Sunday, December 02, 2007

Why Allegheny County Should Say “No” to the Drink Tax and Send the Legislature Back to Work

Allegheny County Council is being forced this week to vote on whether to impose a 10% tax on alcoholic beverages (when “poured,” i.e., the tax is by-the-drink) and a $2/day fee on car rentals. Many people have been led to believe – falsely – that these taxes are necessary to provide increased funding for public transit service in Allegheny County, when in reality, they are being used to balance the County’s budget. County Council shouldn’t be forced to make this Hobson’s choice. The public should demand that state legislators give Allegheny County better revenue options, and quickly.

Here are the key facts:

Only a small part of the proposed taxes would represent new money for transit. The state General Assembly took action this summer to provide a larger and more predictable stream of state funding for public transit. As part of this action, the state also required Allegheny County to provide a 15% match for the state funds. Although the state is increasing funding to the Port Authority by more than $70 million (to $183 million), Allegheny County is only required to increase its local funding contribution by a little over $1 million, from $26.3 million in 2007 to $27.5 million in 2008. The amount of state funding and local match will remain the same until 2010, and then will increase after that.

It’s been estimated that the drink tax imposed at the maximum 10% level will raise about $28 million. That’s far more than needed for the $1 million in new funds needed to meet the minimum matching level required by the state. The County could provide more than the minimum match and give the $28 million in new revenue to the Port Authority above what it is currently receiving from the County, but that’s not what the County is proposing to do. Allegheny County is planning to collect $28 million in new revenues from the drink tax, but transit will only get $1.2 million in new funds – a mere 4% of the total. Looking at it another way, Allegheny County would only need to impose a drink tax of one-half of one percent, rather than ten percent, if the issue were merely where to find the money for the increased matching requirement.

Allegheny County is inappropriately proposing to shift all local transit funding from the broad-based, stable property tax to a new, untested, and narrowly-based drink tax. Allegheny County has proposed adopting the maximum drink tax so that it can shift its entire $28 million annual funding obligation for the Port Authority away from property taxes and onto the new tax.

For decades, one of the fundamental goals of transit advocates has been to obtain a stable, predictable source of funding for transit. The state legislation passed this summer creates a more stable, predictable source of state funding, by dedicating a portion of the state’s sales tax to transit. But now Allegheny County wants to go in the opposite direction, by moving the local funds – which are required in order to get the state funds – to a less stable and less predictable source of funding. The County has no experience with the drink tax, so it’s hardly a predictable source of revenue. And a tax on “poured alcoholic beverages” is a far less stable funding source than the property tax which Allegheny County has been using. If a significant number of restaurants in Allegheny County shift to BYOBs (“bring your own bottle"), as happened in Philadelphia after it imposed a similar drink tax, how will Allegheny County make up the shortfall in transit funding? If the local funding falls short, so does the state money, and the goal of stability and predictability has been defeated.

Allegheny County would be the only community in the country to make transit funding dependent on a drink tax. Communities around the country have faced the exact same issue that Allegheny County is facing – what’s the best way to fund public transit? Their answers are, in order: sales taxes, property taxes, and gasoline taxes. Not only are all of these taxes more stable and predictable than a drink tax, they are more consistent with a fundamental principle of public finance – you should use broad-based taxes for public services with broad benefit, and use narrowly-based taxes for services that benefit narrow constituencies.

While many people who ride public transit probably buy a drink in a bar or restaurant from time to time, it’s hardly the case that the biggest patrons of bars and restaurants are the major users or beneficiaries of public transit. Everyone benefits from public transit, even those who don’t use it, because (a) traffic congestion, parking availability, and air quality are all better for everybody thanks to those who ride transit, and (b) most businesses are dependent on workers who are dependent on public transit to get to work.

And since everyone benefits from transit, everyone should help pay for it. A drink tax is not a tax on everyone. (And remember that it’s not even a tax on all alcohol; it’s a tax only on alcohol served by the glass!)

The drink tax will hurt businesses and workers. You don’t need an economic impact study to understand that if you raise the price of something by 10%, people are going to either consume less of it, or less of something else, or both. Of course, some people are wealthy enough that they can and will pay 10% more for a drink without changing their consumption. But they will still have less money in their pocket as a result, and that means that they’ll spend less on other discretionary items, which are sold by other merchants. Other people will, in fact, drink less as a result (or eat less or cheaper food in the restaurant), or shift their business to another county where they won’t have to pay the tax. The bar and restaurant owners who get less revenue will have to do something; they may lay off workers, or make workers pay more for their health insurance, or just go out of business altogether if they were already only marginally profitable. And going out of business isn’t out of the question when you realize that the restaurant business is, in general, a marginally profitable business.

Nobody knows for sure how big these impacts will be. CONSAD Research Corporation, a local consulting firm, did a credible job of trying to estimate the potential impacts of the drink tax. They estimated that profits among restaurateurs would decrease by 10-25%, and would cause some to go out of business altogether.

Unfortunately, Dan Onorato seems to have dismissed the study out of hand, claiming that the study’s authors admit they didn’t have time to do a good job. But the study’s authors didn’t say that. They said “an economic decision of this magnitude deserves more comprehensive analytical review than has been conducted in this preliminary study (or in any other existing study of which CONSAD is aware), but more precise quantification of the consequences of the proposed tax would be extremely unlikely to invalidate CONSAD’s fundamental original conclusions expressed in this study.” That’s hardly a self-admission of inadequacy.

The study focused primarily on the impacts of the tax on bars, restaurants, and event facilities, and so it didn’t really describe the kinds of impacts a drink tax could have on other taxes that Allegheny County Council should be concerned about. For example, if people buy fewer drinks or food in restaurants, they will also be paying less sales tax, and that affects the Regional Asset District tax, which thereby affects (a) the funding that the Allegheny Regional Asset District provides to dozens of arts and cultural organizations, and (b) the tax relief funds that come to Allegheny County and all of its municipalities. (Because Pennsylvania exempts so many items from the sales tax, sales tax revenues are disproportionately affected by changes in things that are taxed.) If employees of restaurants are laid off, that will reduce the earned income tax revenues that municipalities collect, and if bars or restaurants close, that will reduce the business privilege, payroll, and occupational taxes that municipalities collect.

Of course, any tax has negative effects on the people who are taxed. The point is that, in contrast to a broad-based tax that would spread the burden widely, the drink tax imposes that burden narrowly on one particular industry. And because of that, the economic dislocations will inherently be much greater than what would result from a broad-based tax.

It’s worth remembering that the amount that is expected to be raised by the drink tax is equivalent to a 10% increase in the County’s property taxes. That’s why the County Executive and County Council are reluctant to give up on the drink tax and rely solely on property tax increases to balance the budget. But if they would be concerned about a tax hike of that magnitude if it applied to every property owner in the County, shouldn’t they be even more concerned about a tax that generates the same amount from a single industry?

(It’s important to note that a 10% increase in the County’s property tax rate would not represent a 10% increase in the total property taxes that a County property owner would pay; most of a property owner’s property taxes are imposed by their school district, not by the County.)

The real problem is that Allegheny County – like all counties in Pennsylvania – needs a broader range of funding sources than just the property tax. Allegheny County’s $700 million budget this year consists of two main funding sources – (1) $293 million in state and federal funds, and (2) $279 million in property taxes. Dan Onorato’s budget for next year would add the drink tax to this mix.

The stark reality is that Allegheny County’s property tax revenues are not growing, partly due to the lack of economic growth in the county, and partly due to the County’s decision to freeze county assessments in the “base year” system. Although the estimated $28 million in revenue from the drink tax is equivalent to what the County is planning to provide to the Port Authority, it is also roughly equivalent to the $23 million growth in total County spending. To Dan Onorato’s credit, he has kept the County’s expenditures in check, and is only proposing a 3.2% increase in spending, a third of which would go to fund the County’s growing debt service burden. But property taxes are growing at an even slower rate, and that is leaving the County with a bigger and bigger gap to fill.

Municipalities in Pennsylvania – cities, boroughs and townships – have a wide range of taxing options available to them. In addition to the property tax, they can use earned income taxes, occupation taxes, business privilege taxes, amusement taxes, and other taxes and fees to fund the public services they provide, and they have flexibility to decide what combination they will use.

In contrast, the state has given counties no such flexibility. They have basically one option – property taxes. And that lack of flexibility makes no sense for the unit of government in Pennsylvania which has become as important, if not more important, than most municipalities.

Providing two narrow options – a drink tax and a car rental tax – and passing them in the middle of the night was the wrong way for the legislature to provide Allegheny County with revenue flexibility. A few years ago, when the City of Pittsburgh was facing a structural budget deficit and needed additional revenue sources to support its budget, a more than 2-year long public debate took place about what options were most appropriate, before the state legislation authorizing those options was passed.

In Allegheny County’s case, however, there was no discussion about options at all. Legislation suddenly emerged from Harrisburg providing the options of the drink tax and the car rental tax. Legislators went home for the summer saying, in effect, “take it or leave it” to Allegheny County. And so now, thanks to this top-down approach, Allegheny County needs to decide whether to take it or leave it.

It’s also worth noting that in the case of the City of Pittsburgh’s battle for more flexibility in raising revenue, the goal was to obtain taxes that were broader-based than existing taxes. The broad-based payroll tax took the place of the business privilege tax that had increasingly come to burden a small and narrow set of businesses in the City (such as restaurants and bars), and the increased occupational privilege tax was designed to ensure that commuters and visitors joined residents in supporting the costs of City services.

In Allegheny County’s case, though, the state gave Allegheny County the ability to extract more from drinkers of poured alcoholic beverages and renters of cars, with no clear rationale as to why they, and they alone, should have to provide more support for the County’s budget. Although the drink tax would enable some support for the County’s services to be obtained from tourists and other visitors, the majority of those who will pay are probably also paying property taxes to the County. So while it won’t show up as a change in their property tax millage, their wallets will be lighter nonetheless.

There’s time to find a better solution. Although it’s been portrayed as an urgent necessity for County Council to pass the drink tax by the end of December, the County Executive has already made it clear that, regardless of what County Council does about the drink tax, he’s not giving any money to the Port Authority until the union makes major concessions on costs. The union has made it equally clear that it’s not planning to compromise anytime soon. So if the threat of withholding funds from the Port Authority is a serious one, it means that the Pennsylvania General Assembly has time to do what they should have done in the first place – go back to the drawing board, identify an appropriate range of local taxing options for Allegheny County (and other counties, if they wish), pass the enabling legislation, and let the County have an open discussion about what the right mix of taxes is to support the entire County budget – including funding for the Port Authority, but not limited to it.

The Pennsylvania General Assembly can provide additional options quickly – if the community demands that they do so. Transit funding proponents will argue that Allegheny County has to take the crippled options that the legislature provided because (a) there’s no guarantee that the legislature will act to provide additional options, and (b) even if they would agree to do so, the Port Authority needs money now, and the legislature moves slowly. That’s defeatism, not realism. The General Assembly can act quite quickly when it wants to – just look at what it manages to do every year when the budget deadline is looming and at the end of each session.

And in this case, the legislature doesn’t even need to spend time drafting the legislation – all it needs to do is amend the Local Tax Enabling Act to make it apply to counties as well as municipalities. How long does the legislature need to do that? A week, at most – if it wants to.

The question is, will it want to? Certainly not if the citizens and business leaders in the county sit on their hands and say “we have no choice but to accept what the legislature gave us.”

Opposing the drink tax isn’t opposing funding for transit, it’s holding state legislators responsible for doing their jobs the way they should. The folks in Harrisburg must be enjoying themselves right now watching the citizens of Allegheny County fighting amongst themselves about whether to support or oppose the joke-of-a-tax option that the state provided. What will they do for fun next year? How about authorizing additional funding for police services through a tax on golf course fees? How about paying for health insurance for the uninsured by authorizing tolls on the Ft. Pitt, Squirrel Hill, and Liberty Tunnels? The potential list of silly options is endless. So why would we say yes to the one silly option they gave us, a drink tax, instead of demanding real tax flexibility?

This need not be a statewide issue – our local legislative delegation can and should take the leadership to provide a better solution. The battle over state transit funding was difficult because it involved providing funding for local transit from statewide funding sources. Legislators from rural counties understandably had concerns about the use of taxes paid by their constituents to fund services provided disproportionately in Pittsburgh and Philadelphia, particularly when the cost structures of the transit agencies there were so far out of line.

But the issue today is about how Allegheny County should fund its local services, including, but not limited to, transit. If Allegheny County wants more revenue flexibility, what do legislators in the rest of the state care? Just as the battle over the City of Pittsburgh’s revenue flexibility came down primarily to what local legislators were willing to support, the decision about what revenue flexibility Allegheny County should have depends on what the Allegheny County legislative delegation agrees to support.

Instead of drink tax vs. no drink tax, the community should focus advocacy on the real third option: state legislation that provides genuine revenue flexibility for the County. To its credit, Allegheny County Council recognizes that there is a third option, and they started a dialogue with state legislators about it. It’s time for the rest of the community to recognize the third option and get behind it. Instead of spending precious time, energy, and money on supporting and opposing the drink tax, attention and lobbying resources should be redirected to something really worthwhile – genuine revenue flexibility for the County.

We need a better fix now for a problem that will get worse in the future. Maybe you're saying, "Why bother fighting the drink tax and trying to get new state legislation? What’s done is done – pass the drink tax, balance the county budget, and move on."

That’s shortsighted for one simple reason. The problem’s coming back again next year, and the year after that, and the year after that. The County has a $28 million hole in the budget this year, not because of the need for more transit funding, but because of stagnant property tax revenues. When Allegheny County’s service costs go up again next year by 3% or more, the County will have another $20-30 million hole in its budget again. If you believe Dan Onorato when he says he has no other way to balance the County budget this year, then you have to believe that he’s not going to have any way to do it next year, either, unless he gets some new revenue options in the meantime.

Will we wait until the morning of July 1 each year to find out what new revenue options the state invented for us in the middle of the night, and then spend the next six months fighting about whether it’s a good idea? Or will we start now to push for a permanent solution?

The choice is obvious. And it’s ours to make.

Kill the drink tax, and make our state legislators provide a real solution.


Blogger Pingus5611 said...

I totally disagree with you, and I'm sorry. I live in the South Park, Pennsylvania area, and although not alot of crime happens here, I know that if there is no drink tax criminals will just get drunk and commit more crimes. I do understand that this is funding for the Port Authority. If the tax is lifted, more people will turn away from drinking and also turn away from the risk of death or death of other people.

12:12 PM  
Blogger Brent said...

Thanks for providing a solid case for flexibility in taxes. So many against this tax just said "NO TAXES! IT'S SIMPLE!" I believe some on council were asking for other options from the Commonwealth. I hope they do get approval from the state and can determine whether the drink tax is the best option given a wider array of possibilities.

4:42 PM  
Blogger Daniel said...

Good solid arguments like this blog post seem lacking from the current frenzy of referenda propaganda. I finally see where the 0.5% rate the FACT group proposes comes from.

Meanwhile, the 25% property tax increase that Onorato claims will be necessary to cover a repealed drink tax is clearly misleading. This needs to be brought to light more prominently by the media.

5:54 PM  

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