Balancing the City Budget

I haven’t yet attended any of Mayor Nutter’s budget forums, but the word on the street is that the overriding sentiment is to raise taxes rather than cut services. Even without my relatively insider information, you probably could’ve guessed that, given the visceral response to the proposed library closings late last year.

Maybe I’m looking too much through the lens of what’s going on at a national level, in terms of the tarring and feathering of bailed out bank execs who shouldn’t be allowed to make more than $500,000. But my guess is that John Q. Public wants to stick it to the businesses: if you’re going to force me to have to choose between less services and higher taxes, I’ll choose to keep the current level of services and hike taxes, especially the ones paid by businesses. At the very least, the obvious conclusion drawn by many residents seems to be that the long downward march of business tax rates (championed vigorously by Mayor Nutter when he was a councilperson, by the way) should be stemmed.

The irony, of course, is that it is businesses that predominantly create jobs, and to the extent that we chase them away and/or stifle their growth with cumbersome taxes, we shoot ourselves in the foot; for isn’t John Q. Public’s main concern really that there aren’t enough jobs to go around? The fact of the matter is that despite 15 consecutive years of tax rate reductions, Philly is usually at or near the top of the list of big cities, in terms of tax burden. And while there are other reasons businesses choose not to move to or expand here - not enough skilled workforce, high labor costs, regulatory burdens - taxes do matter, and 21st century economic activity is mobile enough to not want to locate itself where it'll be at a financial disadvantage. (As Wharton professor Robert Inman notes in a recent Forbes Magazine write-up on Mayor Nutter: ""There are no more blast furnaces. The jobs in warehouses and office buildings are incredibly mobile.")

By the way, an under-told story here is the very real third option to a fiscal crunch besides cutting services or raising taxes: dealing with pensions and health benefits for city employees. Between police, fire, blue collar, and white collar workers, that’s a lot of current and former bodies whose retirement funds and health care plans we have to pay into and pay out to. If in the near future you see some studies go public that compare the amounts city workers pay in or get out versus other public sector workers or private sector employees, pay attention; because if you can get city workers to agree to pay more in and/or get less out, you can take a really good hack at the budget hole.

If there’s anything I learned in Econ 101, it’s that there’s no free lunch. If you have a budget hole, you have to increase your revenues and/or decrease your expenditures, no matter how hard or painful it is. If you postpone fully funding your pension and health care obligations, you’re not just delaying the pain, you’re worsening it. And if you think you can just stick the bill with the businesses, you may find less of them around to provide the jobs and tax revenues that a city needs.

You should know that this post comes off the heels of a presentation I attended yesterday on Philadelphia’s fiscal crisis, and how to act in ways so as to not only advance short-term fixes but address long-term structural concerns. Here’s some remarkable information that was provided in this presentation on how other cities are faring in this recession:

Funny to find ourselves with Los Angeles as in relatively good shape, compared to other big cities. Meanwhile, Phoenix is just getting killed; its main revenue source is the sales tax, which is the most vulnerable to getting whipsawed in a downturn. And San Francisco won’t be able to look to the state for help since California is in even worse shape: a $40 billion deficit combined with 200 percent overcrowding in the prisons is leading to calls to release 40 percent of prisoners as soon as possible. Finally, note how much bigger New York City is, both in terms of its budget and its deficit; and with no end in sight to the pain in the financial markets, Mayor Bloomberg could be in for some very tough decisions soon.

Cities and states aren't often in a position to zig when their economies zag; that's why fiscal stimulus at a federal level is so compelling, even if it comes at the cost of borrowing from the future and having to make smart and fast decisions via the nation's largest bureaucracy. But crisis also represents opportunity, to fix what's structurally broken and be better off in the long term for it. Thinking that hiking taxes for businesses is a free lunch is certainly not the best use of that opportunity.
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