HARRISBURG -- Pittsburgh's ability to win approval for a commuter wage tax was thrown into confusion yesterday when a state House committee approved a measure banning the city from using Act 47, the state's law for aiding distressed municipalities.

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Even though Mayor Tom Murphy has already asked state officials to declare Pittsburgh as financially distressed under the act because of its ongoing budget deficits, the House Finance Committee approved a Republican legislative proposal "suspending" the use of Act 47 by Pittsburgh.

The bill, by Reps. Mike Turzai, R-Bradford Woods, and Jeff Habay, R-Shaler, would place Act 47 and its provision for seeking a commuter tax off-limits.

Instead, the bill would create a five-member financial oversight board to recommend ways to reduce city spending and thus bring its budget into balance.

But the future of the Republican initiative is far from clear. First, it has to pass both the full House and Senate, possibly next week, and then it faces a certain veto by Gov. Ed Rendell.

"I have been clear about this, that I won't sign anything that suspends Act 47 for Pittsburgh," he said at a news conference yesterday. Rendell and Murphy have agreed that "the city can't just cut its way out of deficit" and additional revenue options are needed.

Even if the veto were overridden by the GOP-controlled Legislature, the override could occur after Dennis Yablonsky, secretary of the state Department of Community and Economic Development, has made a decision on Pittsburgh's use of Act 47.

Last month, Murphy asked Yablonsky to declare Pittsburgh "economically distressed" under state law. A public hearing on the request was held Tuesday, and Yablonsky now has 30 days to make a decision. If he grants the request, he will then name a recovery plan coordinator who would come up with a fiscal plan to resolve the city's deficit. That plan could include asking a Common Pleas judge to allow the city to impose a wage tax on commuters who live in the suburbs but work in the city.

A city under Act 47 also gets additional power in crafting new contracts with its labor unions. Contracts must fit within spending guidelines developed by the state-appointed recovery plan coordinator.

So far, 19 towns in Pennsylvania have obtained Act 47 distressed status. Most of them are small towns whose economy was based on the steel industry, such as Clairton, Rankin, Duquesne, Aliquippa and Ambridge. Act 47 makes grants and low-interest loans available for smaller distressed towns, but Pittsburgh is too large to apply for that type of state financial aid.

It is not clear what would happen if Yablonsky grants Act 47 protection to Pittsburgh and the Legislature bans its use.

That kind of conflict probably would have to be resolved in court. State Sen. Jane Orie, R-McCandless, co-author of the Senate's version of an oversight bill, said she thinks action by the Legislature to block Pittsburgh from using Act 47 would take precedence over any decision by Yablonsky to let the city use the distressed law, but she admitted a court fight is likely. That, she said, could cause a lengthy delay in efforts to help Pittsburgh.

If the Turzai-Habay bill does pass the House and Senate and is vetoed by Rendell, state Rep. Dan Frankel, D-Squirrel Hill and a political ally of Murphy, said he'll work to round up enough Democrats in the House vote to sustain the veto.

The bill before the House Finance Committee yesterday was approved 13-7, with Republicans in favor and Democrats opposed. Frankel said that outcome shows that Democrats are standing firm against the Turzai-Habay bill.

Republican legislators said the General Assembly shouldn't get into the habit of bailing out the leaders of cities who have bungled their finances, as they claimed Murphy had done.

"A lot of us are tired of officials mismanaging the money from their own taxpayers," said Rep. Stanley Saylor, R-York. "It's time to hold elected officials accountable. Somebody has to start looking out for taxpayers."

Rep. David Levdansky, D-Forward, was unable to persuade his colleagues to cut Pittsburgh a break. "We shouldn't slam the door on any options to solve the city's problems," he said, to no avail.

He insisted that Murphy has made spending cuts, including a 25 percent reduction in the city workforce since 1994, and savings through bond refinancing. He also noted that DCED's outside experts had recommended Pittsburgh be declared distressed, noting city budget deficits for each of the past three years.

Turzai said Pittsburgh still has ways to raise revenue, including higher property taxes and income taxes on residents and garbage collection fees. Levdansky said higher taxes on Pittsburghers would simply drive more people from the city, further eroding its tax base and exacerbating its fiscal problems.

Rep. Robert Flick, R-Chester, voted for the Turzai-Habay bill but insisted he still wants to help Pittsburgh.

"We're all interested in Pittsburgh. It's one of our jewels in the commonwealth," he said. "We want to make sure it gets itself out of its difficulties, but we just have different remedies."

Meanwhile, state Sen. Jack Wagner, D-Beechview, yesterday said he's come up with a better way to tax businesses in Pittsburgh.

Wagner said he'll introduce legislation that would eliminate two longtime city levies, the business privilege tax and the mercantile tax, replacing them with a new tax on the payrolls of for-profit businesses.

Ending the two taxes, which Wagner said are ridden with loopholes, would cost the city about $50 million a year. But he said his new "payroll expense tax" would raise $50 million a year levied at a rate of 0.625 percent. Under his bill, the rate could go as high as 0.75 percent, which would raise an additional $10 million a year for the city. City Council would set the rate.

Wagner's bill probably won't be considered until early next year, although he said he might try to amend financial oversight legislation

Wagner said Act 47, even if the state allows Pittsburgh to use it, would only be in effect for a few years and then would be rescinded. His proposed tax changes, however, would be permanent.

Financial investigators hired by the state on Tuesday issued a scathing report on city finances and agreed with Murphy that the city meets the qualifications for distressed status under Act 47, the Municipalities Financial Recovery Act. In a 38-page report, Public Finance Management of Philadelphia pointed to these negative signs:

The city's four main taxes -- on property, wages, gross business receipts and parking -- are among the highest in the region. While property taxes are average for Allegheny County, the city has the highest combined income tax, the second highest receipts tax and an "extremely high" 31 percent parking tax, which is even more than New York City's 18.25 percent parking tax.

As high as the four major taxes are, none of their revenues is expected to grow as fast as inflation in any year through 2007, with the sole exception of property tax receipts after the 2006 reassessments.

Pittsburgh has lost 44.6 percent of its population since 1960 and another 35.6 percent since 1970. That is a larger percentage drop than any large Pennsylvania city.

Based on the experience of Philadelphia and Washington D.C. -- two of the last major cities to have "junk bond" credit ratings -- Pittsburgh will be at junk status for at least one to two years, even with quick fiscal help.

The annual city deficit at the end of 2004 is estimated to be $53.6 million, growing to $99.6 million by 2007. The accumulated annual deficits by 2007 will grow to a negative fund balance of nearly $304 million by that year.

Citing worries over the city's finances, the state Labor & Industry Department is forcing the city to pay $21.6 million in up-front workers' compensation payments by the end of January, rather than spread them over the year.

Stock market dips in the value of the city's pension funds have increased the city's yearly outlays from the city budget.

The city will pay more than 20 percent of its budget on debt service in 2004, far more than the 10 percent recommended by bond raters. Worse yet, that percentage is set to grow through 2006 and will not diminish until 2012 -- even if the city takes on no new debt the next nine years, which is unlikely.