It’s the end of the first week of April and all eyes turn to (drum roll)… the Monthly City of Philadelphia Tax Revenue Update! (.PDF brought to you by the good folks at the Pennsylvania Intergovernmental Cooperation Authority or PICA.)

Let’s go to the numbers and, using our own understanding of these numbers, translate what they mean. We’ll begin as PICA does with the wage tax.

March collections of the City portion of the Wage, Earnings, and Net Profits taxes (collectively referred to below as the “wage tax”) imply that the wage tax base declined approximately 5.6 percent from March of 2008 (after accounting for tax rate changes). Compared to 5.5 percent growth in the first quarter of FY09, and 2.5 percent growth in the second quarter, the third quarter result indicates continuing deterioration in the wage tax base. For FY09, the City currently projects an overall 4.9 percent decline in wage tax collections from the FY08 level (not adjusting for gaming revenues). Year-to-date collections are in line with the City’s current projection for FY09, however accelerated declines in collections are possible.

This is the “oh crap” number.  The “wage tax base” of course refers to all of the money paid in wages and salaries to people who work in Philadelphia and to Philadelphians who work outside of the city.  A 5.6 percent decline in that base basically means that people are either (a) being paid less for the same work they were doing last year or (b) not working at all. The latter is much more likely, reflecting trends from all around the country.  Though the numbers for March aren’t yet available from the Bureau of Labor Statistics, in February 2009, 7.7 percent of the labor force in Philadelphia was unemployed compared to 5.0 percent in February 2008. So it’s no mystery where that wage tax revenue is going. Overall, this has led to a 0.7 percent decline in wage tax revenue for the third quarter of FY09 (that’s January, February and March since the fiscal year starts on June 1) compared to the third quarter of FY08.

On the positive side, the city has factored this decline into projections for FY09 but PICA warns that if layoffs continue and employment continues to go down, drops in revenue could exceed expectations.  This is especially scary since the wage tax makes up such a large part of the city’s overall budget and raising the wage tax rate to make up for the loss is commonly thought to lead to faster migration of businesses and people (and the wages they pay and earn) out of the city.

Ok, what’s next?

Sales Tax collections in March were down 10.0 percent from the prior year. FY09 year-to-date collections are down 3.0 percent, reflecting a generally slowing rate of growth in retail sales. Collections in the third quarter were down 5.3 percent, compared to a 2.1 percent increase in the first quarter and a 5.8 percent decline in the second quarter. Year-to-date collections are in line with the City’s current projection for FY09 of $128 million.

No big surprise here.  If the wage tax base (i.e. all the money we earn) has gone down, then it stands to reason that we would all have less money to spend on the stuff that is subject to the sales tax.¹ I know I’m not dropping two grand on a flat screen any time soon, depriving the city of the $20 they would get from its 1 percent sales tax.  Multiply me by about a thousand other folks who are just giving up flat screen TVs and suddenly the city is out 20 grand!  Multiply that by the 100,000 people not buying any big ticket items… well… you get the picture (but not the TV). This is also a little scary considering that raising the sales tax to 8 percent² with the city getting that 2 percent over the state’s 6 percent, is one of the options that Mayor Nutter has put on the table.  To use an extreme case of why these numbers are scary, what’s 2 percent of zero? Fortunately, the city’s projections for a declining sales tax base are in line with these actual numbers.

Next up in our rogue’s gallery: Realty Transfer Tax, otherwise known as that bite in the butt that you experience at closing when you buy a house in Philadelphia (full disclosure, bought one almost a year ago, felt that bite!)

Realty Transfer Tax collections in March showed some improvement relative to prior months but continue to be well below FY08 levels. March collections were down by 27.2 percent from the prior year, with year to date collections down by 34.7 percent. The City’s Five Year Plan projection for FY09 is $110.6 million, a significant downward revision from the $128.6 million projected in the Quarterly City Managers Report released in February. The new projection indicates a decline of 39.9 percent in FY09 from the prior year, which is in line with current trends.

Is this any surprise?  This is a tax based purely on the buying and selling of real estate.  The Philly is getting more than zero dollars from this tax probably makes local governments in Southern California or Florida jealous.  So while Philadelphia isn’t doing great compared with itself from a few years ago during the ridiculous nationwide real estate bubble, there still seems to be some demand for urban living, especially among the high end folks. For example, the city’s 3 percent cut of that $7.7 million Two Liberty condo comes to $231,000.  Also, the RTT, while a source of “bonus” money over the past few years, is not a huge part of the overall revenue picture.

Is there any good news? How about the property tax itself?

Real Estate tax collections through March are up 2.1 percent over the same period in FY08. The City is on track to meet its projection of $412.8 million in revenue in FY09, which is an increase of 2.5 percent over the prior year.

Despite all of the craziness in the economy and the fact that property values in some regions of the country are crashing through the floor, Philadelphia’s real estate tax base seems to remain stable.  This “Home Value Index” snapshot at real estate website Zillow.com illustrates that the average value for Philadelphia has dropped very little year-to-date and has actually continued a steady increase over the past several years compared to the nation as a whole. And real estate tax collections continue to increase despite the fact that the city’s methods for assessing property values continue to be so dysfunctional.

The takeaway? Basing the bulk of tax revenue on property values, especially in an urban core with decent access to transit, walkable neighborhoods and an opportunity to cash in on future increases in gasoline by marketing a car-free lifestyle, would prove much more stable than wage taxes or business taxes (which we won’t mention in this post since most of those won’t be collected until April and May). If the city could just get the assessments right AND figure out how to collect all the taxes that are owed in a more timely manner, this could be the answer to the constant crisis we find ourselves in every budget season.

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¹ Food and clothing are, for the most part, exempt from the sales tax.

² Since I’m somewhat of stickler about getting the math vocabulary correct, it’s important to clarify the difference between raising a tax from 7 percent to 8 percent and increasing a tax by 1 percent. Raising the sales tax from 7 percent to 8 percent actually increases the tax by 14 percent. Imagine if you now have to pay $108 for a $100 item instead of $107.  The cost of the item [EDITED TO CORRECT] The cost of the tax on the item has gone up by 14 percent.  So any time you see a news report that claims that Nutter is proposing a 1 percent increase in the sales tax, that just isn’t correct.