Analysis of Tax Burdens on Businesses in Philadelphia by Daniel Xu

Philadelphia Businesses Face Disparity in Tax Burdens, Pew Report Reveals

A recent report by the Pew Charitable Trusts has shed light on a significant gap in the tax burdens carried by businesses in Philadelphia, with large businesses shouldering a much heavier load compared to small businesses.

The analysis found that smaller businesses, in terms of absolute gross receipts, had a lower tax burden, with very small businesses being taxed at an average rate of 0.8%, while very large businesses faced a tax rate of 7.1%. The median effective tax rate across all businesses was 3.5%.

The report focused on Philadelphia’s Business Income & Receipts Tax, which exempts the first $100,000 of gross receipts and then applies a tax rate of 0.1415% on the remaining amount. Additionally, the tax includes an income-level tax ranging from 6.20% to 6.35% during the study period, or 5.99% currently. This, along with a net profits tax on unincorporated businesses, creates a progressive tax structure that makes it challenging for large corporations to reduce their tax bills through planning.

The double-barreled nature of the BIRT results in varying tax burdens across different market sectors. For example, real estate businesses saw a significant portion of their tax bill (84%) coming from the income tax, while restaurants and bars had a smaller portion (40%) attributed to the net income tax due to their narrower profit margins.

Philadelphia’s tax structure may serve as a model for other cities seeking to maximize tax revenue without burdening small businesses. A combination of a small gross receipts tax and a higher net income tax could be a balanced approach to ensure fair taxation across businesses of all sizes.

The findings of the Pew report highlight the complexities and disparities in tax burdens faced by businesses in Philadelphia, offering insights into potential strategies for tax reform and revenue generation in other cities.