Monday, May 26, 2008

Barking Up the Wrong Tree

Opponents of Allegheny County’s ill-conceived 10% drink tax are now pushing for a voter referendum to repeal the tax. (The $2 per day rental car tax is equally ill-conceived, but the restaurant and tavern owners are better organized than the rental car companies.)

County Executive Dan Onorato has vowed to fight the repeal effort, claiming that without the drink tax, he and County Council will be forced to raise property taxes, which he is adamantly opposed to doing.

Unfortunately, both sides are right (at least partially), and as a result, fighting each other is a no-win proposition. Instead, they should join forces to fight their common enemy – the Pennsylvania General Assembly.

It’s Not About Transit, It’s About Every Service Allegheny County Provides

Many people have been led to believe – falsely – that the drink tax and car rental tax are necessary to provide increased funding for public transit service in Allegheny County, when in reality, the taxes are being used to balance the County’s budget. And the County is using the drink tax and car rental tax to balance the budget because those are the only options the legislature has given it.

Under current state law, 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.

Doesn’t Allegheny County Have “Home Rule?”

In Pennsylvania, when the legislature gives a county or municipality “home rule,” it means (among other things) that the community has completely flexibility as to the rates of taxes, but not the types of taxes. If a community wants to use different types of taxes, it has to go begging to the legislature for approval to do that. That’s what the City of Pittsburgh, even though it’s a home rule municipality, was forced to do a few years ago when it wanted a more balanced mix of revenues from commuters and residents.

So instead of being truly home rule, it’s more like “house arrest” – you have freedom to do what you want, as long as you don’t leave the boundaries the legislature has defined for you.

Narrow Taxes vs. Broad-Based Taxes

Of course, any tax has negative effects on the people who are taxed. However, in contrast to a broad-based tax that would spread the burden widely, the drink tax and car rental tax impose that burden narrowly on two particular industries. And because of that, the economic dislocations will inherently be much greater than what would result from a broad-based tax.

The amount that was expected to be raised by the drink tax and car rental tax was equivalent to a 10% increase in the County’s property taxes. That’s why the County Executive and County Council refuse to give up on the drink tax and rely solely on property tax increases to balance the budget. It appears that the revenues are going to be significantly higher than expected, making them even more strongly opposed to giving up the revenues. But if they would be concerned about a tax hike of that magnitude if it applied to every property owner in the County, they should be even more concerned about taxes that generate the same amount from two industries. (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 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 revenue from the drink tax was equivalent to what the County was planning to provide to the Port Authority, it was also roughly equivalent to the growth in total County spending. To Dan Onorato’s credit, he has kept the County’s expenditures in check, and his budget for this year included only 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.

The Wrong Kind of Taxes, Created the Wrong Way

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. When the City of Pittsburgh pursued additional taxing sources to support its budget, a more than 2-year long public debate took place about what options were most appropriate.

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, thanks to this top-down approach, Allegheny County had to decide whether to take it or leave it. Unfortunately, but probably not surprisingly given their lack of options, they decided to take it.

It’s 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 two taxes 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.

A Quick Fix is Possible, If There’s a Will To Do It

The General Assembly could act quite quickly to provide additional options if it wanted 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.” And certainly not if the citizens of the County are busy fighting amongst themselves about the crippled options the legislature has already given us.

The Joke’s On Us

The folks in Harrisburg must be enjoying themselves right now watching the citizens of Allegheny County arguing about whether to repeal the drink tax or raise property taxes. 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 are we accepting the one silly option they gave us, a drink tax and car rental tax, instead of demanding real tax flexibility?

At Least Solve the Problem In Allegheny County

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.

Barking Up the Right Tree

Instead of wasting energies inside Allegheny County battling over whether to repeal the 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 recognized that there is a third option, and they started a dialogue with state legislators about it last fall. But once they passed the drink tax, they lost all of their leverage to get action.

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 or opposing the drink tax, attention and lobbying resources should be redirected to something really worthwhile – genuine revenue flexibility for the County.

There is no provision in the Pennsylvania Constitution for a voter-led referendum on local tax options, so the only approach is advocacy with state legislators. Rather than expending energies trying to pass a referendum in Allegheny County or to defeat candidates for County Council, whose hands are tied by state legislation, the focus should be on state legislators and the Governor, who determine the taxing options that County Council can use.

Fix It Now or Suffer Later

Maybe you're saying, "Why bother fighting the drink tax and trying to get new state legislation? What’s done is done – leave the drink and car rental taxes in place 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 had 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 year 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.

Demand that our state legislators pass legislation this summer giving Allegheny County the ability to choose the best taxing structure for the future.


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