From wage taxes to red tape, here’s why Philadelphia is one of the hardest cities to do business

Why would a company moving into a century-old building that’s never flooded need to cut a drain flap into its metal front door?

It’s the extra cost of doing business in Philadelphia.

Andrew Halladay, a production manager at Imperial Yeast, an Oregon-based brewery supplier, said the company loves the facility at the former Frankford Arsenal in Northeast Philadelphia. In establishing an East Coast outpost, the business landed on the natural-light-filled building, surrounded by neighborhoods full of breweries, and close to I-95, a key artery that connects Maine to Florida.

But it took months to win city approvals, and some of the requirements explain why businesses balk at setting up in Philly. Imperial couldn’t move into the former munitions plant until contractors designed and cut the doggy-door-like drain, said Matt Handel of Alliance HSP, the building’s manager. Although the building is in a floodplain, according to the city, the site has no history of floods, he said. “It is thick tape and a cumbersome process to get through, for stuff that felt unnecessary.”

Philadelphia ranks among the worst U.S. cities to do business, with high taxes and burdensome regulations. Most major cities face similar complaints. But Philadelphia is particularly unwelcoming to new and transplanted businesses, academics, business owners, and public policy experts said, helping to ossify Philly as the nation’s poorest big city.

Philadelphia boasts several strengths that should make it fertile ground for business. It’s at the center of the Northeast Corridor and home to top hospitals and universities. Compared with Boston, New York City, or Washington, the cost of living is more affordable. Philly is a biotech center, too.

But with influential unions boosting costs, ensnaring red tape, and a workforce sapped by intergenerational poverty, Philadelphia trails other big cities in the ease of doing business, undercutting efforts to attract and nurture employers.

“If you’ve got barriers to entry for new businesses or make it difficult to expand existing businesses, you’re by definition also restricting the employment prospects,” said Stephen Slivinski, an economist at Arizona State University and a senior research fellow at the school’s free enterprise-focused Center for the Study of Economic Liberty. Slivinski heads a project launched last year ranking major North American cities by how hard or easy it is to run a business. Philadelphia was among the lowest-ranked U.S. cities.

“We do not agree with the assertion that Philadelphia isn’t a favorable place for business,” said Lauren Cox, a spokesperson for Mayor Jim Kenney. “Philadelphia had been on a historic job-creation streak prior to the pandemic, with more jobs in the city than at any point since 1990, which is proof that businesses can and do succeed and thrive here.”

The city’s annual job growth in the decade after the Great Recession, however, was slower than the national average and 23 major cities, according to the Center City District, a business improvement zone.

‘It’s so difficult’ to do business

Sherimane Johnson adopted a vegan diet a decade ago, hoping to avoid the fate of her diabetic grandmother. Johnson, an IT consultant, also loved getting creative in the kitchen. In 2010, she launched a vegan bakery, followed by Night Owl Vegan, a meal delivery service.

Johnson attends farmers markets and food festivals across the region. Nowhere has it been harder to set up a food cart or booth than Philadelphia, said Johnson, a New York City transplant to Philly. “It just seems like they make it so hard unnecessarily.”

Philadelphia makes food vendors set up their stations for inspection in a Medical Examiner’s Office parking lot, she said. After verifying that the fryers and water lines work — and charging $150 for an annual license — the city inspects vendors again at festival

“I don’t understand why it’s so difficult,” Johnson said. Cox, the city spokesperson, said the initial inspection protects against vendors showing up to an event unprepared.

Researchers at Arizona State University agree overall with Johnson. In their 2020 report, ASU researchers ranked Philly 71st out of 80 U.S. cities in the ease of doing business.

The ranking assessed more than 100 economic and regulatory indicators and distilled the data into an overall score, with categories that include tax codes, zoning rules, labor regulations, and the ease of starting up a firm.

Similar research has ranked Philadelphia’s business climate near the bottom. Last year, Philadelphia finished 97th out of 100 large U.S. cities in starting a business, according to the personal finance website WalletHub.

Doing Business in Philadelphia

According to a yearly study conducted by Arizona State University, Philadelphia ranks near the bottom in ease of doing business. The project examined 130 cities from the U.S and other countries and of the 80 U.S. cities included, Philadelphia ranked 70th and 71st overall.

The barriers in Philadelphia begin before a business opens. The city slowly processes paperwork needed to open an establishment, taking 10 days when other U.S. cities need just two to five days, Slivinski said.

A firm in Philly needs four governing boards to sign off on a building’s modifications, while businesses elsewhere must go through one or two steps, the ASU study found.

The extra steps might matter less for firms that can hire lawyers, said Ross Emmett, the research center’s director. But for small shops, it’s often the business owners themselves who must stand in line or wait in limbo for the next step.

“A week of waiting when you are not receiving any income and are incurring start-up costs can set many businesses back,” Emmett said.

But Philadelphia’s low ranking in the ASU study was impacted the most by its high taxes. Philly has the nation’s highest wage tax and stands alone in how it taxes business income. Just 11 of the nation’s 30 biggest cities imposed levies on either profits or revenue, according to a 2016 Pew report. Only Philadelphia taxes both.

A unique business tax structure

Jerry Sweeney, CEO of Brandywine Realty Trust — Philadelphia’s largest office landlord — said he has the same conversation, over and over, with businesses considering a move to Philadelphia.

“Every lease transaction we go through, we’re always talking about how we can compensate those companies moving into Philadelphia, due to the wage tax and to the business tax,” he said.

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