Philadelphia’s Unique Tax Structure: An Analysis of Businesses’ Effective Tax Rates

The Pew report reveals that businesses of different sizes face varying effective tax rates, with large businesses facing a 7.1% rate, small businesses facing a 3.2% rate, and very small businesses paying less than 1%. Ginsberg notes that the effective tax rate reflects the burden that businesses experience and directly impacts their profits. According to BIRT, the median effective tax rate for businesses is 3.5%.

The tax structure in Philadelphia is unique in that it imposes taxes on both net income and gross receipts, leading to varying effective tax rates for different industries. Wholesale trade businesses have the highest effective tax rate at 6%, while real estate companies pay only 2.1%. This discrepancy is due to differences in how taxes are calculated based on gross revenue versus net income.

Combining BIRT and Net Profits Tax contributes around 16% of the city’s revenue, with certain industries like nonprofits, health care, and social assistance having different tax brackets. Despite employing 24% of the city’s workforce, the health care sector accounts for only 5% of BIRT revenue. The professional, scientific, and technical businesses are the largest contributors to BIRT revenue, making up 25% of the total.

During the previous year, Philadelphia City Council and Mayor Jim Kenney’s administration slightly lowered the BIRT tax rate. However, under City Council and Mayor Cherelle Parker’s administration, there are no plans to provide similar relief to businesses in the future.