HARRISBURG -- State Sen. Jack Wagner says Pittsburgh should enact a new payroll expense tax that would allow city officials to reduce or eliminate two longtime levies, the business privilege and mercantile taxes.

The Beechview Democrat has three options for how the tax would work, but in general, it would be levied at a rate of 0.5 to 0.75 percent of a company's payroll.

If a business had a payroll of $10 million and the rate were set at 0.5 percent, the company would owe the city $50,000 a year. If the rate were 0.75 percent, the firm would owe $75,000.

Wagner conceded last week that he might have trouble persuading owners of some companies to support the proposed tax, which would be paid by all for-profit firms, some of which are now exempt from the business privilege and mercantile taxes.

Wagner has written to the five-member Pittsburgh Fiscal Oversight Board and asked the board to consider including the payroll tax in its recommendations to the General Assembly.

Wagner said the city needed "to restructure Pittsburgh's business tax system to improve the city's economic competitiveness, create jobs and provide additional revenues to the city.''

In an interview, he added, "The city's business tax structure is archaic and outdated and needs to be reformed.''

Wagner, who was on City Council for 10 years, contends his proposed payroll tax would raise enough revenue to replace the $50 million now raised annually by the business privilege and mercantile taxes and, depending on the rate, could add $10 million to $15 million yearly for the cash-short city.

The current business privilege tax raises about $43 million a year but is riddled with exemptions. A number of large employers, including banks, financial institutions and manufacturers, including the Pittsburgh Post-Gazette, don't pay the levy because they've obtained exemptions over the years.

The business privilege tax is 6 mills, applied to a company's gross revenue rather than net revenue. A firm that earned $1 million in gross revenue but didn't show a profit would still have to pay the city $6,000 that year.

The mercantile tax is a 2-mill levy on a retail business's gross receipts and 1 mill on the gross receipts of a wholesale company. The mercantile tax raises about $7 million a year.

Wagner outlined three variations of the payroll tax:

Eliminate the business privilege and mercantile levies and replace them with a 0.625 percent tax on company payrolls, to raise $50.5 million. If the rate were put at 0.75 percent, it would raise an estimated $60.5 million, more than $10 million more than the city now gets from the two existing business taxes.

Eliminate the mercantile tax immediately but phase out the business privilege tax over three years. The new payroll tax would start at 0.45 percent in the first year, rising to 0.60 percent in the second year and ending at 0.75 percent in the third and succeeding years.

Eliminate the mercantile tax and cut the business privilege tax permanently in half -- to 3 mills -- plus impose the new payroll tax at a rate of 0.50 percent. Wagner estimates that this option could raise as much as $62 million a year.

City Councilman Alan Hertzberg hopes the oversight panel will consider Wagner's ideas. Hertzberg said the city "desperately needs'' the additional revenue that would be produced by the proposed payroll tax.

He said the business privilege tax contained too many exemptions for big businesses, creating a hardship on smaller companies that must pay it. Commercial property owners have told him that many commercial tenants don't want to lease space in the city because of the business privilege tax.

Wagner's tax plan is one in a long series of taxing options that have been suggested over the past 18 months. Others include raising the $10 a year occupation privilege tax to $50 or $100; removing all exemptions from the business privilege tax, an idea that upset banks and manufacturers; or enacting a wage tax on suburbanites who work in the city, an idea that angered suburbanites.

Another idea has been to require tax-exempt and nonprofit entities, such as universities and hospitals, to pay something to the city in lieu of taxes, but Wagner said the political hurdles to that idea seem too high.

Former Allegheny County Chief Executive Jim Roddey, one of the five oversight board members, said Wagner's plan was "an interesting alternative to the business privilege tax. It's worthy of consideration.''

But before anything definite is done about tax changes, Roddey said, the board needs to examine all the city's existing taxes and "analyze the pluses and minuses'' of each one.

Another oversight board member, Squirrel Hill developer David O'Loughlin, said something had to be done about the business privilege tax, which, he said, "has driven many a business out of the city. It's created a playing field that isn't level. It especially hurts small and medium-sized businesses," such as law firms, engineering firms, accountants and architects.

Wagner's idea "provides a much broader tax and it picks up the larger businesses, like banks and manufacturers," O'Loughlin said.

Once the oversight board makes a report on new revenue options to the General Assembly, legislators still have to approve them, Rendell would have to sign the authorizing legislation and then City Council would have to enact any new levy.