Butkovitz Finds City Awarded $385M in Tax Credits, Recorded Minimal Gain in New Revenues


Audit Date: March 19, 2014

Audit Categories

  • Financial
Controller: Alan Butkovitz

Executive Summary


For Immediate Release:
March 19, 2014

Contact: Brian Dries
215-686-8869

Butkovitz Finds City Awarded $385M in Tax Credits,
Recorded Minimal Gain in New Revenues
City Controller releases first-ever analysis of Philadelphia’s largest
tax incentive program

Analysis of the Keystone Opportunity Zone Program

PHILADELPHIA – City Controller Alan Butkovitz today released the first-ever analysis of Philadelphia’s Keystone Opportunity Zone (KOZ) Program that indicated $385 million in tax credits was awarded to 617 businesses.

Of the total credits issued across nearly 3,000 acres of tax-free zones, the City generated $40 million in new Wage Tax revenues resulting from the creation of new jobs, either by businesses that entered the Philadelphia market for the first time or existing businesses that expanded payroll. There were about 3,700 new jobs created during the 14-year period of the KOZ.

“There was an implicit bargain that the City would recoup its losses over time from increased wage tax revenue due to heightened business activity and increased employed,” said Butkovitz.

“In short, each new job cost roughly $104,000 in tax credits,” said Butkovitz. “It would take roughly 52 years for each new job to pay itself off.”

In reviewing the program sector-by-sector, the KOZ Program provided a reasonable return on investment in Retail, Utilities and Transportation. These three sectors accounted for 70 percent of the total jobs created and were awarded only $10.4 million in business tax credits.

For sectors such as Finance and Real Estate, these two sectors created 22 percent of the jobs and were awarded almost half, $176 million, of the credits.

“Our findings are consistent with studies in urban economics which indicate tax incentive programs such as KOZ are an ineffective tool for enhancing economic growth,” said Butkovitz. “Programs like the KOZ tend to subsidize firms in sectors that are already doing well under local economic conditions.”

Additionally, the Controller’s Office discovered that the records necessary to provide adequate oversight of the KOZ Program largely do not exist. The Commerce Department shreds new and renewal applications after three years and does not convert them into electronic records. Neither Commerce nor the Revenue Departments require KOZ participants to track job creation or capital investment in any verifiable form.

“The City has done a poor job at maintaining records and there has been minimal effort to require verifiable annual reporting,” said Butkovitz.

“While some new jobs were created and there was a minimal boost in tax revenue, the KOZ Program has not produced the type of results promised for Philadelphia,” said Butkovitz. “This report should serve as a guiding tool in developing future initiatives to attract and retain business in the City of Philadelphia.”

To view the report, “An Analysis of the Keystone Opportunity Zone Program, 1999-2012 – The Costs and Benefits to Philadelphia,” please visit the City Controller’s website at www.philadelphiacontroller.org

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Keystone Opportunity Zone Program: It was created in 1998 by the Pennsylvania General Assembly with the aim of fostering economic opportunities in the Commonwealth and stimulating industrial, commercial and residential improvements. The program provided for the creation of long-term, virtually tax-free zones in areas chosen by local governments; the zones were all supposed to be in distressed areas. In Philadelphia, businesses located in KOZ-designated parcels are exempt from paying Business Income and Receipts Taxes, Net Profits Taxes, Real Estate Taxes, and Use & Occupancy Taxes for the duration of the KOZ designation, typically 15 years.