\u00a0 \u00a0 \u00a0 \u00a0Listen to the audio edition here:<\/p>\n
As Mehta understood it, in reforming BIRT and reducing other corporate taxes \u2014 a longtime goal for corporations in Philly \u2014 the City had incidentally placed a new burden on those who could least afford it: small business owners. Until the Mayor\u2019s tax plan, which passed in June, a longtime BIRT exemption allowed a company\u2019s first $100,000 in earnings to not be taxed; that allowed small companies to keep more of their income, reinvest in their business and potentially grow jobs in communities.<\/p>\n
The administration sought to repeal that exemption out of an abundance of caution,<\/a> because a legal challenge threatened the constitutionality of the system.<\/p>\n When he first heard about those plans, Mehta figured the impact would be bad \u2014 but just how bad? After downloading the public data on the past few tax cycles, Mehta estimated that a small business with $95,000 in net profit, one that was previously exempt from BIRT, would be asked to pay about $4,600 next year in new taxes, then $1,600 the following year. That may not seem like much, but for a mom-and-pop business, it could be a game changer.<\/p>\n Mehta, a former board member of the Asian American Chamber of Commerce,<\/a> brought this point to life during testimony in front of City Council<\/a> last March. He described a mom-and-pop operation, the owners living within their means and saving modestly. \u201cThey\u2019re able to put away $3,000 a year and, if they can stay the course, they can buy a house by 2030. Now, all of a sudden, we find out that the dream is going to be deferred, because of how the BIRT is structured,\u201d he said. \u201c[Their] savings are cut in half.\u201d<\/p>\n Even after Mehta went public with his concerns, he hoped that his fears were overblown. \u201cI ran the numbers 100 times and I still thought, This can\u2019t be right,\u2019\u201d he says. \u201cThis is a systemwide crisis for small businesses. Why is nobody talking about it?\u201d<\/p>\n So Mehta started talking \u2014 and talking \u2014 about it. He was encouraged by the Chamber of Commerce for Greater Philadelphia to testify; then, met with Councilman Mark Squilla, who recommended that he find legal experts to confirm his theory and help draw up a solution. In May, Mehta put together a brain trust that included Dean Krishna, a tax lawyer from Stradley Ronon, barreling forward. \u201cThere was something heartening about seeing people put their heads together to try to come up with a creative solution to replace the exemption,\u201d says Chris Jones, the head of Ballard Spahr\u2019s tax team in Philly, who provided legal help during the effort.<\/p>\n As spring turned to summer, several people inside City Hall believed that Mehta was right \u2014 not only about the problem they\u2019ve caused, but also, potentially, how to fix it.<\/p>\n Right before Thanksgiving, City Councilmember Mike Driscoll introduced a bill that borrows directly from Mehta\u2019s brain trust. The bill, which is scheduled for a City Council hearing in January, faces an unknown future. But already, the collaborative nature of how the legislation came about is an example \u2014 some might say, an exceedingly rare one \u2014 of local advocates and government officials\u2019 willingness to step up, perhaps even owning up to a mistake, when it counts.<\/p>\n \u201cYou appreciate your City Council in times like this,\u201d says Mehta.<\/p>\n Protecting the corner store<\/p>\n Throughout his grassroots campaign, Mehta confronted an obvious question, stemming from the fact that he primarily resides in New Hope, PA. Why do you care so much? <\/p>\n Mehta, the son of immigrant parents who settled in Northeast Philly, says that his advocacy around the BIRT exemption is deeply personal. When he was a teenager, his father got sick and they lost their family\u2019s grocery store. For a long time after his father\u2019s death, the family struggled to make ends meet and relied on help from members of their extended family and religious community \u2014 which, although a necessity, filled Mehta with shame and guilt at the time.<\/p>\n \u201cI saw, as a 15-year-old kid, how a decline in income can cause stress to the whole family,\u201d he says. \u201cIt\u2019s led me to think about economic security on a neighborhood and community level.\u201d<\/p>\n Like a lot of residents (Mehta owns property here and does work as a business consultant in the city), he supported Mayor Parker\u2019s plan to rewrite aspects of the tax code. One of the reasons that Mehta moved outside of Philly was the notoriously onerous local tax structure. But as details of the plan began to emerge, he quickly grew concerned about the potential fallout from eliminating the $100,000 BIRT exemption.<\/p>\n \u00a0\u201cI ran the numbers 100 times and I still thought, this can\u2019t be right. This is a systemwide crisis for small businesses. Why is nobody talking about it?\u201d \u2014 Jigar Mehta<\/p>\n Often referred to as a \u201cdouble tax\u201d on local businesses, BIRT claims a percentage of both net income and gross receipts from a company. For example, setting the exemption aside, companies owe taxes on the gross amount of their sales and services (even if they\u2019re operating at a loss); plus, they\u2019re taxed on the net income that they make over the course of the year. The two-pronged BIRT applies to all businesses, from restaurants to retail stores to multinational corporations.<\/p>\n Its detractors have blamed BIRT for everything from Philly losing out on the Amazon headquarters sweepstakes<\/a> to hampering the success of small and minority-owned businesses<\/a> to forcing homegrown firms to relocate.<\/a> Op-ed after op-ed has made the case that the tax is a scourge on the city: unfair, unnecessary, and reputationally damaging to the city\u2019s business ecosystem.<\/p>\n But in practice, the $100,000 exemption has protected most businesses from the damage. A 2024 Pew analysis found that three-quarters of all Philly businesses have no liability whatsoever when it comes to BIRT \u2014 even though the plight of small businesses has been often used as justification for reducing the tax writ large.<\/p>\n In other words, since the exemption took hold in 2015, BIRT has functioned as a progressive tax: Businesses that make the most money account for nearly all of the City\u2019s tax revenue.<\/p>\n \u201cThat exemption was put in place as a shield for small and minority-owned businesses,\u201d Mehta says. \u201cThey can\u2019t afford to lose it, especially right now.\u201d<\/p>\n The City was forced to rethink the exemption as a result of a shifting legal landscape. In recent years, multiple lawsuits have challenged the constitutionality of Pennsylvania local taxes and exemptions on the grounds that they violate the state\u2019s \u201cuniformity clause\u201d \u2014 in essence, a law that requires taxes to be levied evenly across the same tax class (i.e. corporations and individuals).<\/p>\n While PA\u2019s uniformity clause is not unlike provisions that exist elsewhere \u2014 including the equal protection clause of the U.S. Constitution \u2014 the state\u2019s judges have allowed for minimal wriggle room and have struck down taxes that have the effect, even unintentionally, of creating graduated tax rates.<\/p>\n \u201cGoing back probably 100 years, the PA Supreme Court has interpreted the requirement for uniformity in a way that I don\u2019t think any other state courts or federal courts have,\u201d says Jones, a tax-compliance expert.<\/p>\n Fearing that the popular exemption was on shaky constitutional footing, because of case law that developed after its enactment, Mayor Parker chose to preemptively remove it, even as some observers asked her to stand behind it. \u201cInstead of fighting for small businesses in court, the Administration chose to give up on defending the BIRT exemption,\u201d said Councilman Nicolas O\u2019Rourke during the spring\u2019s budget negotiations. \u201cOur City\u2019s smallest businesses will pay the price.\u201d<\/p>\n Small businesses-centered legislation<\/p>\n In May, weeks after Mehta\u2019s brain trust of lawyers and business-minded citizens got to work, they landed on a promising idea. \u201cThe lightbulb went off in my head,\u201d says Jones.<\/p>\n Although the state\u2019s uniformity clause could be an obstacle for a narrow exemption, there were other ways of working around it. In Philly, for example, corporations do not have to pay the net profits tax or NPT (which is separate from BIRT) because they already pay a state corporate income tax. They are not technically exempt, rather, not eligible for NPT thanks to nuances in the law. \u201cIt sort of hit me: Wait a minute, if corporations can be constitutionally carved out from the net profits tax, then there\u2019s no reason why a specific taxpayer classification couldn\u2019t be carved out from the business income and receipts tax,\u201d says Jones.<\/p>\n Mehta and others ran with it, coalescing around a bold idea to effectively restore the BIRT shield for thousands of businesses. In place of an exemption, the City could create a new business class within the local tax code that would not be subject to BIRT, one that includes a large portion of the small businesses that will suddenly see their tax liability rise. Their proposed new class is for individuals as single-member LLCs and sole proprietorships, which would protect solo entrepreneurs, members of the gig economy, and a wide range of companies.<\/p>\n It\u2019s not a perfect solution. At first, the brain trust considered separating each and every business that wasn\u2019t a corporation into a new class, but by doing so, they would allow large partnerships (like law and accounting firms) to profit. The idea they settled on would not save every previously exempt business from BIRT, but it would provide some relief.<\/p>\n \u201cI\u2019m not sure that it\u2019s some kind of magic wand, but it\u2019s at least a possibility,\u201d says Jones, who clarifies that he\u2019s not making a policy recommendation to City Council \u2014 rather, his involvement has centered on the legality of Mehta\u2019s proposal, which Jones believes \u201cwould pass constitutional muster.\u201d<\/p>\n \u201cThis BIRT problem has become a pressure point with small mom-and-pop businesses. This could be the difference between those businesses being open or closed.\u201d \u2014 Councilmember Mike Driscoll<\/p>\n Beginning in June, Mehta set out to find legislators who were willing to take on the challenge. He immediately found an audience. \u201cThis BIRT problem has become a pressure point with small mom-and-pop businesses,\u201d says Councilmember Driscoll, who introduced a bill in November which would create this new tax class. \u201cThis could be the difference between those businesses being open or closed.\u201d<\/p>\n
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