Earlier this month, City Council member Kendra Brooks proposed another new tax on city residents, this time on intangible personal property. If passed, the tax would force owners of such property (mostly stocks, bonds, mutual funds, and other financial instruments) to pay an amount equal to 0.4 percent of the value of that property every year. In what has become a yearly tradition, the city seeks to solve its annual budget deficit by reaching into the pockets of the citizenry.
To be fair to Brooks and her co-sponsor, Helen Gym, the tax is not one they have just invented—few taxes are, as governments have generally already tried every conceivable way of getting people’s money. It is very similar to a tax that City Council repealed in 1997. It may shock you to learn that City Council has ever repealed a tax, but the reasons they did so in this case are part of the reason why Brooks’s plan will never work.
The story of this tax begins in 1913 when the Pennsylvania state legislature passed the law, currently located at 72 P.S. § 4821 in the statute book. It was amended and enlarged several times, but was a simple concept at heart: Intangible personal property was to be taxed at 0.4 percent. In 1978, the law was changed to allow counties to choose whether they wished to impose it on their residents. Philadelphia and the suburban counties all did so.
Among the quirks of the intangible property tax is that it taxed stock in corporations, but made an exception for corporations that did business in Pennsylvania. When the U.S. Supreme Court found that a similar statute in North Carolina was unconstitutional for this reason in 1996, taxpayers in Pennsylvania sued to have the Commonwealth’s tax struck down as well. State courts agreed, and, facing the inevitable, the counties began to eliminate the tax.
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By mid-1997, Philadelphia was the only county in the region still imposing it, and the effects began to show. While lamenting the loss of revenue for the government, the Philadelphia Inquirer acknowledged that for the city to keep the tax while the other counties abolished it would be harmful. “In the last month,” a July 1997 editorial noted, “the city’s paid a high price: First Union, PNC and Mellon Bank have moved more than 200 jobs to suburban locations to avoid the tax on the trust funds that they managed. Others may follow.”
When the U.S. Supreme Court found that a similar statute in North Carolina was unconstitutional for this reason in 1996, taxpayers in Pennsylvania sued to have the Commonwealth’s tax struck down as well.
The flight of jobs from the city deprived City Hall of both the intangible property tax and the wage tax on those employees. The threat of further job losses convinced Mayor Ed Rendell and Council President John F. Street to repeal the tax in September of that year. Since 1998, no county has attempted to impose it. Many expressed hope that the legislature would amend the tax law to remove the unconstitutional favoritism to local companies, but it never did. The law remains on the statute books today, unchanged and unused. Last year, the state House of Representatives voted 189 to 1 to repeal it entirely, citing the pointlessness of retaining an unconstitutional tax that no county imposes. The bill is currently in the state senate’s finance committee awaiting further consideration.
With all of that history, it comes as something of a surprise that Brooks and Gym want to resurrect this tax. In a tweet on the subject, Brooks noted the 1997 repeal, but not the reasons for it. She claimed further that the tax “raised approximately $17 million in its last year. Given the tripling in stock values over the last 25 years, this tax could raise over $50 million each year.”
That is optimistic, but it might be true if not for the constitutional and practical problems with the tax. The state statute authorizing it has been held to be unconstitutional, and nothing in the Supreme Court’s jurisprudence since 1997 suggests a change in that ruling. Brooks’ proposed law ignores the issue by purporting to tax the stock of allcorporations, whether they do business locally or not. That would be a fix, if the state legislature had done it. But for City Council to do so is impossible: It would tax things that the state government has not empowered them to tax.
The threat of further job losses convinced Mayor Ed Rendell and Council President John F. Street to repeal the tax in September of that year.
The original law violates the federal constitution, and the 2020 version would exceed the powers the state grants to counties. Either way, the tax is dead on arrival. But even if the legislators in Harrisburg decide to keep the law they are now trying to repeal, and even if they go further, amending it to remove the flaw that doomed it in 1997, re-imposing the tax would be unwise.
Philadelphia is too small a jurisdiction to impose punitive taxes on things that can easily be moved to the suburbs. In the few months in 1997 when the city had a tax and the suburbs didn’t, jobs already began to move out. They would do so again. It is simple to change the location of a trust and cheap, too, compared with paying the tax and the associated compliance costs.
Believing that a tax can be imposed without changing behavior is a species of magical thinking that has a long history in City Council. But each new tax imposed on the residents of Philadelphia gives another reason for people paying it to leave. There is no surer way to end the city’s 21st-century renaissance than to re-impose the policies that laid it low in the late 20th century.