Modeling the Impact of Tax Reform in Philadelphia

Econsult Solutions Inc. (ESI) was asked by the Central Philadelphia Development Corporation (CPDC) to estimate the impacts of the City tax reform proposal put forth by the Philadelphia Growth Coalition on tax revenues, economic growth and employment within the City of Philadelphia over the next decade (FY 2017-2026).

From the perspective of the city government, tax rates represent more than just a mechanism for raising revenues. They are an expression of policy choices, encouraging certain activities and discouraging others, that ultimately have profound implications for the economic opportunity of citizens in addition to their implications for the municipal revenue streams that allow the city to provide needed public services.

The City’s current conservative approach to forecasting, which disregards the impacts of tax rate changes on tax bases, is understandable in a world of budgeting. It is not, however, an appropriate framework for evaluating the economic development and job creation impacts of large scale tax reform proposals like the one advanced by the Growth Coalition. These impacts are not simply budgetary in nature, but instead are designed to address the long-term strategic needs of the City, and are thus best thought of within a long-term financial planning framework.

ESI found that both the Growth Coalition proposal and Five-Year plan will result in economic growth, expanding tax bases to offset decreases in rates. The exact magnitude of that growth is of course uncertain, and small differences in projected growth rates greatly impact long-range revenue forecasts. ESI’s model suggests that the Growth Coalition’s proposal generates slightly more tax revenue than the Five-Year Plan over a ten-year time window. The model also projects the Growth Coalition plan to have a far greater impact on employment growth within the city than the Five-Year plan and to generate significant ongoing incremental revenue for the School District by stimulating growth in the real estate tax base.