Harrisburg can keep its enhanced taxing authority on workers for two years while it pursues changes in state law instead of boosting property taxes for residents next year, according to a revised Act 47 exit plan released late Wednesday.
The revised plan also slapped down Mayor Eric Papenfuse’s request for a commuter tax over the next three years to help pay down the city’s crushing debt. The city’s Act 47 Coordinator Marita Kelley disagreed with the mayor’s contention that a two-percent earned income tax on commuters would generate millions of dollars, better positioning the city to exit the state’s program for financially struggling cities.
“We have found that the commuter tax would not yield significantly more than the currently levied Local Service Tax,” Kelley wrote. “The coordinator will keep an open mind as to the potential for a commuter tax but cannot now support an increase.”
The revised document represents a big departure from the original exit plan presented on July 10 that called for increasing property taxes 20 percent for each of the next two years and then spiking the rate 43 percent in 2021 for an overall cumulative increase of 105 percent over the current rates.
The dramatic property tax hikes would have been necessary to cover $12 million that would have been lost annually if the city had to reduce its earned income tax and local services tax, as was part of the original exit plan.
“That would have been devastating on so many levels,” said City Councilman Ben Allatt. ” People who could move out of the city, would, and no one would move in. It would have destroyed an already fragile tax base.”
Instead, the city’s Act. 47 coordinator revised her plan after a public hearing when people overwhelmingly rejected the idea, saying severe property tax hikes would sink property values and ruin the city’s recovery efforts.
The revised plan allows the city to continue with its elevated earned income tax of two percent on residents and its tripled local services tax of $156 per year for people who work in the city. Those enhanced rates can continue over two years as long as the city is making progress toward its goal of making those tax rates permanent through changes in state law.
As it stands, the increased rates are only allowed for municipalities in the state’s Act 47 plan. A hearing on a bill to change that for Harrisburg is set for September.
The exit plan aims to get the city out of the state’s Act 47 plan after receiving a three-year extension. The city entered the program in late 2013 and legislators later enacted a five-year deadline for municipalities to exit the program.
As part of the revised plan, Kelley also recommended that city officials “seriously consider” pursuing a “Home Rule Charter” which would allow them to keep the enhanced EIT without legislative action and enact other taxing options not allowed under the state’s restrictive law for third-class cities.
If legislators don’t make progress on changing the law, however, and if city officials don’t start the process for Home Rule, then the city will have to reduce the earned income tax to 1.5 percent in 2020, and revert to 1 percent in 2021, under the revised plan.
The local services tax also would be reverted back to $52 annually in 2021, when the city exits the Act 47 program.
Under that grim scenario, the city would have to make drastic budget cuts and increase property taxes to make up for the lost revenue.
City Council members expect to hold public hearings about the revised plan in late August and then vote on whether to approve it. If council members do not approve the document, the Act 47 coordinator could try to send the city back into receivership.
If council members do approve the document, then they will be tied to its recommendations and possible amendments made by Kelley.
The coordinator could “make any necessary amendments to the operating budget strategy to ensure the city’s termination of distressed status in 2021,” according to the report.
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