Tax-hike talk louder on Council

Momentum is building in City Hall for higher taxes.

Confronted with a second $1 billion budget deficit in less than three months, a growing number of City Council members - emboldened by Mayor Nutter's statement that "all options are on the table" - are now actively calling for tax hikes that they describe as "inevitable."

The real questions now, those Council members said, are: How steep will the increases be? And which taxes will be targeted: the dreaded wage tax, the oft-criticized property tax, or something else entirely?

"We're never going to be able to resolve a budget problem this big solely by reducing the size of government," said Councilman Darrell L. Clarke, whose views are shared by Council members Maria Quiñones Sánchez and Bill Green.

To be sure, there are still at least as many tax-hike opponents on Council as advocates, as well as a third bloc that is on the fence.

But in interviews late last week, tax-hike foes appeared far less settled in their position than those calling for higher levies.

Councilman James F. Kenney, for instance, said he would accept higher taxes as a "last resort." Or take Councilman Curtis Jones Jr., who said he opposed tax hikes but could change his mind if the mayor made a "compelling case" for them.

Nutter - who has been a leading tax-cutting champion throughout his political career - clearly does not want to raise taxes. He has warned Philadelphians to expect spending cuts of up to 30 percent in some city departments, and he has told labor leaders that city employees would have to "sacrifice" as well.

But Nutter has also hinted strongly that cuts and new labor contracts might not be enough, even if the mayor gets the involuntary furloughs, health-care concessions, and lowered pension benefits he is seeking from union leaders.

To eliminate both November's $1 billion deficit and the fresh $1 billion gap announced last week through spending cuts alone, Nutter would have to trim his five-year spending plan by 10 percent.

Cutting that deep would likely lead to stark service reductions, such as fewer police on the street, closed recreation centers, and less-frequent road repaving, to cite just a few examples.

Given his tax-cutting credentials, Nutter may be able to convince Philadelphians (who already are groaning under one of the heaviest tax burdens in the nation) that desperate times demand they shoulder still more.

Already, the city's business establishment appears to be giving Nutter a tacit green light to raise taxes.

It would be "extremely difficult" to close the new $1 billion gap without raising taxes, acknowledged Greater Philadelphia Chamber of Commerce chairman David L. Cohen, who is also a Comcast executive.

Here are Nutter's revenue-raising options:

Property taxes. The city's property tax represents perhaps the most likely tax-hike target.

Revenue from property taxes is split with the school district, which could help Nutter and City Council sell a tax increase.

Plus, the city's business and policy elites generally favor increasing property taxes over wage and business levies. In 2003, the Tax Reform Commission - which helped foster the tax-cutting spirit that has dominated City Hall in recent years - formally recommended the property tax as the most stable and growth-friendly revenue option available.

"If you're going to increase a tax in Philadelphia, then the real estate tax is the one to go after," said Brett Mandel, a member of the disbanded Tax Reform Commission and executive director of Philadelphia Forward, a tax-cutting advocacy organization.

There are significant drawbacks, however.

Senior citizens and other residents on fixed incomes would be hit hard by any property-tax hikes. And since the tax accounts for just 16 percent of city tax revenue, it would take a steep increase to put much of a dent in the $1 billion gap.

Another big complication is the long-coming overhaul of the city's property-assessment method.

Dubbed the "Actual Value Initiative" by the city's Board of Revision of Taxes, the new approach has the potential to fix a system that frequently assesses similar properties at wildly different rates.

Although Nutter and Council have long said the transition to "actual value" assessments would not yield any extra money for the city, many City Hall insiders now expect the city will indeed use the opportunity to collect more in property taxes.

Wage taxes. Despised as it is, the wage tax is by far the city's single largest revenue source, generating more than $1 billion a year. The city takes 3.93 percent out of every Philadelphian's paycheck, and deducts 3.5 percent from those who work in the city but live elsewhere.

Since 1995, the city has chipped away at the tax rate, hoping to make the city more attractive to both businesses and residents.

To raise the tax now, the city would have to clear some significant legal and political hurdles.

Recently, state funds from casino operations across Pennsylvania have been used to lower the wage tax. To get that money, though, the city had to agree not to raise its wage tax in the future, unless certain conditions were met.

Chief among those conditions is a decline in total city tax collections of 2 percent, a figure Philadelphia is likely to meet if the economy continues to weaken, said city Finance Director Rob Dubow. State law also requires that at least 10 of 17 Council members approve any wage-tax hike.

Sánchez - who staunchly backs an increase in the wage tax - recently asked Council staff to draft a memo outlining the steps the city would need to take to raise wage taxes.

Sánchez said last week that if the city diverted the state's next round of gaming-funded tax cuts (scheduled to kick in next January) to the budget, it would generate an additional $16 million a year for the city. Taxpayers, she said, would hardly notice the difference.

"We have to look at revenue. We're cutting into the core of who we are as a city," Sánchez said.

But increasing the wage tax could set Philadelphia on a collision course with Harrisburg. Already, some state lawmakers have tried to prevent the city from receiving its share of state casino revenues, arguing that Philadelphia should not get a cut until casinos open in the city.

Any efforts to use state gaming funds to cover the city's deficit seems sure to further infuriate those lawmakers.

Business taxes. With the exception of Clarke - who said business-tax hikes should be carefully considered - there does not appear to be much support in City Hall for raising the city's business-privilege tax, which takes a cut not only of all profits, but also of all sales, even when businesses are losing money.

Nutter already froze planned cuts to the business taxes in November as part of his response to the first $1 billion budget gap.

"I don't think anybody wants to raise taxes on small businesses in this economic climate," Sánchez said.

Delinquent taxes. The city is owed about $500 million in delinquent property taxes, and millions more in other unpaid fees and fines. Collecting these debts would go a long way toward closing the $1 billion gap, and city officials say they are stepping up their efforts.

But they also warn that it is unrealistic to expect that all the debts - some of which are decades old, or owed by deceased individuals or disbanded corporations - can be collected.

Those properties could be seized by the city and sold at sheriff's auction, but in this soft real estate market, it is not at all clear that buyers would pay enough for many of the properties to cover the delinquent taxes on them.

In the last year of his administration, Mayor John F. Street announced a plan to go after property-tax deadbeats, which he predicted would yield $235 million over five years. As of last fall, the firm that had been contracted to do the job had collected just $35 million.

"We are getting much more aggressive about all this," Dubow, the finance director, said.

Other revenue sources. The city has other taxes - on sales, parking garages, tickets to stadium events, and more. But they generate far fewer dollars, so increasing their rates wouldn't do much to raise revenue.

Tweaking the 10-year property-tax-abatement program is another option under consideration, but that, too, is unlikely to significantly reduce a $1 billion deficit.