Andrew A. Chirls, Chancellor
Philadelphia Bar Association
City Council Tax Hearings February 16, 2005
Council President Verna and members of City Council, on behalf of the 13,000 members of the Philadelphia Bar Association I offer my thanks and appreciation for this opportunity to testify on tax reform generally and more specifically on the elimination of the Business Privilege Tax over a period of time.
We understand that tax reform is a huge issue for this Council and this city government to confront. Overall, we support the recommendations of the Tax Reform Commission. Our Bar Association designated Stewart Weintraub as a delegate to that Commission, and our Board of Governors passed a resolution supporting the Commissions report and recommendations. But I want to commend you today for focusing on one particular inequity, which can and should be promptly addressed.
We urge the city to eliminate the double taxation imposed by the Business Privilege Tax and the Net Profits Tax on service firms that are organized as partnerships.
Under the current tax rules, if a service firm is organized as a corporation, the employee owners and officers of the business will pay City Wage Tax at a rate of 3.9127% for nonresidents and 4.5% for residents. In contrast, if that same firm were organized as a partnership, the partners would be subject to a Business Privilege Tax (BPT) of 6.5% on their net income. In addition, the partnership would also pay a Net Profits Tax (NPT). Though they would be able to claim a credit of 60% of the net profits portion of the BPT, the effective rate of tax on partnership net income could, in some cases, exceed 7%. Thats a serious inequity. This inequity can be eliminated with the phase-out of the Business Privilege Tax that you are considering today specifically the adoption of Bill 040767.
Right now, many Philadelphia lawyers and sole proprietors pay their taxes twice. In this sense, I as a Center City lawyer and resident am not unlike the guy who owns the coffee shop two blocks from where I live, the barber three blocks away, and the many sole proprietors near me on South Street. And I am not different from our many Bar Association members who are in small offices in the citys neighborhoods. We lawyers in private practice pay the Business Privilege Tax, and then we pay the Net Profits Tax on the same income that goes into calculating the Business Privilege Tax. In Philadelphia, it is only partners and sole owners who do that. Nobody else. A company deducts the amount it pays to its principals, but partnerships and sole owners dont. That just isnt fair and it doesnt make sense.
And I have heard lawyers say that this double taxation has had an effect on where they put their offices. When a small practitioner in a neighborhood moves to the suburbs, the City loses and the neighborhood loses.
When there is a glaring difference between rates in territories that are quite close to one another, the difference in the tax rates can be decisive. City Line Avenue is an excellent example. One side thrives; the other does not. I am too familiar with people telling me how their residential and their business location choices between the city and the suburbs in our region were driven by tax rate difference. Taxes matter.
So, the inequities which Ive just enumerated are among the major factors in the relocation of professional firms from the City into the suburbs. Thats why we care so deeply about this.
Many professional services firms operate in partnership form for various reasons. Significant tax and non-tax restrictions exist to limit their ability to convert to non-partnership (or corporate) form.
And in many ways, this is really a small business issue. Bear in mind that many small and mid-size firms are organized as partnerships and consequently suffer under this provision. In fact, nearly two-thirds of the membership of the Bar is composed of small and mid-sized firms.
So, this is a serious issue.
A study released in January 2003 by the Central Philadelphia Development Corporation explains that Pennsylvania suburbs have enjoyed a robust 34% rise in professional services jobs between 1990 and 2000. The study goes on to note that Philadelphia added no new commercial office buildings in the 1990s. By contrast, the Pennsylvania suburbs have added 12 million square feet of space, the equivalent of 10 Liberty Place Towers, surpassing Center City in total space in the process.
In light of such restrictions, and, faced with onerous taxation by the City, firms have (as the CPDC has recognized) explored alternatives such as relocating outside Philadelphia. The City has suffered and continues to suffer as a result.
A recent Pennsylvania Economy League study showed that a law firm is faced with an 80% greater increase in taxes if it expands in Philadelphia rather than in the suburbs.
And over the past fifteen years our surveys show that Philadelphia law firms have been opening satellite offices in surrounding counties at an accelerating rate. Yet, incredibly, the areas major law firms (including many national and regional powerhouses) have continued to maintain their headquarters offices in the city. Clearly, the firms would rather not leave. But more and more, for various reasons, including tax inequities, the growth of our firms has been outside the city limits, and our connections to the city itself undergo the risk of getting weaker all the time.
Indeed, some of the major Philadelphia law firms employ nearly 5,000 employees just on Market West. When you take in all of center city, you can virtually double that figure to nearly 10,000 employees. And that 10,000 is only one third of the entire Philadelphia legal community and its support staff.
The jobs that the legal services sector brings to our city are good jobs.
The ancillary business that the legal services sector supports are vital to our regional economy.
If you need any evidence of that just take a look at Mondays Philadelphia Inquirer, which talked about the positive economic benefits of the new Philadelphia Business Court and thats just one small part of the picture.
If all of the citys lawyers and law firms were part of a single corporation, wed be one of the very largest corporations in the region.
Philadelphia lawyers are exporters for this city. When we have a case based in Chicago or are working on a transaction based in California or even in another country we are exporting for the benefit of this city. We used to export hats and steel from Philadelphia. But now, it is lawyers who export service, knowledge, professionalism, and problem solving for the benefit of Philadelphia.
But our ability to export is being tested. The overlap of the business privilege tax and the net profits tax is a primary example of this. Its a drag on our profession and our ability to export.
Philadelphia without Philadelphia lawyers?
Its hard to imagine.
Center City as it exists today would be totally unrecognizable. Whole parts of it might well be deserted, blighted, barren. Its not just the lawyers who would not be here. It is the paralegals, the independent messengers, the copy shops and the luncheonettes that would lose their patrons.
Thats not our vision of the city.
We love Philadelphia.
We want to see our city continue to grow and prosper.
We care about the city.
We dont want special treatment. We simply want tax equity and reasonable tax reform.
And we want to work with the city government and with City Council to continue to bring good jobs and solid businesses to the city. We can start with the change that Ive recommended today.
Thank you, and I welcome your questions.