1101 Market Street, 11th Floor • Philadelphia, PA 19107

Phone: 215-238-6300 •

April 10, 2002

Testimony of Audrey C. Talley Before City Council on the City Wage Tax




Good morning. I'm Audrey Talley, Chancellor-Elect of the Philadelphia Bar Association. I appear here today on behalf of the officers, the Board of Governors and the members of the Bar Association. I first want to thank President Verna and all of the members of City Council for giving us the opportunity to testify before you today. The Philadelphia Bar Association has long enjoyed a good relationship with City Council and with city government. We realize and appreciate the value and importance of that relationship. We know that the tax structure in Philadelphia is an issue that sincerely concerns all of us. We know that there are strong feelings about this and we appreciate City Council's attentiveness to this matter.

For 200 years America's oldest chartered metropolitan bar association has been proud to be associated with this great city. Our first name is Philadelphia. We love this city and we want to see it grow and prosper. We want to see it thrive and remain competitive. We want to see it attract new businesses and the best and the brightest talent available.

Because of this, the Philadelphia Bar Association strongly urges and recommends the City of Philadelphia restructure the tax system that affects Philadelphia law firms, employees and employers. We specifically request the city aggressively pursue and enact substantial cuts in the city wage tax.

The Bar Association is one of the largest associations of professionals in the city. Our 13,000 members represent a substantial and important part of the employers and employees located in the city. Moreover, as counselors and advisors, we are in a particularly good position to know the concerns of the business community in general. Thus, we speak for ourselves as major participants in the Philadelphia business arena, and with first hand knowledge of virtually every other business in and around the city.

As a point of reference, the top 22 Philadelphia law firms employ about 8,500 people, withhold more than $14 million in wage taxes annually and lease nearly 14 percent of all of the office space in Center City, and these are just the large law firm numbers! Most of the law firms in the city are small and medium-sized. So, you can multiply the previous figures and consider that a large majority of our lawyers, while operating small businesses, make huge contributions to Philadelphia's tax base. The city's tax structure impacts on these small and medium sized firms in a manner that is clearly a deterrent for them to operate in the city and understandably makes it more conducive for them to merely cross City Line Avenue to open shop.

Studies have time and again shown that the wage tax is one of the principal reasons why businesses leave Philadelphia, do not expand here, or never locate here. Most recently, a study by the Pennsylvania Economy League came to this very conclusion. These studies are confirmed by our own experience as well as those of our clients. In our dealings with business clients in the Delaware Valley, we have repeatedly heard businesses express their concerns with the city's tax structure. Understandably and more specifically, the wage tax drives workers out of the city. One study shows that a Philadelphia family of four earning $40,000 annually can save $816 per year by moving out of the city. That is significant. This worker migration also limits the available talent pool for employers. Common business sense dictates that a business needs to be located reasonably close to affordable employees therefore requiring them to migrate with the employee pool. This migration affects law firms as well as all other businesses.

We repeat two frequently cited illustrations.

First, there are a large number of prosperous and successful businesses located on the west side of City Line Avenue and very few on the east side. The Philadelphia tax structure is the explanation for the disparity.

Second, Boston is a city economically comparable to Philadelphia. Like our city, it is located in the Northeast and has good transportation, lots of colleges and many of the same issues that face Philadelphia including troubled public schools. However, in Boston, one of the two largest mutual fund companies in the world, Fidelity, has its company complex located in downtown Boston. Not surprisingly, Boston has no wage tax. The second major mutual fund company, Vanguard, has its complex, with its 8,500 employees, located in Malvern, just outside of Philadelphia. Vanguard leaders have unabashedly stated that the tax structure in Philadelphia precludes their locating within the city. The Philadelphia tax structure would require them to pay higher wages to recruit and retain the same talent they can acquire in Chester County. These examples speak volumes and are consistent with the repeated findings of various studies as well as with the experience of our members. Philadelphia competes with the suburbs and other locations to attract business and Philadelphia has been losing the fight for about 50 years. It is time to stop the jugular bleeding!

We believe that a major tax policy objective of the city should be to make a deep and substantial cut in the rate of the Wage and Net Profits Tax. A major cut will affect all taxpayers across the board and will have a substantial and positive effect on the city's economy, stop the migration of jobs to the surrounding areas and turn the city back into a desirable place to work and do business. The change will benefit our members, their clients, associates and employees. As businesses have steadily deserted the city there has been less productive work here for our members. It follows therefore, that there has also been less attraction for law school graduates to locate here. This all adds up to more incentive for law firms to open suburban offices. The Economy League study showed that a law firm is faced an 80% greater increase in taxes if it expands in Philadelphia as opposed to expanding in the suburbs. Given that lawyers serve clients, if the clients leave the city, the lawyers will by necessity have to follow. The current tax structure is an indisputable economic encouragement for lawyers to follow their clients out of the city. We strongly urge City Council to enact a major tax restructuring including a wage tax cut to reverse this downward spiral.

Additionally, we urge the city to address the inequality that is inherent in the interaction of the Net Profits Tax and Business Privilege Tax and thereby correct the over-taxation of professional firms that are organized as partnerships.

While we understand and appreciate that the city must fund city services, and clearly understand the alarms sounding at decreasing the immediately available pool of tax dollars, various studies have succinctly shown that by restructuring the city's tax system we would induce more businesses and employees to locate in the city which would increase the overall number of participants in the tax pool and would thereby increase the totality of available tax dollars. A reduction in immediate revenue would be reinstated by the volume of participants involved with lower taxes on more entities versus higher taxes on fewer.

We encourage and implore you to make substantial and meaningful changes and cuts to the tax structure in the City of Philadelphia. It is the only way to revitalize and rejuvenate this wonderful city. I thank you for your time and attention here today.

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