Philadelphia’s reliance on the Wage tax (30% of the General Fund) and the BPT (9%) places the City at risk from economic trends and employment fluctuations of the wider economy. Other cities and states that rely more heavily on property tax revenues are more susceptible to dramatic shifts in the housing market.

In FY09, the City was expected to receive $4.03 billion in revenue, mostly through modest growth in these 6 taxes.

However, with the economy in decline, tax revenues are estimated to be significantly lower than was originally forecast, and total revenue is now estimated at $3.968 billion for FY10.

The Wage, Earnings and Net Profits (Wage) tax is the largest source of revenue for the City, and its receipts remain at risk as local unemployment rises and wage growth across the local economy stagnates. The wage tax is collected from all employees working within the City’s limits, and from all City residents, regardless of their employment location. Wage tax receipts are expected to reach $1.158 billion (excluding PICA contribution) in FY10, with average annual growth of 2.6% from FY10-14.

In FY95, the City established a schedule to gradually reduce the wage tax rate each year. As of July 1, 2008 the rate for residents was lowered below 4% for the first time in over thirty years. The decline in revenues from the Wage Tax between FY08 and FY09 is primarily due to this rate decrease. However, as a result of the recent downturn, the City has established a rate reduction moratorium on further City-financed reductions (the State will continue reductions from Gaming revenue) until 2014 or until economic pressures lift.

Currently, the resident wage tax rate is 3.93% and 3.5% for nonresidents. The resident wage rate includes 1.5% that is reserved for the Pennsylvania Intergovernmental Cooperation Authority (PICA). PICA has overseen the City’s finances since 1992, when the State oversight board was first established. The PICA Statute permits the Authority to a “first dollar” claim on its portion of wage tax proceeds.

Property tax revenues are projected to be the second largest source of tax revenue for the City. This tax is levied on the assessed value of residential and commercial property in the City, and is set at a rate of 82.64 mills. The City receives 40% of property tax revenues, with the other 60% allocated to the School District of Philadelphia. City property tax revenues are projected to reach $574.2 million in FY10 (based on the temporary higher millage rate of 98.64 mills), with average annual growth of 2.6% over the course of the FY10-14 Five Year Plan.

BPT declined considerably since FY08 and is expected to decline again in each of FY09 and FY10. Even after these sharp declines, BPT receipts are expected to grow by an average of 1.9% annually over the course of the Five Year Plan.

Businesses pay a percent of net income and gross receipts toward the BPT. The net income contribution for FY09 is 6.45%, and gross receipts is 0.1415%. There are modified rates for financial institutions, public utilities, some manufacturers, wholesalers and retailers. In response to current economic conditions, the City has kept the BPT rates at the FY08 level until 2014 or when there are indications of recovery.

The sales tax is also significantly affected by the downturn in the economy, particularly as consumer spending weakens. The tax rate is 7% in Philadelphia, of which 1% is levied by the City and the remaining 6% is levied by the Commonwealth of Pennsylvania. As of January 2009, total national retail sales have declined over 9% from the same month in the previous year. As a result, Philadelphia sales tax receipts are estimated to reach $128 million in FY09 (a drop of almost 7% from FY08 receipts) and $234.7 million in FY10 due to additional revenue projected from the temporary sales tax increase. Revenues are estimated to grow an average of 1.2% from FY10-14.

The City imposes a 3% tax on real property sales within the city under the Real Estate Transfer tax (RTT). An additional 1% is charged by the Commonwealth of Pennsylvania, for a 4% total tax.

In FY06 revenue from RTT peaked at $236.4 million in collections. Since 2007, an unstable housing market coupled by the start of the recession has led to a significant reduction in the amount of revenue generated from the RTT. The current projection for RTT in FY10 totals $84.7 million – a decrease of 64% since the peak in FY06.

The second quarter of FY09 marked the eighth consecutive quarter where RTT revenues came in lower than the prior year, falling short in both receipts and records. By the fourth quarter of FY08, total RTT receipts were down by 21.7% while records fell by 22.7%, compared to the same quarter in the previous year.

In keeping with nationwide trends, median home sale prices have begun to decline in Philadelphia, prompting a rising number of homeowners to delay selling. Decreasing sales for residential properties, the largest component of the transfer tax, has largely contributed to the decline in transfer tax revenues.

Residential properties (single family homes, apartment buildings and condominiums) comprised 86.6% of total RTT receipts in FY07, and 73.9% in FY08. In recent years, average home sale prices for condos have shown the greatest potential for growth. However, considerable volatility was seen in the past fiscal year. In the first and second quarters of FY09, average condo sale prices fell by 19.7% and 11%, respectively, as compared with the same quarter in the previous fiscal year.

The parking tax is levied on the gross receipts from all parking transactions. In 2008, the Administration raised the tax to 20%, which brings expected revenue up to $70.7 million in FY10. Parking tax receipts are expected to grow at the regional inflation rate of 2.5% each year from FY10-14.