Philadelphia’s Varying Effective Tax Rates for Businesses: A Closer Look at BIRT and Net Profits Tax

A recent report by Pew reveals that the effective tax rates for businesses in Philadelphia vary widely based on their size. Large businesses pay a 7.1% rate, while small businesses face a 3.2% rate, and very small businesses pay less than 1%. Ginsberg argues that the effective tax rate directly impacts a business’s profits, with higher rates leading to lower profit margins. The median effective tax rate for BIRT (Business Income Replacement Tax) is 3.5%.

Different industries also face varying effective tax rates due to their unique operations and the city’s tax structure. Wholesale trade businesses have the highest rate at 6%, while real estate companies pay the least at 2.1%. This discrepancy is due to the dual taxation of both net income and gross receipts, a structure that differs from most cities where taxes are imposed on one factor, not both.

The combination of BIRT and Net Profits Tax contributes around 16% to the city’s revenue. However, certain industries like nonprofits, health care, and social assistance have different tax brackets. Despite employing over a quarter of the city’s workforce, the healthcare sector only accounts for just 5% of BIRT revenue. The professional, scientific, and technical businesses are the largest contributors to BIRT revenue, making up over a quarter of the total.

In contrast to last year when Mayor Kenney’s administration slightly lowered the BIRT tax rate, Philadelphia City Council under Mayor Parker does not plan to provide similar relief to businesses this year.