Commuters may be asked to pay more to help balance Harrisburg’s budget if the capital is unable to preserve other taxes once it exits Act 47, the state program for distressed municipalities.
Mayor Eric Papenfuse recently pitched a three-year, 2 percent commuter tax, known as a non-resident earned income tax, to the city’s state-appointed Act 47 coordinator. The commuter tax would be one way for Harrisburg to make up for the potential loss of its higher earned income and local services taxes once it exits Act 47 in 2021.
Under the city’s debt-recovery plan, Harrisburg was allowed to double its earned-income tax on residents to 2 percent and triple its local services tax, paid by people who work in the city, to $156 per year. The higher taxes provide more than $11 million per year to the city.
The mayor and other city officials would like to maintain those elevated rates. But if state lawmakers are unwilling to act this fall on legislation to lock in the higher rates, the mayor believes a commuter tax would be better than enacting steep hikes in property taxes. Such hikes were presented in a draft of the coordinator’s Act 47 exit plan last month.
Those hikes, which would double current property taxes over three years, were listed as a way to offset the loss of higher rates on the other two taxes. Other than raising property taxes, the draft plan also identified the possibility of the city adopting a home rule charter, which would allow city officials to write a new tax code.
The coordinator is expected to submit a final draft of an exit plan to city officials on Wednesday, though it’s unclear whether a commuter tax is included. The state Department of Community and Economic Development said officials have been reviewing all options for the final draft, including the mayor’s suggestion.
Business leaders and lawmakers argue that the commuter tax is the wrong move.
“Non-resident EIT is not the solution and would be very complex to administer,” said David Black, president and CEO of the Harrisburg Regional Chamber and Capital Region Economic Development Corp.
Under the mayor’s proposal, the local services tax would revert back to $52 per year. But in its place, Harrisburg commuters would pay 2 percent tax on their income. Most non-residents who work in Harrisburg live in municipalities with earned income tax rates lower than 2 percent, so the difference would go to Harrisburg.
For example, residents of Lower Allen Township pay 1.55 percent earned income tax to the township. If they work in Harrisburg, they would pay 0.45 percent to the city, as well as the $52 local services tax.
Black said he believes a bill being developed by state Reps. Greg Rothman (R-Cumberland) and Patty Kim (D-Dauphin) will be passed this fall and allow Harrisburg to keep its special taxing authority.
“The legislative process does take time and everyone needs to be a little patient,” he said.
Rothman also is optimistic that a legislative fix will move quickly in September. He is opposed to any commuter tax.
“It will drive businesses out of the city,” he said. “Commuters contribute to the economic viability of the city when they eat lunch out, shop, go to dinner at the city restaurants, and their employers already pay taxes to the city. The solution to the city’s problems is growing the tax base, not shrinking it.”
Of course, higher property taxes also could send residents fleeing and stifle future development efforts, which also would hurt the city.
“I think the general consensus is that all parties realize that the only true way to get the city on solid footing is for the state to step in and do something,” Councilman Ben Allatt said.
Residents can’t afford higher taxes and the city has few assets left to sell off for revenue, he said. Harrisburg has privatized its trash services, its parking and its water systems.
And interest in development, while rising in the city, can’t make up the revenue from the earned income and local services tax, Allatt added.
Developers also have said it’s important to maintain the momentum that the city has seen over the last few years. Large property tax hikes and the specter of state receivership could choke off investments.
Allatt said he would like to see how the fall session plays out in the General Assembly before acting on an Act 47 exit strategy.
However, Harrisburg will have only until Sept. 11 to approve the coordinator’s exit plan, according to DCED. If the city does not approve the plan by then, the coordinator could take steps to place the city back in receivership, barring any state intervention.
City council is scheduled to meet again on Aug. 28.