The state agency charged with guiding Harrisburg out of financial recovery has denied a city proposal to levy a commuter tax, according to a report delivered to city hall late today.
Harrisburg’s newest Act 47 exit plan, which was prepared by a coordinator in the state Department of Community and Economic Development, calls instead for maintaining the city’s current Local Services Tax (LST) and Earned Income Tax (EIT) rates through 2020, as the city seeks special taxing provisions from the state legislature.
As did a prior draft of the exit plan, the report released today acknowledges Harrisburg’s financial progress under the five-year Strong Plan and the necessity of legislative change for the city’s long-term fiscal health.
But the Act 47 law requires Harrisburg officials to approve an exit plan by September, when its financial distress designation expires.
Harrisburg’s Act 47 coordinator must craft an exit plan based on current state law, which would require Harrisburg to relinquish some of its taxing authority when it exits Act 47 in three years. The city currently collects $11.8 million in annual revenue from its heightened LST and EIT rates.
The first draft of the exit plan called for increasing property taxes by more than 100 percent over the next three years to compensate for the loss of those tax revenues. Harrisburg residents and city officials roundly rejected the proposal, and DCED revised the plan based on their feedback.
Harrisburg mayor Eric Papenfuse said last week that he was asking DCED to consider a commuter tax, which would let the city grow its fund balance and pay down debt without increasing the tax burden on residents.
According to the report, however, a DCED analysis determined that the commuter tax would not yield substantially more revenue than the LST that the city currently levies. Papenfuse previously estimated that the commuter tax would reap “millions” more dollars for the city.
“The Coordinator will keep an open mind as to the potential for a Commuter Tax but cannot now support an increase unless it has an overall beneficial financial impact for the City,” the report states.
The report encourages Harrisburg officials to continue lobbying for the right to levy its current tax rates indefinitely.
To that end, it offers a four-year budget strategy that would give Harrisburg time to continue its lobbying effort. It would allow the city to maintain its status quo tax rates and expenditures through 2020.
If the city does not secure a legislative victory by 2021, DCED would revise the budget projections in the exit plan and would ask the city to change its revenue structure and cut spending.
If state laws have not changed by 2021, the coordinator recommends that Harrisburg lower its earned income tax to 1.5 percent, reduce its spending, and begin using its fund balance to reduce any budget deficits.
In 2022, the city would have to reduce its EIT to 1 percent and its LST to $52 per year.
The plan also outlines initiatives that the city can undertake to curb spending and increase revenues while it implements the four-year budget strategy.
They include asking more tax-exempt organizations to make Payments in Lieu of Taxes (PILOTs), performing a cost analysis of its union and non-union represented personnel expenditures, and limiting enhancements in its future collective bargaining agreements.
DCED also recommends that the city study its split-rate property tax structure and consider moving to a single-rate system. The report says that the split-rate system benefits homesteads at the expense of landowners.
“As revitalization and property improvements continue within the City, the City’s split rate millage is not fully capitalizing on the growth -the county and school district are,” the report reads.
In a statement released through a spokesperson on Thursday, Papenfuse did not comment on the specific contents of the exit plan, instead speaking broadly about the city’s longterm financial recovery.
“My goal remains for a path to exit Act 47 in a way that secures the City’s financial future – sooner rather than later,” he said. “Anything short of this will not be acceptable to the hard-working people of Harrisburg, who have categorically rejected any plan that burdens them with more taxes.”
City solicitor Neil Grover declined to comment on Wednesday night, saying he needed more time to review the document with city officials.
Council Vice President and Budget and Finance chair Ben Allatt said that revised plan was a marked improvement over the first draft that called for property tax hikes.
“We’re headed in a much better direction than the initial exit plan,” Allatt said on Thursday morning. “I think the strategy is to not force the city to make all these crazy decisions in a 30-day period without the state acting. Because the fact is that if we want to resolve our longterm financial situation, then we need to compel the state to act.”
DCED must now hold a public hearing on the revised exit plan. Allatt hopes to schedule it for the week of August 27, when council returns from its annual summer recess.
Have questions about Harrisburg’s financial recovery? Check out TheBurg’s guide to Act 47.
This post was updated on Thursday, Aug. 9 with comments from city officials.
