These entities consisted of law offices and nursing facilities, auto repair shops and cafes, corner stores and trade schools, nonprofits and for-profits, stand-alone local businesses and parts of chains. While most of the city’s businesses were small or midsize, they employed only about 4 in 10 workers, or 242,000 people in 2017. About 14% of them were at midsize businesses and 25% at small ones, the latter mostly “micro” sized, with nine or fewer employees.
According to figures from 2012, the latest available, just over 30% of annual sales at businesses with employees in Philadelphia were made at small and midsize establishments—20% at small ones and 10% at midsize ones. The rest were at large establishments. (See Figure 1.)
Some 22,853 establishments in Philadelphia were owned by small and midsize companies in 2016, the city’s highest number since 1990, mirroring an increase nationwide and accompanying the rising city population in recent years. Preliminary figures for 2017 showed that the number of establishments in this segment continued to rise.
Employment at private sector businesses of all sizes reached 622,100 in 2018, a level not seen in at least 20 years. Overall, employment in the city grew 6% from 2007 to 2016.
However, most of the employment growth came at establishments run by large companies, collectively up 9.5% over the same time period. At small and midsize businesses, employment rose only 1%, far below the median of 10% in the other cities. During that period, large companies in Philadelphia expanded faster than small or midsize ones; small or midsize companies grew to the point that they became large ones; and not enough smaller companies were created to counterbalance large ones’ growth.
Consequently, the small and midsize segment’s share of workers in Philadelphia fell from 41% to 39%. This decline began at least two decades ago but accelerated after the 2007-09 recession, which hit small and midsize businesses particularly hard. Only in recent years have smaller companies begun to catch up with large ones in their employment growth rates. (See Figure 2.)
Philadelphia’s large establishments overall were bigger than their peers in other cities, while its small and midsize establishments were at the median, with an average of 10.6 employees.
“Large companies have gained a lot of the share of the job base. The reason partly is that ‘mom and pop’ businesses are getting crushed by big retailers, particularly online and particularly in urban areas,” Mark Zandi, chief economist at Moody’s Analytics, said in an interview with Pew before the COVID-19 pandemic. “And small and midsize businesses are having increasing difficulty getting debt and equity capital, unless you’re in San Francisco or Boston or D.C.”
As seen in Figure 2, employment at the city’s small and midsize businesses fell sooner and more sharply during the 2007-09 recession than at its large businesses. The smaller ones also began rehiring sooner—although in lower numbers—than large companies did.6
On the whole, small and midsize companies’ financial footprint relative to that of large ones was shrinking. Their percentage of total gross receipts in the city dropped from 31.3% in 2007 to 30% in 2012, according to U.S. Census Bureau data.7 The decline appears to have continued in the years before the COVID-19 pandemic, according to tax data from the city of Philadelphia, discussed below.
In 2017, about 3% of workers at Philadelphia businesses—some 20,000 people—were employed at “new” companies of any size created within the previous year. Almost 8%—about 47,000—were at “young” businesses created in 2012 through 2015, in the growth spurt after the 2007-09 recession. The remaining 89% worked at “mature” companies created in 2011 or earlier.8
Young businesses, which tend to be small or midsize, generally create a majority of an area’s new jobs at any time. But they also shed more jobs than older, large companies do, and their net job creation rate fluctuates widely from year to year.9
Despite Philadelphia’s increase in the number of establishments owned by small and midsize companies in recent years, the city still had fewer businesses per capita than the other cities studied in this report.
In 2016, the latest year that cross-city data was available, Philadelphia had 18.2 small and midsize establishments per 1,000 residents ages 16 and older, a measurement known as business density. That was half as many as Denver or San Francisco; the median figure for the comparison cities was 26.2.10
Of the cities studied, most of those below the median—Philadelphia, Baltimore, Indianapolis, New Orleans, and Boston—had relatively high poverty rates, and three were above 20%. The four cities with the most establishments per capita—Washington, New York, Denver, and San Francisco—had lower poverty rates and higher median incomes. (See Figure 3.) Research has shown that low business density, everything else being equal, is correlated with fewer business births, lower economic output, and higher poverty within an area.11
Metro View: Philadelphia Area on a Par With Others
On the basic measures of small and midsize businesses, Philadelphia’s 11-county metropolitan area was generally comparable to other metro areas—and healthier than the city alone.
In 2016, small and midsize businesses accounted for nearly 47% of all jobs in the Philadelphia area, close to the median share of 12 metro areas that include the other cities studied in this report, and substantially above the city’s 39%. Overall, the Philadelphia region’s job total was flat since the 2007-09 recession, while there was substantial growth in the other metro areas.
In the Philadelphia region, small and midsize businesses accounted for one-third of all business receipts in 2012 (the last year available), matching the other areas and slightly exceeding the city’s figure.
Business density across the region was 24.7 establishments per 1,000 residents ages 16 and older. That was slightly below the other areas’ median density but markedly higher than the city’s 18.2.
Among the comparison cities, Philadelphia had the fewest small and midsize establishments per capita in the professional, financial, construction, real estate, and business service industries. It came closer to other cities’ median per capita number in education, corporate management, and transportation.12
Births, deaths, and relocations
A city’s economy gains business establishments when companies are born, split off from existing ones, move in from elsewhere, or open up new locations, and it loses them when companies go out of business, scale back, or move out.13
Over the 2007-16 decade in Philadelphia, companies created or opened establishments—mostly small ones—at a narrowly higher rate than they shuttered them, on average. The gap between establishment birth rates and death rates averaged 0.6 percentage points over the decade. For the comparison cities, the median was 1.1 points, meaning their births exceeded deaths by nearly double the Philadelphia margin.14
Philadelphia’s relatively weak performance in this regard was due more to a lack of establishment births than to excessive deaths. The city’s birth rates (new establishments as a percentage of the number of existing establishments a year earlier) were slightly, though consistently, below the median city rate over the decade, averaging 10.9% compared with 11.4%. Death rates matched the median, an average 10.3%. (See Figure 4.)
From 2006 to 2016, net job growth at new establishments was also about half the rate elsewhere, an average 0.8% per year. And new establishments lagged existing establishments of any size in creating jobs, with an average 8.4% annual increase from 2006 to 2016. Though strong, that was below the median city rate of 9.3%.15
Relocations are another factor in business dynamism; companies pack up and move operations for various reasons. Entrepreneurial hot spots like San Francisco, Denver, and Boston each have large numbers of moves in and out, a sign of vibrancy as long as arrivals outpace departures. Local officials and economic development agencies spend significant time—and sometimes tax dollars—coaxing companies, especially big ones, to move to or remain in their cities.16
In Philadelphia and the other cities in this report, data suggests that relocations were rare and paled in comparison to births and expansions as a source of new establishments and jobs. That said, when relocations happened, they were more prevalent among small companies than among large ones, making them a distinctive feature of the small and midsize ecosystem.
Metro View: Philadelphia Region Lags Others on Births
Like its core city, the Philadelphia metro area lagged other areas in its rate of business establishment births, while matching them on death rates.
Over the 2013-16 period, the 11-county region’s annual average establishment birth rate was 9.6% per year, compared with a median 10.8% for the comparison cities’ metro areas. Average death rates, on the other hand, were 9.1% and 8.9%, respectively.
Metro-level data is more detailed than county-level data, allowing for analysis of birth and death rates at small, midsize, or large companies; the data shows the Philadelphia area lagged other metros in the rate at which establishments were opened by small companies, but not by midsize or large ones.
From 2015 to 2017, less than a tenth of 1% of all small establishments in Philadelphia—around 50 businesses—were ones that had moved into the city from somewhere else in any year, on average. A slightly higher percentage moved out, though still just a fraction of 1%.17 The city lost far more companies and jobs from outright closure than from out-migration.
Compared with the median city, Philadelphia both gained fewer and lost fewer small businesses as a result of relocations, another sign that its ecosystem has less dynamism than elsewhere. Data was not readily available on where Philadelphia’s departing companies went and which sectors they represented; some research suggests that most stay within their metropolitan region.18
Within the private sector, Philadelphia has a diversified mix of small and midsize establishments, operating in hundreds of industry sectors and lines of business. But a concentration in the health care and social assistance sector makes the mix slightly less diversified than in the other cities.
In 2017, 23% of workers at small and midsize businesses in Philadelphia were found in the health care and social assistance industry; no other city in this study had such a high share, the closest being St. Louis (18%) and Baltimore (15%). Within the industry, the biggest number worked at doctors’ or dentists’ offices and at facilities for youth, older adults, or the disabled.
After health care and social assistance, the next-largest small and midsize employer groups were accommodation and food services (16% of workers); professional, scientific, and technical services (11%); and retail trade (8%).19 (See Figure 5.)
During the economic expansion that ended with the COVID-19 emergency, some industries other than health care stood out. From 2010 to 2017, for instance, job growth in the city’s transportation and warehousing businesses (including ride-hailing services and logistics delivery) exceeded their counterparts in many of the comparison cities. Consumer and business services (“Other services”) also slightly outpaced the average job growth elsewhere.
Employment in several industries in Philadelphia—including hospitality and retail, which tend to be lower paying, and professional/technical services—grew on a par with their peers elsewhere. A few others lagged; among them were manufacturing, finance, and the information sector, including high-tech digital media, which was essentially flat from 2010 to 2017. Figure 6 shows all major sectors’ total number of jobs in 2017 and change in number of jobs since 2010.
Andy Rachlin, managing director for lending and investment at Reinvestment Fund and a former economic development official for Philadelphia’s city government, said before the COVID-19 economic shock that the city had “seen a sharpening of old trends.
“If it’s a business that serves the life sciences, Philly is in a competitive position. If it’s a traditional manufacturing business, the cost basis continues to be tough,” Rachlin said in an interview with Pew, referring to labor, real estate, and other costs.
Employment in small and midsize educational companies also lagged other cities, falling 21% from 2010 to 2017 because of a decreasing number of specialty training schools and test prep companies. These job losses were counterbalanced by 36% job growth at large businesses and institutions over the same period.
Traded and supply chain categories
This report offers two alternative ways to categorize industry sectors, and both show challenges for Philadelphia’s small and midsize business community.
In the first way, establishments are grouped according to where most of their sales take place, either inside the metropolitan area where they are located or not. This distinction is “local” versus “traded,” such as a neighborhood pizza shop versus a national distributor of pizza shop supplies.
Economists consider traded activity to be beneficial for an area because it tends to bring in new capital—in the form of revenue and credit—and create higher-paying positions and jobs that require a greater skill level. This additional capital and buying power, in turn, raises demand for goods and services, often from small businesses.20 On the other hand, local activity is crucial to an area’s business ecosystem, job market, livability, and sense of community, even if it does not lead directly to net economic growth.21
In 2015, some 19% of small and midsize establishments in Philadelphia were in the traded category—well below the median of 27% for the other cities—with the remaining 81% in the local category, according to the latest data available for this analysis. Philadelphia’s traded share was lower than every other city in this study except for St. Louis.22 (See Figure 7.)
“The takeaway is that we might want to stimulate the growth in the traded [category]. Philadelphia has a slow-growing local economy, and the way you can grow is to export to growth markets,” said Christopher Swann, a Temple University economist formerly at Select Greater Philadelphia and the U.S. Bureau of Economic Analysis, speaking in an interview with Pew.
Community advocates point out that “local” business activity also can be beneficial even if its jobs pay less and don’t lift the overall economy.
“The owner may not have wealth to build anything else. But the business may allow them to send a kid to college,” said Beth McConnell, policy director at the Philadelphia Association of Community Development Corporations. “They also help stabilize neighborhoods.”
The other categorization classifies establishments by whether they are “supply chain” businesses, selling goods or services primarily to other companies and governments; or “business to consumer” sellers of products or services to end users. Researchers have found that supply chain businesses tend to be more innovative and pay higher salaries than consumer-facing companies, although they may create fewer jobs than local service businesses do.23
In Philadelphia, 30% of small and midsize companies were supply chain businesses in 2015, and 70% were business to consumer. The city’s supply chain percentage was significantly lower than the median city’s share of 42%. It also was lower than that of all other cities except St. Louis. (See Figure 8.)
One example of a traded, supply chain company in Philadelphia is RJMetrics, a provider of back-end data analytics for online commerce companies around the world.24 Its co-founder, Robert J. Moore, said Philadelphia needs both a startup support system and urban livability—including high-quality schools—to create conditions for entrepreneurial success stories like his.
“The nature of being a traded company is that your ability to grow extends way beyond the city you’re in, and that affects your access to capital and talent. If you want to recruit people, assume you want them to work here. So the city has to be competitive as a city,” Moore said in an interview with Pew.
The number of jobs provides another way to look at traded and supply categories, although data was not available to distinguish smaller businesses from larger ones on this measure. Philadelphia matched the other cities in its share of jobs in the traded economy, at about one-third; this included employees in higher education. But a smaller share of the city’s workers was in the supply chain category (23% vs. 37%), which included wholesalers, enterprise software designers, commercial builders, and others serving businesses and governments.
Philadelphia has many hubs of small and midsize business activity. The locations of these businesses, which are often regulated by zoning laws, can affect neighborhood livability and development, and vary by industry type, proximity of workers, concentration of customers and suppliers, size of business, and owner preference or history, among other factors.
The city has more than 260 distinct commercial zones, roughly 80 of them officially designated as business corridors where thousands of “mom and pop” stores, cafes, boutiques, repair shops, dry cleaners, bars and restaurants, and other establishments provide goods, services, amenities, livability, stability, and sometimes security and spirit for their blocks.25
Center City has the largest share of small and midsize businesses. In 2017, the latest period available, Center City (including Chinatown) was home to 24.4% of all of Philadelphia’s small and midsize establishments with employees, compared with 26% in 2006.26 Over the preceding two decades, however, particularly since the 2007-09 recession, the number of these establishments increased in many of the neighborhood commercial corridors more than it did in Center City.
Major hubs gaining on Center City were Spring Garden/Northern Liberties, University City, the Navy Yard, and the Northeast, the last of which is the second-biggest nexus of business establishments and a top destination for new residents, particularly immigrants. The same areas saw the biggest percentage drops in vacant storefront and commercial properties from 2014 to 2018, according to postal service delivery records.27
ZIP code area data shows that Center City’s 19103 ZIP code remained the main nexus for “white collar” professional, financial, and corporate management firms, as well as a growing zone for publishing, real estate, and staffing agencies.28 Northeast Philadelphia continued to be a major hub for construction companies and logistics businesses, which also were found in Southwest Philadelphia, near the airport. (See Figure 9.)
Notable subsectors included used car dealers in Lower Northeast Philadelphia (ZIP code 19124) and jewelers in eastern Center City (19106), although both areas saw their concentrations decline a bit between 2006 and 2017. The subsector with the highest geographic concentration, and by some estimates the most economic potential, was biotechnology research; 65% of those companies were found in University City (19104).
Owners and entrepreneurs
Philadelphia city officials have made boosting entrepreneurship by underrepresented groups, especially racial and ethnic minorities, a focus of their economic development activities and programs. The data paints a mixed picture of the diversity of entrepreneurs and business owners, with Philadelphia in many cases lagging other cities, particularly those with lower poverty rates.
Self-employment in this report is defined as people ages 16 and older who reported in census surveys working for themselves at least 15 hours per week at a for-profit incorporated or unincorporated business that they owned or had an ownership stake in.29 This may include “solopreneur” or “gig” contractors working alone, as well as employers of wage-earning workers at small businesses—but not usually midsize or larger entities. Economists consider it an acceptable glimpse of an area’s entrepreneurship.30
According to this data, Philadelphians overall were less likely to be in this category than were the residents of most other cities in this study. In 2017, just 5.6% of Philadelphians ages 16 and older were self-employed at a business they owned, below the median 6.8% in other cities.31 Less than half of self-employed Philadelphians’ businesses were incorporated, a legal and tax status determined by the owners themselves and often signaling a higher stage of growth. (See Figure 10.)
The city’s self-employment was in line with that of most other cities with relatively high poverty rates, including St. Louis and Baltimore in this study. Cities with lower poverty rates, such as San Francisco and Denver, tended to have more self-employed individuals.
Looking at specific groups, 10.3% of Philadelphia immigrants and 6.9% of Asians were self-employed, both above the other cities’ median rate. Philadelphia also was near the median rates for Hispanics (6.8%) and for veterans (4.8%). But it came in below the medians for whites (6.9%), Blacks, (3.5%), women (4%), and men (7%).32
Entrepreneurship rates tend to track with other characteristics, particularly income and educational attainment. Research also shows that these rates can be related to creditworthiness, access to capital, networks of mentors and business leaders, and core motivation—was the entrepreneur really intent on building a growing business or just unable to make a good living otherwise, especially during a recession?33
Metro View: Philadelphia Area Lags on Entrepreneurship
Entrepreneurship across the 11-county Philadelphia metropolitan area, as measured by the self-employment rate, lagged behind other metro areas in 2017, the latest year available.
About 6.8% of residents ages 16 and older across the metropolitan region reported being self-employed at a business in which they had an ownership stake, higher than the city’s 5.6% figure but slightly below the median 7.6% for the other regions.
Certain groups also trailed their peers in other metro areas in self-employment rates, including Blacks (3.5%), whites (7.9%), and women (4.6%). There were some 193,000 self-employed business owners across the region, roughly a quarter of whom were based in the city.
Narasimha B. Shenoy, president and CEO of the Asian American Chamber of Commerce of Greater Philadelphia, said in an interview with Pew that many Asian immigrants in Philadelphia who lack skills to get jobs just “start a small business. Many of these mom and pops don’t want to grow. Their objective is basically to stay in business just enough to educate their kids.”
For those intent on building long-term, sustainable businesses, research has found that many rely heavily on personal wealth to operate, expand, and get through tough times, especially in the beginning years. A lack of entrepreneurial mentors or relatives decreases the odds of self-employment, and heavy student debt also appears to squelch entrepreneurship among young adults; both are big factors in Philadelphia.34 For existing businesses, surveys show that members of minority groups are less likely than whites to obtain capital from traditional lenders.35
Della Clark, president and CEO of The Enterprise Center, an incubation and support organization focused on minority enterprises, said in an interview with Pew: “In the minority entrepreneurship community, no matter how much training you do or how much you work with small businesses, if there’s no capital to finance the growth and development of that business, it’s just not going to grow. And capital happens to be one of the shortfalls for minority enterprises in this city.”
For some, the challenges are a bit different. “Latinos don’t have an entrepreneurship challenge. We start businesses at three times the rate of the general population,” Jennifer Rodríguez, president and CEO of the Greater Philadelphia Hispanic Chamber of Commerce, said in an interview with Pew. “The issue is scaling those businesses.”
All these issues are exacerbated by Philadelphia’s entrenched poverty, estimated at 24.5% in 2018, or about 377,000 people, disproportionately minorities. The sheer size of this group stifles the business ecosystem in two ways: First, there are fewer individuals with the personal means, knowledge, and networks it takes to start or sustain a small business; and second, there are limited customers for high-value goods and services from small businesses, as shown by Philadelphia’s relatively low “consumer buying power” rating among the cities in this study.36
At the same time, Philadelphia has recently outpaced many of the other cities in the growth of two groups with relatively robust entrepreneurship and startup rates: immigrants and college graduates. From 2010 to 2018, the city’s foreign-born population grew 31%, and its college-educated population increased 51%.37
The city’s self-employed population numbered roughly 46,300 in 2017. Whites made up a bigger share of this group (56.3%) than of all residents 16 and older (42%).38 Likewise, residents with at least a bachelor’s degree and those over age 40 accounted for bigger shares of the self-employed segment than of the total population. Immigrants’ self-employed share was twice as high as their citywide share. Hispanics’ share was also higher than their citywide share. On the other hand, Blacks, women, and people ages 16-39 each had disproportionately low self-employed shares. (See Figure 11.)
The areas of the city where self-employed residents live say something about them and their role in enhancing neighborhood livability and stability. Research has found that small-business owners, compared with the general population, tend to own higher-value homes, change residences less often, and give more to charities.39
In Philadelphia, residents of Center City and Northwest Philadelphia were most likely to be self-employed, followed by residents of Northeast and South Philadelphia. Residents least likely to be self-employed were in North, West, and Southwest Philadelphia, according to census data for the 2013-17 period.
About 69% of self-employed individuals working in Philadelphia were city residents, up from 62% a decade earlier. Small businesses with the highest resident-owner percentages were in construction and consumer services, such as dry cleaning; those with the lowest resident-owner shares were in manufacturing, and arts and entertainment.40
A different picture of owners emerges from looking at the characteristics of businesses rather than of self-employed individuals.
One distinguishing characteristic among small businesses is whether they have paid employees. Companies without paid employees—called nonemployer companies—include contracting and freelance businesses, partnerships, and holding companies, sometimes set up by people as alternate sources of income or as side gigs. Nonemployer companies tend to generate much less income and economic impact than employer firms, and only a small share turn into job creators. But they have grown substantially over the past decade.
In 2017, Philadelphia’s nonemployer businesses numbered about 100,000, four times more than employers and growing faster than in the median comparison city.41 The biggest growth of nonemployer businesses over the preceding decade was in transportation, which included ride-hailing services.
Compared with employer businesses, nonemployer businesses were far more likely to have nonwhite and Hispanic owners, making them a major locus of entrepreneurship for minority groups. Blacks—either Hispanic or non-Hispanic—owned 6% of Philadelphia’s companies with employees and 30% of those without employees, according to data for 2017 and 2012, respectively.42 Both percentages were higher than the medians in the other cities, largely because of Philadelphia’s larger African American share of the population.
Hispanics in Philadelphia owned about 4% of employer firms and 13% of nonemployer firms, the latter almost double the median.
Asian and white entrepreneurs, on the other hand, operated a greater share of businesses with workers than without. Asians owned about 18% of Philadelphia employer firms and 10% of nonemployer firms. Whites—either Hispanic or non-Hispanic—owned about 75% of businesses with employees and 54% of those without employees. (See Figure 12 for employer firms and Figure 13 for nonemployers.)
Among employer businesses of all sizes, minority-owned companies tend to generate lower revenues and pay lower wages than nonminority-owned businesses do. In 2017, the latest data available, Philadelphia’s average Black-owned business generated $853,500 in annual sales, its average Asian-owned business $840,600, and Hispanic-owned $1.18 million. In contrast, the average white-owned business took in $2.58 million a year.
One characteristic of employer businesses is whether they are headquartered within or outside the metro region. Over the 2009-18 decade, an annual average 85% of Philadelphia small and midsize establishments with employees had their headquarters in the metro area. That was very close to the other cities’ average, 84%.43
Philadelphia’s small and midsize businesses have tended to expand and contract with the national economy on pace with their peers in the other cities but have had lower average sales and worse credit records.
Their financial health reflected and, to some extent, drove economic conditions in Philadelphia, also affecting the amount of revenue the city received from business income taxes and property taxes.
Sales, payroll, and profits
Indications of the health and profitability of Philadelphia’s small and midsize businesses come from their sales, payroll, borrowing, and on-time payment records, among other factors.
The average Philadelphia small or midsize company generated $2.23 million in gross receipts and spent $490,000 on payroll in 2012 (the last year cross-city data by company size was available), both slightly below the median.44
On the whole, Philadelphia’s output per capita, reflecting businesses of all sizes, was below that of the other cities in most sectors, except information, health care, and education. The 2018 GDP of all private sector industries in the city was $106.7 billion, or $84 per resident 16 and older, compared with a median of $117 per resident in the comparison cities.45
Financial health also shows in businesses’ credit scores and timeliness in paying bills, as indicated by ratings from the private business data company Dun & Bradstreet. The ratings are contained in the National Establishment Time Series dataset, analyzed by Drexel University for the 2007-14 period.46
The data shows that more small and midsize establishments had weak credit scores in Philadelphia than in the other cities during the recent strong economy, although their scores were in line with the median during and just after the 2007-09 recession.
In addition, according to Dun & Bradstreet’s “Paydex” ratings of timeliness in paying bills, Philadelphia’s small and midsize businesses generally scored lower than the median of the comparison cities.47 (See Figure 14.) Research by the Federal Reserve Bank of St. Louis has found that extreme lateness in paying bills was an indicator of financial vulnerability—which, along with low liquidity and high debt, raised the risk of collapse during and after the recession a decade earlier.48
Businesses in Philadelphia that took longest to pay bills were in manufacturing (15 to 18 days late, on average) and construction (12 to 15 days late, on average). Those that paid fastest, though still late, were in finance and professional services (both eight to 12 days late, on average). Current timeliness ratings were not readily available. (These assessments did not cover all companies in each city.)
A more detailed view just of Philadelphia’s business ecosystem comes from tax returns filed with the city’s Department of Revenue. Although self-reported figures from tax returns should be taken with caution, changes over time can offer a glimpse at underlying conditions.
Business profits are defined here as net revenue before city tax exemptions or deductions. The average small or midsize company reported 31% less in profits in 2017 than in 2011, adjusted for inflation, while the average large business reported 78% more. As a result, the small and midsize segment represented only 14.2% of all business profits in 2017, down from 33.5% in 2011.49 Possible factors in those divergent profit trends for smaller versus larger companies included changes in local business conditions and in the tax code meant to help city-based companies, as described below.
In terms of gross receipts, the recession had a widely varying impact on different sectors of small and midsize companies, based on data for the 2007-11 period versus 2011-17. On average, small or midsize businesses in information and manufacturing had the biggest declines in gross sales up through the recession; the biggest gains post-recession were in manufacturing, health care and social assistance, and accommodation and food services. (See Figure 15.)
Philadelphia’s tax bill on small and midsize businesses had been shrinking for a decade, as a result of modest sales growth and lower reported profits, as well as lower tax rates, bigger tax exemptions, and changes in the tax code meant to help local employers.
In the 2015-17 period, the small and midsize segment—including those with and without employees—accounted for 50.1% of the total Business Income and Receipts Tax (BIRT) and Net Profits Tax (NPT) bill in Philadelphia.
That came to $307.3 million owed per year on average. A decade earlier, in the 2005-07 period, the share was 58.3% and the total was $377.3 million.50 (See Figure 16.)
Although lower reported profits drove some of the decline, changes in Philadelphia’s tax policy also played a role. City officials waived BIRT payments for certain new businesses starting in 2013, and in 2014 began exempting all businesses from tax on the first $50,000 in receipts, rising to $100,000 by 2016. The city also began requiring companies to use a different formula, “single sales factor,” for calculating taxable sales that was meant to stop disadvantaging city-based companies.51 All told, the changes had a big impact on smaller and younger businesses’ tax bills.
Business Receipts and Taxes by Company Size in Philadelphia
Annual averages, 2005-07 and 2015-17, in millions