Earned Income Tax would double to 2% under judge's order
September 2, 2012 4:00 AM
In the midst of a financial crisis, a Commonwealth Court judge has ordered the Harrisburg city council to double the income tax on working citizens.
By Tom Barnes Pittsburgh Post-Gazette
HARRISBURG -- A court order to double the income tax paid by working folks in this financially stressed capital city is the latest twist in a complex five-year crisis that shows no signs of easing soon.
Commonwealth Court Judge Bonnie B. Leadbetter ordered city council last week to increase the Earned Income Tax to 2 percent, up from the current 1 percent. Since the average wage is about $35,000, a typical wage earner would have to pay $700 a year instead of $350.
The judge gave council 15 days to comply, but action could be delayed if council votes to appeal her order. That decision may come this week.
The judge's order is "a step in helping to reduce the operating deficit that is crucial in providing essential services," said Cory Angell, a spokesman for the state-appointed financial receiver, William Lynch, who went to court to get the tax increase.
But council members and city Controller Dan Miller were critical, saying citizens of this city of nearly 50,000 can't afford it. School property taxes have been increased twice since December, and this would be another blow, they said.
First-term Mayor Linda Thompson was more accepting of the tax increase, but insisted it wouldn't be permanent. She said her goal would be to eliminate it if re-elected next year to a second four-year term. Mr. Miller has already said he'll run against her, and the tax hike is becoming a divisive issue.
Judge Leadbetter said the 2 percent EIT rate would stay in effect for only one year. But she said Mr. Lynch, who's now in charge of Harrisburg's shaky finances, could ask the court to extend it.
"The city's financial distress is a very complicated problem," the receiver said in a February report. "It cannot be solved easily or quickly."
That report also laid out a fiscal-recovery plan that includes more income-tax revenue; talks with city unions about pay cuts; concessions from creditors on city debts; and a one-time boost from selling or leasing physical assets like the trash incinerator, parking garages/meters and water and sewer lines.
But nothing has happened yet. The value of the assets is still being determined, and council has balked at the higher income tax. That is why Mr. Lynch went to court -- to have council ordered to do it.
State officials, including Gov. Tom Corbett, created the financial receiver's job in 2011 because it seemed that city officials were unable or unwilling to balance the budget.
It's still unclear exactly when the 2 percent EIT would go into effect. The judge gave council a 15-day deadline for enacting it, but council members are talking with a local lawyer, Neil Grover, about whether to appeal the decision, either to the full Commonwealth Court or the Supreme Court. Mr. Angell said the receiver could ask the full court to keep the 15-day deadline in effect even if council appeals.
Some council members, including the outspoken Brad Koplinski, have questioned if the state has the constitutional authority to order the city to raise taxes. Such orders, he contended, take away the power of local citizens to elect their leaders. The receiver insists he has adequate authority to enforce a recovery plan.
Mr. Koplinski said the city is hurting, adding, "Thirty percent of city residents fall below the federal poverty rate. Only 48 percent of the land is taxable," largely due to the many state buildings here.
He and others argue that the recovery plan should include more state aid for the city budget, either through direct grants or by creating an additional 1 percent sales tax for Dauphin County, with the city getting some of that sales tax revenue.
Suburban Harrisburg legislators strongly oppose the higher sales tax, along with another idea -- a commuter tax. Council members say the higher EIT should not be imposed just on city residents but also on the thousands of suburbanites who drive into the city every day, mostly to work in state government. Mr. Miller supports a commuter tax, saying it would bring in $16 million a year rather than just the $6 million produced if only city workers pay the higher EIT.
Mr. Miller and Mr. Koplinski also think the city should have the ability to file for Chapter 9 municipal bankruptcy protection. They say that would force creditors to come to the bargaining table and reduce some of the city's long-term debt. Mr. Koplinski said Birmingham, Ala., got a third of its $3 billion debt erased through bankruptcy. But the Legislature has banned the city from filing for bankruptcy before Nov. 30, perhaps to avoid the public relations stigma of the word "bankruptcy."
Causes of the crisis
The city's financial hole has two main causes -- a structural deficit in the annual operating budget and more than $1 billion in long-term debt, which it hasn't been able to pay off.
Officials have said the city may not have enough money to cover the salaries of its 500 workers through Dec. 31 -- unless it skips a bond payment to creditors that's due in September or doesn't pay city vendors until early 2013. The city already skipped a $5 million bond payment in March and it appears it will skip another $3 million payment due this month.
The receiver, in February, estimated the 2012 budget deficit at $11 million, but he recently upped it to $12.6 million. Mr. Miller last week put it even higher, at $13.6 million.
The $1 billion in lingering debts is the city's other major problem. The largest chunk is $330 million owed on the city's faulty trash incinerator. Money was borrowed several times to fix it, and that debt is growing at $1 million a month in unpaid interest.
"The problems caused by the incinerator debt ... when combined with insufficient revenue sources and significant labor costs, had a crippling effect on the ongoing ability of the city to perform its normal functions," Mr. Lynch said.
As if budget deficits and long-term debt weren't enough, there's a third factor in the crisis -- city politics.
In addition to Mr. Miller and Ms. Thompson, Mr. Koplinski could run for mayor in 2013, setting up a three-way Democratic primary in May.
Harrisburg is certainly not the only Pennsylvania city with money problems. Scranton, Reading, Bethlehem and Philadelphia are also struggling.
Most of the 3,000 municipalities in the state have a 1 percent EIT, with 0.5 percent going to the municipality and the other half to the school district.
But 60 towns or cities have a combined EIT that exceeds 2 percent. Three-fourths (1.5 percent) of the revenue from Harrisburg's 2 percent EIT would go to the city. The judge said it had to be used only for core functions of government, such as police, fire, emergency medical and other safety and welfare issues; the other 0.5 percent would continue to go for schools.
Mr. Koplinski said council has until Sept. 11 to decide whether to obey the judge's order. If it doesn't, it could be cited for contempt of court.