By Daniel Tay

Law360 (May 1, 2020, 7:57 PM EDT) -- Philadelphia would suspend scheduled cuts to its business income tax rate and raise other taxes to address a projected $649 million deficit for fiscal year 2021 caused by the novel coronavirus pandemic under a budget the city's mayor proposed Friday.

The city would freeze its business income and receipts tax rate at the 2020 rate of 6.2% until fiscal year 2024 under Democratic Mayor Jim Kenney's revised budget for fiscal year 2021 and the five-year plan he proposed to the Philadelphia City Council. Under the proposed budget, the city's resident wage, earnings and net profits tax rate would also be frozen, at the 2020 rate of 3.8712%, until fiscal year 2024.

Both rates were scheduled to be gradually cut with each passing year, but Kenney said difficult decisions would be needed to close the projected deficit. Under the city's charter, the city government must pass a balanced budget. Kenney said the scheduled rate reductions would resume in fiscal year 2024.

"By making the tough decisions now, we can maintain our commitment to helping all Philadelphians reach their potential," Kenney said in a recorded statement.

Kenney in March proposed a $5.2 billion budget, which contained funding for a new community college scholarship program and expanded residential sweeping and paving. The new proposal would cost $4.9 billion. Kenney noted that the impact of the pandemic would likely cause a "dramatic decline in tax collections from the shutdown of business activity and the resulting drop in wages" and said there was no guarantee of federal government assistance.

Kenney's proposal would also raise the rate for the nonresident wage, earnings and net profits tax, from 3.4481% to 3.5019%, until fiscal year 2023, after which scheduled rate reductions would resume. Kenney said in the five-year-plan document that the changes would make Philadelphia a less attractive location for businesses and jobs, but that the proposed hike would "put the least burden on vulnerable Philadelphia residents for the amount of funds it will generate." The raise in the nonresident rate and the freeze on the residential rate are expected to raise $17.2 million in the 2021 fiscal year.

The city's parking tax rate would also be increased, from 22.5% to 27%, with Kenney noting that the tax was less likely to affect low-income Philadelphians. The increase is expected to generate $16.9 million in fiscal 2021. Additionally, Kenney proposed eliminating a discount for early payments of the real estate tax, which would bring in an additional $5.7 million.

The proposed tax freezes and raises, combined with proposed fee increases, will generate about $50 million. Reductions in spending and drawing on city reserves would close the remaining $599 million budget gap under Kenney's proposal.

Council Member Maria Quiñones-Sánchez, chairwoman of the council's Appropriations Committee, expressed concern about the tax increases. She noted that the parking industry had been vocal about the heavy tax burden, saying it would be difficult to increase the parking tax.

"I'm going to always keep an open mind. Given where we are, the kind of recovery that we're going to need, everything has to be on the table," Quiñones-Sánchez told Law360. However, she noted she would be "very, very reluctant" to ask Philadelphians to take on additional tax increases without closely analyzing the choices the budget would make.

"We will drill down more on the numbers because the residents of Philadelphia are hurting," Quiñones-Sánchez said.

She added that the pandemic had amplified existing inequities in the city and that the crisis could be an opportunity for the city to reimagine the budget to address poverty and inequity.

Council Member Allan Domb told Law360 that raising taxes during a pandemic is the last thing the city should do, adding that doing so would discourage businesses and people from working in the city.

"If anything, we want to go in the reverse direction. We want to lower the taxes further," Domb said. He added later that the city should look at the current crisis as "an opportunity to recreate ourselves" and become a less regulated city with lower tax burdens.

Council President Darrell Clarke told Law360 the council had appointed a COVID-19 working group comprising leaders with "deep fiscal experience," which would examine the budget and attempt to spare Philadelphians as much pain as possible.

The Chamber of Commerce for Greater Philadelphia did not respond to requests for comment.

--Editing by Robert Rudinger.

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