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Tuesday, November 12, 2002

By Timothy McNulty and Tom Barnes, Post-Gazette Staff Writers

A mayoral panel charged with helping the city find ways to end chronic revenue shortages has recommended the creation of two new taxes, one on wages and another on alcohol, that together would bring in an estimated $70 million.

	Online Chart: PGH21 proposals: Murphy's panel suggestions

The new taxes were among 40 recommendations issued yesterday in a 49-page report by PGH 21. Mayor Tom Murphy assembled the panel in March to examine the city's finances and suggest long-term solutions.

The new taxes would include a levy of 0.5 percent on employers' gross payrolls and a 10 percent tax on alcoholic drinks sold in the city.

The new levies are intended to raise an additional $70 million in tax revenues from commuters, tourists and institutions such as hospitals and universities, which are currently tax-exempt. The additional revenue would be significant for the city, which the panel said is facing a $60 million budget deficit next year and as much as $75 million in 2004.

The "retail drink tax also would take advantage of the activity generated by the convention center expansion," said the tax study panel, which was co-chaired by Paul Renne, retired chief financial officer of H.J. Heinz Co., and Doris Carson Williams, president of the African-American Chamber of Commerce.

The panel suggested fundamental changes to spending on police, fire and paramedic services that could save some $20 million per year. It also urged the city to lobby Harrisburg for tax reform and additional state aid for the city's pension fund.

Murphy yesterday declined to say if he would recommend adoption of either of the two proposed taxes, but added: "Stay tuned."

Murphy will make his budget speech for 2003 this morning before City Council.

He did say, however, that the panel's report "has the potential to be as historic for the city as anything we've done over the last 10 years. Pittsburgh is not the city it used to be 50 years ago. Its economic base has changed, and we need as a city to recognize that."

One major problem the city faces, the panel said, is that about 30 percent of its property is exempt from real estate taxes. Also, of the 24 top employers in the city, 17 are tax-exempt, and of the remaining seven, only two pay business privilege taxes. Additionally, there are 195,200 commuters working in the city that pay only $10 each in wage taxes every year.

Altogether, those tax-exempt businesses and commuters could be paying an additional $166 million that could go to the city's $374.7 million budget this year.

Since that budget structure rests on real estate, wage and business privilege taxes, new taxes are needed to make those tax-free businesses and commuters pay their fair share for city services, the panel said.

The new payroll tax, which would be called a "payroll preparation tax," would be assessed at a rate of 0.5 percent and would be applied to the gross wages of all employees working in the city. It would generate an estimated $60 million in new revenues.

The new levy would not only hit nonprofit organizations but companies like financial services and manufacturing businesses that are now exempt from business privilege taxes on the gross receipts of city trades.

It would be separate from the combined 3 percent wage tax city residents pay to Pittsburgh and to the city school district.

Once the payroll tax is approved, the panel said the city could decrease property and business privilege taxes, largely to lower the tax liability for for-profit companies.

The 10 percent alcohol tax would be added to the price of poured drinks, generating $10 million for the city budget. It is intended to soak city visitors, especially those to the new convention center and stadiums.

Not surprisingly, hotel and restaurant operators reacted negatively to the liquor tax idea.

"Such a beverage tax doesn't work for a tiny little dot like Pittsburgh," said Kevin Joyce, owner of The Carlton restaurant, Downtown, and an official with the Restaurant Association of Western Pennsylvania. "People will simply go outside the city to drink."

"We have a tremendous challenge luring people Downtown to begin with," he added. "Restaurants are already struggling to keep their customers."

Joseph Kane, general manager of the Westin Convention Center hotel, said the state of Pennsylvania already imposes "the highest tax in the country on liquor, 18 percent. Now they want to slap a 10 percent tax on top of that?"

Major employers hadn't heard of the proposed payroll tax yesterday, so it was difficult to gauge the reaction.

Both the payroll tax and the drink tax would have to be authorized by the state Legislature before they could be implemented.

State Rep. Dan Frankel, D-Squirrel Hill, said he was "optimistic" the state would approve the tax levies, once it understood how grave the city's financial situation is.

"We need to create an environment where [the city] can solve our own problems," Frankel said.

Murphy named the PGH 21 panel of government, business and community leaders in March to study the city's financial structure and recommend ways to solve the roughly $25 million budget shortfalls the city faces each year.

For years the city has kept the budget balanced with some $200 million in accounting quick-fixes, like refinancing debt and liquidating bank accounts, but those "one-time" revenue sources have vanished.

With next year's deficit jumping to more than $60 million, largely because of spiking debt payments, Murphy asked the panel to issue long-term, fundamental changes that will veer the city away from financial ruin. He also wanted the panel to study Pittsburgh's economy that has fundamentally changed, and is reeling from population loss and more dependent on tax-exempt businesses than it once was.

The city has had "a structural deficit year after year after year. It's been through almost magic over the last 10 years or so that it's been able to balance its budget without a tax increase," said David Matter, president of Oxford Development Corp. Matter was a PGH 21 member and the former top aide to the late Mayor Richard S. Caliguiri.

"We're now at the point of reckoning," he added.

Besides the new taxes, PGH 21 suggested saving $5 million by cutting the police force by some 100 positions, and merging the fire and paramedics bureaus, which would eliminate another 175 jobs and save roughly $15 million.

It said the Pittsburgh Police Bureau is too big, with more than 30 officers per 10,000 residents, as compared with averages of 20 officers per 10,000 in other cities. Some 71 percent of cities nationwide have merged fire and paramedic services.

Public safety takes up more than 50 percent of the city's overall spending, the report said, so it urged the city to launch fiscal studies of the three public safety bureaus, with the assistance of their unions.

It also urged the city to privatize Emergency Medical Services billing, merge the city and county 911 centers, and lobby for state law changes on binding arbitration for police and firefighters and workers' compensation rules.

Matter and Sala Udin, City Council's budget chairman, said the success of the report's biggest ticket item, the payroll tax, will depend on convincing businesses that it is fairly applied to all employers. They also said it had to trigger reductions in other taxes, particularly those paid by for-profit companies.

The tax could prove to be a "major competitiveness issue" in wooing business to the city or keeping it there, said Don Smith, university director of economic development for Carnegie Mellon University and the University of Pittsburgh. Land-bound nonprofit groups like hospitals and schools cannot leave the city, but other employers can.

"In this business climate, a tax levied on payrolls of a company or organization could conceivably convince them to go outside the city to avoid that tax. Private companies have options," Smith said.

Tim McNulty can be reached at tmcnulty@post-gazette.com or 412-263-1542. Tom Barnes can be reached at tbarnes@post-gazette.com or 412-263-1548.