Baker: Repeal policy on wage tax
By ADAM TAYLOR The News Journal
October 01, 2010 06:10 AM
Facing growing opposition from the city's business community, Wilmington Mayor James M. Baker Thursday asked council to repeal a controversial new tax policy, even though he believes objections to it are wrong.
Baker said he's making the move because many business owners have said the additional tax burden could force them to move to the suburbs, which would make the city's poor financial condition even worse.
"I don't know if the threats are real, but I will not take the chance of losing businesses and further weaken the city's fiscal base," Baker said Thursday.
The business leaders who have been fighting to remove the law from the books applauded Baker's decision.
The City Council president expects the mayor's request will pass.
Baker, though, asked a group that advises city government on fiscal issues to examine whether there is a better way to tax entities known as "S" corporations.
Baker's announcement came one day after a city agency, called the Administrative Board, passed a series of regulations related to a law passed last year that broadened the way Wilmington could tax "S" corporations.
There are about 1,000 such entities in the city, which include medical practices, law firms and real estate agencies.
Council President Norman D. Griffiths said the group from Wilmington's corporate community who attended Wednesday's Administrative Board meeting were seriously thinking of relocating and played a role in Baker's announcement Thursday.
"All those people in the same room saying the same thing can't just be an idle threat," Griffiths said. "I'm glad to see him do it."
"S" corporation employees are paid salaries, but the workers and shareholders also get income that is declared "distributions." The old law allowed the city to impose the 1.25 percent wage tax on salaries only. The new law made the distributions also subject to the wage tax.
When the law was passed, city officials said some of the "S" corporations were skirting the law by declaring low salaries and taking large amounts of distributions. But many officials from the corporations said the law was a sneaky way for the city to get more wage-tax money.
City finance officials estimate the law would generate about $3 million. The city already is facing a $5 million operating shortfall, just three months into the fiscal year.
"This places a tremendous additional burden ... to overcome growing budget pressures that will now swell to $8 million, resulting in the likely loss of jobs for city employees and a corresponding reduction of city services," Baker said.
But members of City Council and the businesses affected said Baker's request is good because losing companies would cost the city more than it could ever hope to collect in extra wage taxes.
"I'm glad the mayor has finally looked at this thing in its totality and is not focused on the short-term windfall, but on the long-term impact of not only losing businesses, but creating a climate that would make recruiting new businesses here nearly impossible," Councilman Steve Martelli said.
Earlier in the week, Martelli said he would introduce a measure to repeal the law.
Baker essentially is doing the same thing, but in a more moderate way.
Baker said he also will ask the Wilmington Economic and Financial Advisory Council to review the issue of how "S" corporations should be taxed. The council meets four times a year to monitor the city's financial health. Baker wants the advisory council to come up with an alternative way to tax the "S" corporations on more than just employee salaries.
Martelli's proposal -- which he said he will continue pursuing -- would entirely eliminate city taxation of "S" corporation distributions.
Griffiths said he thinks Baker's request to repeal the law will pass. Councilman Bud Freel will introduce it Tuesday and it will come to council for a final vote in November.
Griffiths added that it would be difficult to get the 13-member council to get the same law back on the books in the event the advisory council determines that the city's law is reasonable.
"I think that whatever gets brought back to the council next year will have a tough time getting the seven votes required to pass it unless it has the full support of the business community," Griffiths said.
Rich Heffron, a lobbyist for the Delaware Chamber of Commerce, agreed.
"I don't think they understood the seriousness of this situation until now," he said.
Heffron added that state Rep. Gerald Brady's announcement that he would consider a law that could tighten the city's authority to collect the wage tax, which was created by the state Legislature in the 1960s to help the city raise money, was also a factor.
"The last thing the city wants is to go down to Dover and fight this battle," he said.
The wage tax, a levy on earned income for everyone who lives or works in the city, provides more than 40 percent of revenue for the city's $147.7 million operating budget. It's the city's largest single source of money.
Fred Sears, board president of the advisory council, said he hopes to complete Baker's request in three meetings.
The board is considered independent, but its members are appointed by Baker. One member, Geoff Langdon, is a consultant for the city and his focus is helping them collect as much wage-tax money as possible.
Sears said Langdon might have to recuse himself from the process, but Baker's Chief of Staff, William S. Montgomery, said that's not necessarily true, because Langdon is an expert on the issue.
State Chamber of Commerce President Jim Wolfe said he's comfortable that the advisory council will be fair in assessing the issue of how to best tax "S" corporations.
Scott Johnson, a real estate developer who co-owns the Hercules building, has tenants that are "S" corporations. Keeping his building full would be hard if the new law isn't repealed, he said.
"This is a very complicated issue and it's a good thing that the business community is well-engaged in the process now," Johnson said.
Ann G. Riley, president of Gilpin, Van Trump and Montgomery Inc., a mortgage company that has been in Wilmington since 1865, said the "S" corporations would like to help the city get out of its financial mess.
"We're obviously pleased with the mayor's decision," she said. "It really has made all of us want to put our business minds together and come up with ideas to help the city with the shortfall it has."
Councilman Freel said he wants to make sure that whatever the advisory council comes up with doesn't allow people who are currently abusing their "S" corporation status to continue to do so.
"Most people are declaring reasonable salaries, but not everybody is and that concerns me," he said.