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Philadelphia relies on a commuter tax to balance its budget. What does that mean in a work-from-home world?

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Jon Dumont has walked through Philadelphia’s Center City district to and from his office for years, passing familiar businesses and friendly faces. But the experience over the past several months, as the COVID-19 pandemic has shuttered big swathes of the city, has been disconcerting.

“I do see some street vendors, but I don’t know if there are as many as before,” said Dumont, an attorney. “Many of the restaurants I love have shut down, hopefully temporarily, or have changed the type of food they serve because they’re only doing to-go. Many of the people wandering around are homeless. There’s not a lot of people on the street and most of the people you see are not working.”

Dumont’s occasional trips to his office are emblematic of bigger uncertainties in the post-COVID world. Will city business districts will ever get their businesses back? Will people come once or twice a week, like Dumont does now, or not at all? Will they eat in restaurants or just carry out? How will they commute?

Those questions aren’t abstractions for municipal governments. Philadelphia’s budget is highly dependent on income taxes — both those levied on city residents, like Dumont, no matter where they work — and those paid by non-residents who come into town to work. Budget officials this week announced a projected $450 million hole for the current fiscal year, which ends June 30, and are scrambling to figure out exactly what that gap will mean not just now, but into the future. What good is a commuter tax in a work-from-home world?

“It’s a chicken-and-egg kind of thing,” said Marisa Waxman, the city’s budget director. “Do we try to redesign the tax structure for a new economic reality even if we don’t really know what that is? Or do we try to figure out what kind of economy and tax structure we want and design to that?”

Wage taxes account for about 40% of all operating revenues for the city. “We worry about it because it’s such a large share of the total, but it does tend to be fairly steady,” Waxman said in an interview. It’s worth noting that Philadelphia’s wage tax is the highest in the nation.

Officials made two rounds of budget revisions once the scale of the corona crisis became obvious in mid-2020, and right now, wage tax collection projections aren’t too far off the last budgeted figures.

The wildcard, though, is the taxes levied on non-resident commuters, which account for about 40% of the total wage tax.

Many large employer could stop withholding those commuter taxes if their workers are no longer coming into the city, and workers may claim refunds if their employer didn’t stop withholdings. “It’s a blind spot and a real concern for us: what happens if those refunds requests are higher than we’ve anticipated?” Waxman said.

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Philadelphia isn’t the only municipality wrestling with questions about dealing with an increasingly mobile workforce. In December, several states joined a pending Supreme Court case between New Hampshire and Massachusetts, which continued to tax New Hampshire residents who have worked remotely throughout the pandemic.

Some public finance analysts think now is as good a time as any to rethink revenue structures that have been around for decades, in some cases.

“A lot of what needs to happen is an adjusting of the pre-pandemic tax structure to a reckoning of the post-pandemic reality, but this is a challenging time,” said Matt Fabian, a partner with Municipal Market Analytics. “We often think about what’s happening now in terms of a regular economic recession, with benchmarks for recovery. But this is more of an evolution. We don’t know what we’re going to recover to.”

Philadelphia has been gradually reducing its reliance on the wage tax for years, Waxman noted. She and other officials are all too aware that taxing workers can be a negative for employers considering setting up shop there, even as the city has tried to market itself as a less-expensive version of New York or Washington.

Still, it’s not just revenues that are hurting. In the midst of a public health crisis, the city’s social services are strained, and weird quirks of the new reality keep popping up — like the extra money the city is having to pay for residential, rather than commercial, garbage collection.

And Waxman and other city officials don’t just want to rebuild numbers in the budget. They want to be sure they’re respecting racial differences and the most vulnerable among the populations, she said.

“We have to be really diligent about evaluating the decisions we’re making now even as we understand we have to make cuts. The question is, what kind of recovery do we want?”

By charter, Philadelphia has until mid-April to propose a budget, Waxman said. For now, the city has decided to hold off starting that process until there’s more clarity both on the fiscal 2021 actuals and on another round of aid from Washington.

Read next: The coronavirus crisis is costing states and locals hundreds of billions, analysis finds

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