown to weather the recession reasonably well. This is more good news.

The one problem:  the number of office jobs has flat lined.  Center City employment stands at 264,878, according to Paul Levy, head of the district. 

With the recession lifting, that number should be poised to grow, but they likely will not and the big reason is cost.  On average, having a business located in Philly costs 19 percent more than the suburbs.  The main reason is taxes.

In turn, this depresses demand for office space in the city and leads developers to look elsewhere to locate their office complexes. Because of slack demand, per square foot rates in the city are low (compared to other big cities) and this discourages developers from building more.

As Levy explained it at a news conference: "the simple argument, it seems to me, is that taxes and wages depress demand [for office space]. It's not that we have weak office demand. It's that we have a tax structure that deflects demand to the suburbs. It causes the high-wage jobs to move to the suburbs..."

To put it another way, don't want to pay $85 for a veal chop? There are lots of places where they serve the same for less.

Levy's argument is that Philadelphia is not only more expensive than, say; an office park in Radnor, its tax structure is antiquated. Our reliance on wage and business taxes date back to the days when the city was, literally, the center of the business universe in the region and the suburbs were mostly cow pastures.

As a result, we place too much reliance on taxing things that can easily move elsewhere -- people and business income and profits -- and too little on those that cannot, such as real estate.

If I were the president of a major corporation and wanted to build a regional headquarters in the Mid-Atlantic region, I would fire the VP who recommended the city of Philadelphia as the place to do it. Mostly because of the taxes and other costs that would eat into my profit margin.

As a businessman, if I looked into the recent history of Philadelphia, I would be skeptical that the tax climate would improve. In the last four years, as Philadelphia struggled with the recession, the Nutter administration has enacted a wide range of tax increases that has certainly not improved the picture.

To begin with, decreases in business and wage taxes, due to drop according to a small-step-by-small-step schedule, were frozen at their 2008 levels and have not budged since. The administration halted the declines, though says it plans to resume them next year.

In addition, real estate taxes went up 15 percent, the hotel room tax rose 17 percent, the tax on gross receipts on parking garages rose 33 percent and the sales tax rose went up 14 percent. (It was already a point higher than Pennsylvania's 6 percent sales tax. Now it is 8 percent in Philly.)

Another round of real estate taxes are due this year, as the city switches to full-valuation on buildings and property. No one is sure what the increase will be because the city has yet to complete the re-evaluation of city properties. But, it will be adjusted accordingly to raise an additional $94 million for the public schools.

The Nutter administration is on record as supporting tax reform and lowering taxes, in balance keeping city services at appropriate levels and blah, blah, blah. The truth is: it won't happen, not in the 3 1/2 years left on Nutter's term, unless council forces it on him. Such are the realities of a strong-mayor form of government, minus a strong mayor.

To summarize, the lights are on, the tables are set, the silver is polished and the chef and his staff are waiting for the first orders of the night. And waiting. And waiting.

If I was them, I'd freeze those uncooked veal chops.

-- Tom Ferrick

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