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August 23, 2012 | By | Posted in General News

Controversial Harrisburg tax increase heads to court

By Melissa Daniels | PA Independent

HARRISBURG — Harrisburg residents soon will find out, if they must pay twice the amount of earned income tax, a directive from the city’s state-appointed receiver.

But first, Commonwealth Court Judge Bonnie Leadbetter has to decide if that’s even legal.

Attorneys for the receiver and the fiscally struggling city of Harrisburg argued the case in Commonwealth Court on Thursday on the constitutionality of the tax increase. Attorneys for the city said it’s unconstitutional to allow an agency, like the Office of Receiver, to will a governing body to vote a certain way.

The city’s receiver, Maj. Gen. William Lynch, filed a petition with the Commonwealth Court earlier this summer over the increase, after city officials refused to pass a 1 percent tax increase, which would bring the total earned income tax to 2 percent.

Right now, residents pay a 1 percent earned income tax, half of which goes to the city of Harrisburg and the other half to the Harrisburg School District.

Municipalities fall under Act 47 after they’re considered financially distressed. The state’s Department of Community and Economic Development then is charged with reviewing its financials. In Harrisburg, DCED appointed the Office of the Receiver to enforce the recovery plan after city officials failed to adopt a plan.

Increasing the city’s earned income tax was a recommendation in the city’s recovery plan that the Commonwealth Court approved in March.

If Leadbetter sides with the petitions, city officials will have to comply.

Neil Grover, defense counsel for the city, said the question is whether anyone — the receiver’s office, or even the court — can order a public official to pass a law.

“It doesn’t make sense to me, and I think to most people, that you have elected people to vote on the will of the people who put them in office who then can be told by someone else that they must vote a certain way,” he said.

Lee Morrison, another attorney for the city, said the tax increase also would be illegal, because state law caps the earned income tax credit for municipalities at 1 percent.

“The City Council can’t do something that’s illegal just because the receiver wants it to do that,” he said.

Attorneys for the receiver argued that because the tax is necessary as part of the city’s recovery plan, it’s within the scope of the Office of Reciever’s authority.

Mark Kaufman, attorney for the receiver, said the tax is “a critical necessity” in Harrisburg’s recovery plan. Though it would not solve the city’s structural deficit, it would offset operation costs and become a reliable source of income that would help in its negotiations with creditors, he said.

Estimates from the Pennsylvania Economy League, which subcontracts with DCED to help monitor finances in Act 47 municipalities, suggest the income tax increase would generate $1.7 million in 2012, if it was enacted as proposed on July 1.

It would generate $5.1 million in 2013, and $6.8 million in 2014 and thereafter.

In 2012, the city’s structural deficit stands to be about $12.3 million, $9.5 million from this year and the rest carryover from 2011.

Lynch, receiver for Harrisburg, said increasing the earned income tax was a recommendation in every version of the recovery plan.

“If it’s not implemented now, when do you do it? A year from now, or a year from then?” he said. “If it’s implemented now, we have some reasonable expectation of figuring out a stable financial future for the city. If not, it just puts off an inevitable issue.”

Though she did not indicate when she would deliver a final ruling on the case, Leadbetter said that if she is to grant the petitioner’s request to raise the tax, she may insert a caveat on how the money can be used.

“At this point, if the taxpayers are going to be asked to put forth more money from their taxes, they should see the vital services,” she said.

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Melissa Daniels is a reporter for PA Independent. She can be reached at 717-350-0962 or Melissa@PAIndependent.com

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