Mayor Nutter and City Council have reached an agreement in principal on the city's budget which would wipe out the Mayor's proposed property tax increase and instead raise the city's sales tax a penny on the dollar for five years, five sources familiar with the plan confirmed this morning

After a weekend of negotiations between the administration and Council leadership, budget hearings in Council Chambers this morning were canceled as Council President Anna Verna briefed Council members in small groups. Nutter's embracing of Council's reliance on sales tax rather than property taxes to close a $1.4 billion gap over the next four years represents a major shift for the administration, which had criticized the proposal.

Council had pushed for a five year sales tax increase, from 7 percent to 8 percent (the state gets 6 cents on the dollar, the rest goes to the city) to avoid Nutter's temporary but steep increase in property taxes ¬¬– 19 percent over current levels beginning July 1, and 14. 5 percent over current property tax rate in July 2010. Because the revenue to offset the recession over the next two years would not come in quickly enough, Council had proposed borrowing about $240 million, either with a bond or a bank loan, to be spent over two years but repaid over five years.

Nutter had also proposed increasing the sales tax, but for only three years. He had criticized Council's borrowing plan as bad and risky financial planning. Instead of seeking money through the financial markets, Nutter has apparently proposed some form of financing involving the pension fund.

There are still details to be worked out, the sources said. Council's sales tax plan still involves $25 million in annual cuts, which must be worked out before Council can vote on a budget. In addition, there is another huge 'if." Both changes to the pension plan previously proposed by Nutter and increase in the sales tax require approval by the state legislature; Gov. Rendell  has already said approval of the sales tax in Harrisburg will be "an uphill battle."

Nutter's spokesman, Doug Oliver, did not respond immediately to a request for comment.

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