Will Philly ever cut taxes again?

There’s something really depressing about watching Philadelphia City Council debate a tax increase to fund the school system. The debate comes after increases in both property and sales taxes in the past three years to plug holes in the city budget.

It’s depressing because we’ve watched our struggling city actually cut wage and business taxes for more than ten years running. Are those days gone forever?

A little history : In the 1970’s and 80’s, as the city’s economic base collapsed and its middle class fled, city leaders repeatedly cut services and raised taxes to balance the books, and it seemed we were in a death spiral: The government simply couldn’t manage on its shrinking tax base, so it raised taxes, which only encouraged the job and population drain.

Then a startling thing occurred in the 1990’s. Mayor Ed Rendell came into office with the city humbled and broke, and things turned around. It happened because he brought smart people in who cut employee benefit costs, privatized some services and make productivity gains, and because he was lucky: the national economy was booming, which drove up tax revenues, and Rendell had a friend and fellow Democrat in the White House.

But it shocked me when, in 1994, Rendell proposed that the city actually cut wage and business taxes. The cut was so small it was mocked at the time, but he pledged to repeat the trims every year, and gradually ease our tax burden without cutting services.

And it stuck. It continued though the rest of his term and the eight years of his successor, John Street. Michael Nutter was a big tax cut proponent in City Council, and stayed with the program when he moved into the mayor’s office.

With a little help from state casino tax revenue, the city wage tax is now 20 percent lower than it was when Rendell announced those first tax cuts in 1994. If you make 50 grand a year, that’s worth $520 to you, every year.

Just as important, the consistency of the cuts changed our outlook in a subtle way. We began to believe that maybe even a city like Philadelphia, with its widespread poverty, aging infrastructure and unionized workforce, could systematically lower its crushing tax burden with discipline and political will.

And then came the economic collapse.

Mayor Nutter inevitably suspended the wage and business tax cuts, then the tax increases came – different taxes, yes, but the hikes were in much bigger bites than the skinny annual reductions of the past.

And now the mayor wants another tax increase. It seems like Sisyphus’ rock rolling back down the hill.

It’s true circumstances have changed. We had an economic catastrophe, and the current school funding crisis is largely the product of a Republican governors’ refusal to fund education, even while he lets gas companies drill for free.

But maybe that’s more the norm for us than the booming 90’s. There will often be economic problems, and unfriendly leaders in Harrisburg or Washington.

Maybe the whole tax-cutting thing was an impossible dream.

Last week I spoke to both Rendell and Nutter to see if they could talk me out of this funk.

Rendell said yes, he’d benefited from a booming economy, “but in the last analysis, the reason we were able to balance the budget and cut taxes was because we exerted fiscal discipline.”

He said Nutter has to deal with a much tougher economic climate, “but yes, I believe there are cost savings to be achieved, and those cost savings could be applied to any number of things – to programs, to cutting taxes, to whatever the mayor and City Council think are best.”

It’s only fair to point out that when Rendell took office, the city had just added a one percent sales tax to cover the city’s accumulated deficit of more than $200 million. That tax never went away. And right around the time Rendell announced his tax cuts, the city added a ten percent liquor by-the-drink tax to fund the schools, which remains in effect today.

I spoke to Nutter’s finance director Rob Dubow, who told me there are some things to smile about. He pointed out that the property tax and sales tax increases are scheduled to end in 2012 and 2014 – though its likely many property tax bills will grow when the city’s reassesses property values late next year.

And he noted that the burden of those tax hikes are still considerably less than the impact of the cuts made since the mid 90’s. The rock hasn’t rolled all the way back down the hill.

And, he reminded me, the city’s five year plan calls for the resumption of wage and business tax cuts in 2013.

When I spoke to Nutter, he was upbeat and said he was committed to continuing the cuts.

“We’ve seen growth in population for the first time in 60 years,” he said. “There are a lot of factors pointing to at least our small part of the world in Philadelphia and the region getting better.”

“In a couple years, we expect to restart the wage and business tax cuts that city government started back in 1995,” he said.

It’s only fair to point out the city’s five year plan which shows wage and business tax cuts resuming also assumes no wage increases for most city employees.

Given the demands of union contracts, not to mention the city pension system’s problems, balancing the books will remain a challenge for years to come.

High taxes certainly aren’t the only thing that discourages people and businesses from coming here, and it certainly shouldn’t be the only policy goal for city leaders.

But Philadelphia families and businesses do face one of the highest tax burdens in the nation, and a demonstrated commitment to reducing that burden, not adding to it, is important.

I hope Council members remember that as they consider tax increases in the coming days.