Greater Harrisburg's Community Magazine

State recommends doubling property tax, reducing income and services tax to ease Act 47 exit.

If you winced when the Harrisburg school district levied a 3.6 percent tax hike in June, you may want to sit down for this.

Real estate taxes in Harrisburg city could increase by 105 percent over the next three years, if recommendations in a financial recovery plan submitted to city officials last evening come to pass.

The state Department of Community and Economic Development yesterday published Harrisburg’s Act 47 exit plan, a report intended to guide the city through the next three years in the state financial oversight program.

The plan, which was prepared by Harrisburg’s Act 47 coordinator Marita Kelley, calls for Harrisburg to restructure its revenue sources to align with tax rates set forth in the state code.

Act 47 has granted Harrisburg extraordinary taxing power that generates $11 million in revenue each year. The city doubled its earned income tax (EIT) rate in 2015 and tripled its local services tax (LST) in 2016.

Unless state laws change, Harrisburg would lose that revenue when it exits Act 47 in 2022.

To avoid facing a fiscal cliff, Kelley recommends that the city gradually surrender its extraordinary taxing authority and replace its EIT and LST revenue with real estate tax revenue over the next three years.

The exit plan calls for a complete reversal of the LST and EIT hikes by 2021. Simultaneously, Harrisburg would levy 20-percent real estate tax hikes for two consecutive years, followed by a 42 percent raise in 2021.

Harrisburg property owners pay taxes to three separate taxing jurisdictions: the city, the school district and Dauphin County. The hikes recommended today would only affect the city property tax.

Meanwhile, under the plan, bills for the city’s EIT and LST would decrease.

Kelley recommends reducing the EIT by .5 percent in 2019 and 2020, offsetting the 1 percent hike that City Council levied in 2015. The plan also calls for the city to reduce its LST by $52 for the next two years, bringing it down to a $52 annual, flat rate by 2022.

The astronomical real estate tax hikes still wouldn’t bring in as much revenue as the current LST and EIT rates. Budget projections in the exit plan call on the city to spend more than $13 million from its fund balance to mitigate annual deficits.

The plan makes clear that Harrisburg can’t afford any new expenditures. Kelley outlined initiatives the city could make to curb spending, such as paying down debt obligations, renegotiating existing loans, adopting financial management policies to improve the city’s credit rating, and developing a five-year capital improvement plan to prioritize its infrastructure improvement projects.

The plan calls for the city to adopt a more stringent hiring process, but does not advise a full hiring freeze like the one that Mayor Eric Papenfuse recently implemented.

It did, however, recommend against hiring more personnel in the city’s police department.

“The most pressing issue confronting the police bureau is sworn staffing shortages,” the plan reads. “Given the limited financial resources available through the exit process, it is unlikely that additional personnel can be hired. The city should fully evaluate more opportunities to more efficiently deploy existing personnel.”

To that end, Kelley calls for a staffing and shift study to enhance efficiency and reduce expenses in the city’s police force. She also suggests that Harrisburg could reduce its forensic staff and outsource some work to the Dauphin County forensic investigation team.

The city does have potential to find revenue in one of its emergency services. Staffing levels in the Harrisburg Fire Bureau have stabilized while other municipalities struggle to find firefighters, the report says. Harrisburg could generate revenue by extending fire-service agreements to its neighbors.

The city currently collects $5 million each year from the Pennsylvania legislature for offering emergency services to state office buildings and the Capitol complex.

Harrisburg does have two paths to avoid the real estate tax hikes. It could adopt a Home Rule charter, which would allow it to write its own tax code. Harrisburg would have to form a government study commission to initiate the home rule process.

The city can also ask the legislature to let it levy its current LST and EIT tax rates in perpetuity. City officials have been lobbying lawmakers for months in hopes of securing legislative change. In January, Papenfuse signed a 12-month, $60,000 contract with Maverick Strategies, a local lobbying firm, for that purpose.

Efforts to secure legislative change blew up in June, when a special taxing provision for Harrisburg failed to make it into the legislature’s final votes before summer recess.

If the legislature does pass special tax provisions for Harrisburg when it reconvenes in September, the city could exit Act 47 and maintain its current taxing authority.

If the state fails to act, the city would enter its 2019 budget cycle under the assumptions set forth in DCED’s recovery plan.

DCED will accept written comments on the exit plan until July 24. Written comments must be submitted to Kelley’s office at 400 North St., Harrisburg. Kelley will preside over a public hearing on July 24 to hear oral comments.

After the public hearing, Kelley has 10 days to file a final exit plan. City Council then has 45 days to adopt it as an ordinance.

Papenfuse declined immediate comment on the report. However, he has said previously that he could not foresee council approving a steep increase in the city’s property tax and that a mandate to do so likely would lead Harrisburg back into state receivership.

Click here to read the report.

July 10: The Department of Community and Economic Development issued the following statement in response to this story: “The recovery coordinator believes the significant property tax proposed in the Act 47 Exit Plan should be considered as a last option. As stated in the Exit Plan, the city should first explore reducing costs and renegotiating deals, entering into a home rule charter, and negotiating with the state legislature to extend the deadline for collecting the LST and EIT.”

This version has been corrected from an earlier version of the story, which did not take into account the city’s split tax rate for land and improvements.

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