Harold Miller, president and COO of the Allegheny Conference, says an analysis of business tax burden that takes into account more than just state-level corporate net income tax provides a better picture of true business costs. The chart above depicts annual taxes (in US$ thousands) paid by a manufacturer with approximately $7 million net income, taking into account five state tax categories and four local categories. "The state taxes may be low, but there's a 'gotcha' at the local level that most ranking systems don't capture," says Miller.

Two Cities, One Aim

Is Pittsburgh a city that's cash poor, the only major U.S. city relegated to "junk bond" status by credit agencies, which has cut its 2004 infrastructure budget from $30.2 million to $9.8 million and is teetering on the edge of fiscal disaster? Or is it a metro on the make, welcoming recent corporate facility projects from the likes of Del Monte Foods, netting manufacturer JetNet Corp., industrial procurement services provider MRO Direct and semiconductor design firm ADCUS?
        Yes.
        In December 2003, an evaluation by Philadelphia-based firm Public Financial Management (PFM) of the City of Pittsburgh's request to be considered a community under distress determined that it did meet certain criteria. Absent corrective action, the city's budget would be in a nearly $100-million hole by FY 2007. Hence, the evaluation's recommendation to the state Dept. of Community and Economic Development is that the city be declared distressed.
        Yet at the same time, MDL Capital Management, the nation's fourth-largest minority-owned asset management company, cut the ribbon on its new national corporate headquarters in the center city in October 2003. And for Del Monte's integration initiatives, approximately 15 percent of the company's San Francisco-based positions will be phased out, with their work largely integrated into the existing staff at the Pittsburgh operations center.
        Ronnie Bryant, president and CEO for the Pittsburgh Regional Alliance (PRA), says the area has been able to garner new momentum, thanks to the convergence of three major economic development groups – PRA, Greater Pittsburgh Chamber of Commerce and Pennsylvania Economy League Western Division – under the umbrella of another: the Allegheny Conference on Community Development.
        "We operate under one common vision and operating plan," he says, "four organizations moving in one direction." The result is a leadership approach that is at once dynamic and consistent, he says, enabling the formation of a 280-plus-member regional business advocacy council, among other measures.
        "From my perspective, it allows our organization to focus on what we do best – work with companies and with consultants, and devote more time and effort to focus on activities that give us the greatest return," says Bryant. That includes substantial momentum in the field of advanced manufacturing, a sector in which Pittsburgh has flouted national trends by increasing employment.
        However, notes the PFM evaluation, "Pittsburgh residents face an aggregate tax burden that is one of the highest in the region ... these factors are perceived to contribute significantly to the City's declining population and static property tax base."
        In this case, perception is reality. But reality can shift, as the evaluators note in their citation of cross-state commerce capital Philadelphia, also known for its relatively high taxation. A study performed for the Philadelphia Tax Reform Commission reached conclusions remarkably similar to those reached by other studies around the country supporting the use of incentive packages in luring corporations.
        The study found that tax reduction can be a saving grace for a city in trouble, stating that "reductions in tax rates expand the base of the particular tax being reduced and that changes in the wage and gross receipts tax rates have cross-base effects as well as significant impacts on the number of jobs in the City." It concluded that "losses in tax revenues resulting from a reduction in tax rates will be partially offset by the growth in the bases, which result from tax reductions." Philadelphia has reduced its business receipts tax (gross receipts) by 35 percent since 1996, to 2.1 mills, and the Tax Reform Commission's report calls for its complete phase-out by 2015.
        Pittsburgh collects a 6-mill business privilege tax (the statutory limit), although companies in the very active banking, manufacturing and securities sectors are exempt.
        The PFM report also notes the city's high parking tax of 31 percent on off-street parking, which is projected to grow by at least another 10 percent by 2007. And payments in lieu of taxes, successful in other cities around the country, are stymied by restrictive state laws.
        But Harold Miller, president and COO of the Allegheny Conference, is quick to note that the issues with the city are not about the basically sound economics of the region, but about fiscal structure.
        "The job base in the city has actually been growing," he says. "The city's finances are not bad because somehow the city's economy has gotten bad." Rather, it's a reflection of the population and commuting patterns of the whole area, some 10 counties in southwestern Pennsylvania. Now the challenge is to restructure the tax base to capture various entities that use city services.
        One proposal involves increasing the occupational privilege tax, which taxes each worker's pay at $10 per year, and which hasn't changed in 40 years. Another involves a broader-based tax that focuses more on number of employees than on gross receipts. And yet another proposal will seek to change the tax law so that the city has more autonomy in regard to structuring its tax base and negotiating with unions. Miller asserts that, contrary to popular conception, the area is not a high-taxation area for businesses, once the whole range of business taxes is examined (see chart). And he says there is a dearth of nationwide comprehensive tax analysis data that delves deeply enough into the details of state and local tax rates and exemptions.
        In fact, he says individual site selection cases have revealed that the searcher's analysis involved either superficial or incomplete calculations – meaning the city never makes the project's initial list. If enough attention is paid, he says, the Pittsburgh area comes out more in the middle than the upper range.
        "Don't just look at tax rates," he cautions, "but at particular industries, what their P&Ls will look like. Add it all up, and see how they rank."