Every time I hear about Pittsburgh's financial woes, I think about the tax-exempt banking institutions. Why are they exempt from the city's business privilege tax? | Pittsburgh City Paper

Every time I hear about Pittsburgh's financial woes, I think about the tax-exempt banking institutions. Why are they exempt from the city's business privilege tax?

Question submitted by: Chris Seymour, South Side Slopes



Those damned financial institutions, always getting one over on the rest of us. Who do they think they are? Pittsburgh City Paper?



It's true: Newspapers don't pay the tax either. But I can raise a couple points in our defense. First, it really isn't a great tax to begin with. And second, it accounts for a much smaller share of the city's budget -- and its problems -- than it did a year ago.


Let's look at the definition of the tax. City budget documents define it as follows: "a 6 mill tax on the gross receipts of a service business, trade, or profession in, or attributable to the City." Note the first problem right off -- it's a tax on gross receipts, not net revenue. So you had to pay it whether you made any money or not. That's tough, though not as tough as my personal favorite city levy: the "going out of business" license. (That license generates only a few bucks a year, though I've always thought it should be raised as high as possible, to provide a disincentive for companies to go out of business. By similar logic, if Republicans chose to raise the so-called "death tax" instead of abolishing it, no millionaires would ever die.)


Note too that this was a tax on any "service business"; it doesn't apply to manufacturers like steel companies. Back in 1969, when Pittsburgh actually made stuff, that was a big loophole. And everyone wanted to squeeze through it.


If you read only one text on the business privilege tax -- and I hope one is all you read -- it should be the landmark text "Insecure Transactions: Pittsburgh's Business Privilege Tax and the Securities Industry, 1969-1997." Written by Kevin Forsythe of the City Controller's office, this treatise makes clear that Pittsburgh's business privilege tax was defined by people's attempts to dodge it.


"[I]ndustries such as food-processors, meat-packers, and materials finishers attempted to mold themselves in to the ... definition of 'manufacturing' to avoid paying the tax," Forsythe writes. Newspapers like this one got to be counted as manufacturers, while radio and TV stations did not -- presumably because you can't line the birdcage with a radio signal.


As for the banks, they were exempted by a 1980 State Supreme Court decision City of Pittsburgh vs. Allegheny Valley Bank. The ruling established the doctrine of "tacit preemption," which held that if an industry were subject to state regulation, local governments had no right to tax it. Banks and utilities were thus exempted, and later on so were beer distributors and others. This was the 1980s, remember: By then, banks and beer distributors were about all we had going for us.


Many of these decisions were outside the city's control, but local leaders sometimes made things worse. In 1996, Mayor Tom Murphy -- who in more recent years has bemoaned the loopholes in the privilege tax -- demanded that such a loophole be created for the financial-services firm Federated Investors. As with much of Murphy's development strategy in the 1990s, the idea was to keep a business in the city by giving it a tax breaks. (Indeed, when city councilors began complaining about how the state legislature had passed the exemption through "clandestine, back door, midnight legislation," Murphy charged that they suffered from a "basic ignorance of business.") The result, of course, was that when the city went belly up a few years later, everyone started wondering where the hell all these tax breaks came from.


On the bright side, as part of last year's financial bailout, the rate of the business privilege tax was cut by two-thirds -- from 6 mills to just 2. Revenues are dropping accordingly: According to city budget figures, in 2003 the tax brought in about $42.5 million; it's projected to draw just a little over $13.8 million this year. The tax can be phased out entirely in a few years.


In the meantime, banks and other firms still aren't paying the business privilege tax ... but the value of the exemption is a lot less than before. In today's Pittsburgh, that's as close to fairness as we get.