The United States Department of Labor recently announced its March 2013 job statistics. In it, Pennsylvania was ranked 49th in the country in total non-farm job growth; only the “economic powerhouse”, Wyoming, ranked lower than us. It gets worse: recent data presented by The Pew Charitable Trusts and Temple University showed that, since 1970, Philadelphia has lost 25% of its jobs while Washington, D.C. has gained 25%, Boston has gained 18%, and New York City has gained 15% in that period. In fact, as a whole, the large Northeastern cities have seen double digit job growth since 1970. Not a good sign for our State and local economy, or for area landlords struggling to fill up their buildings.
If the real estate market is going to rebound, it will require a lot of new job formation, especially because companies are generally consuming less space per employee now than ever before. As the biggest city in the State, we need to lead the way if things are going to change. The truth is, we can bring jobs to Philadelphia, but only if we are willing to think outside the box.
As commercial real estate brokers, we often help our clients evaluate the pros and cons of a city versus suburban location. While there are certainly examples of companies moving from the suburbs to the city, and from the city to the suburbs, most firms decide to stay where they are absent a compelling strategic business reason (i.e., co-locating with another large company presence, access to skilled labor, etc.) or some meaningful economic incentives package from a competing jurisdiction. Companies tend to stay out of Center City for two main reasons: (1) fear of disrupting existing employee commuting patterns and (2) taxes. Clearly, companies want their offices to be conveniently located for their employees. Over time, companies draw new workers from their surrounding areas and existing employees buy homes in locations which are close to work. Changing the office location and disrupting these established commuting patterns can lead to employee defections.
Taxes also play an important role in a company’s real estate decision. For example, suburban companies that consider moving into the City need to factor into their decision the impact of higher taxes, including the Business Privilege Tax and the City Wage Tax, which can be substantial. More often than not, these additional burdens, when coupled with parking costs and commuting pattern disruption, keep companies from moving into Philadelphia. Unfortunately, Philadelphia doesn’t have the cash to compensate out of town companies for the higher tax burdens and, therefore, rarely do we see existing companies move here. Given the foregoing realities, how can Philadelphia grow jobs?
Frankly, growing jobs is a lot like building a successful professional sports team; it’s a lot cheaper to grow your own talent internally than it is to buy someone else’s established talent. To save money, professional sports teams invest in their farm system in the hopes that some raw, inexpensive talent will eventually develop into superstars who may accept “home town” discounts. Similarly, if Philadelphia cannot afford to attract established companies because of limited funding for economic incentives, it needs to find a way to convince entrepreneurs to create and grow their companies in the City. Of the hundreds of companies started at the University City Science Center over the past 50 years, many of the successful ones have left Philadelphia immediately after becoming profitable. That’s a shame. We incubate them, nurture them, and then force them to leave due to excessive taxes. It doesn’t have to be that way. Interestingly, companies that have been in the City for a long time tend to gradually build these higher expenses into their pricing structure; this allows them to remain in the City and enjoy all of its amenities, conveniences, and benefits.
Philadelphia needs to create a tax structure that incents new companies to form and grow here. Instead of whacking home grown companies over the head the minute they generate revenues or turn a profit, we should gradually phase their City taxes in over a 10 year period. This will give them the opportunity to slowly absorb these costs into their pricing structure. The City could require that these savings be re-invested in the company, thereby creating more jobs. As these companies grow during those 10 years, their employees would find homes in and around the City with many hopefully using public transportation. A move out of the City after 10 years would then become very disruptive and possibly prohibitive.
This approach would be different from the current Keystone Opportunity Zones in several key respects. First, it would be limited only to new companies. Second, the benefits would not be tied to specific real estate; companies would be free to choose the best location for their business. Third, the qualifications would not be tied artificially to job growth in the first year; they would require sustained growth in one of investment, jobs or revenues over time. Finally, tax savings would need to be re-invested in the business at least for some period of time.
In addition to modifying its existing tax structure, Philadelphia should invest in incubator spaces for young companies and partner with its universities to provide mentoring and technical support for these fledgling businesses like the University City Science Center does today. The Redevelopment Authority and School Districts have lots of vacant or underutilized buildings that could be perfect incubators for emerging companies. If we made these buildings available to developers at a low cost through joint ventures with the City, the developers could charge cheaper rents; a real benefit to new companies trying to preserve precious cash. In addition, this approach would add properties to the City’s tax rolls and help revitalize our neighborhoods. It would be a win-win for everyone.
If we can’t convince existing companies to move here, we need to create new companies in the City and find creative ways to retain them when they become successful. To do this we need a tax system and infrastructure that fosters fledgling companies during their formative years, allowing them put down roots so they become permanent fixtures in our community. It won’t be easy and it won’t happen over night; however, it may be the only way to build a true City of Champions.
For more information contact Glenn Blumenfeld