Pittsburgh’s 0.3% Solution is a Very Bad Idea

Member Group : Allegheny Institute

According to Mayor Ravenstahl there is unanimous agreement in his task force of government, university and business leaders that Pittsburgh needs a new source of revenue to bail out its ailing financial situation. We can think of a few gigantic problems with the Mayor and his task force’s assessment of the situation.

First, there is absolutely no evidence that a new source of revenue will solve Pittsburgh’s long standing tendency to spend or commit to spending all the money it gets its hands on and then some. Of course the Legislature has heard these cries from Pittsburgh before. In several instances they have granted the City more taxes. Back in 1993, the City and its civic and business community supporters asked the Legislature to create the Regional Asset District tax, which it did. The new one percent sales tax for Allegheny County was portrayed by its supporters as a virtual panacea for the City’s financial woes. The purpose of the new tax revenue was twofold. One, it would provide funding for Three Rivers Stadium and major cultural and educational organizations, thereby allowing the City to reduce or eliminate its financial support for those entities. Two, the RAD tax revenue would provide money to municipalities for tax relief. Pittsburgh, being the largest municipality, would receive the largest share of those funds.

Did the RAD tax revenue end the City’s financial problems? In a word, no.

Only three years after the RAD tax was implemented, the Legislature approved a referendum to allow an additional 0.5 percent sales tax to fund new stadium construction and other projects. After the referendum was trounced at the polls, a Plan B was implemented that required the Legislature to ante up $150 million (which it did) to keep the stadium construction on track as well as the allocation of RAD money to underwrite a large bond issue needed to get the construction underway. Once again supporters argued that new stadiums and convention center would be the catalysts for a major revival in the City’s fortunes. Did that happen? Again, the answer is no.

As we have noted on many occasions all this additional support for Harrisburg was not enough to forestall even worse problems. By 2004, a short five years after the new stadiums were built or underway, the City was compelled to ask for and received Act 47 financial distressed status. Further, that same year, the Legislature authorized major new taxes to increase City revenues. The City was allowed to levy a payroll preparation tax on for-profit businesses; had 0.25 percentage points of the earned income tax on residents transferred from the school district, as well as a redirection of the school district’s RAD allocation; and had the annual Local Services Tax increased from $10 to $52. The gaming legislation of 2004 requires the casino operating in the City to pay the City two percent of gross terminal revenues or $10 million a year, whichever is larger.

In short, over the past two decades the Legislature has provided numerous additional sources of recurring revenue to the City as well as several hundred millions of dollars to support construction of large scale projects. All of the state’s efforts have failed to fix the City’s finances despite assurances from Pittsburgh and its supporters they would. So why would we think another new revenue source, such as the 0.3 percent levy on earned income for anyone working in Pittsburgh, would solve the problem? After all, while state and county taxpayers have been forthcoming with even more money, the City has failed to make the large, meaningful spending cuts necessary to bring the City to financial stability.

As we noted in a previous Policy Brief (Vol. 10 No. 11), the City is spending $50 million more in 2010 than it did in 2003 (even after adjusting for an accounting entry change that started in 2005 for state pension funding) and has thereby pushed expenditures beyond the $40 million increase in revenues derived from the new taxes permitted by the Legislature in 2004. And to make matters worse the City now needs $15 million more for pension fund payments.

To put this in perspective, we compared Pittsburgh to other regional hub cities in our Benchmark Report (#10-2, March 2010). We found that on a per capita basis, Pittsburgh is spending 50 percent more than our Benchmark City ($1,440 vs. $961). Pittsburgh is spending 22 percent more on police and 30 percent more on fire while collecting 56 percent more in tax revenue than the Benchmark City. Moreover, Pittsburgh’s tax collections are $1,113 per resident compared to $715 per resident in the Benchmark City and have risen 24 percent since 2004.

The 0.3 percent levy will replace the $52 Local Services Tax on those working—commuters and residents—within the City. The Local Services Tax currently generates $13.5 million. Not only will the new levy be expected to replace that revenue stream, but is projected to generate an additional $15 million for City coffers. And now we are told that $15 million more in taxes will solve the problem. Unless there is a strong and unshakeable commitment to lower the City’s expenditure trajectory dramatically another $15 million will never be enough.

Another problem we have is with the Mayor’s comment to the effect that the City needs to "…require (those who don’t live in the city) to pay for their fair share for the services we provide". With his 0.3 percent solution a person making $80,000 per year would pay $240 in new taxes. What exactly are the services consumed that cost this person $240?

And why do the services consumed by someone making $80,000 cost more than the services consumed by an individual earning $40,000 who would pay only $120 in higher taxes. The logic fails. Furthermore, commuters are paying the nation’s highest parking tax; attendees at sporting and other events pay an amusement tax. Then too, except for government agencies, most commuters work for companies or organizations that rent office space. Through their rent payments those companies are paying City and school property taxes. The companies are also paying a payroll preparation tax tied directly to the pay of their employees. For most companies a significant fraction of those workers are non-residents.

How many companies conducting business in Pittsburgh could function at current levels if they could not hire non-residents? With fewer or smaller companies there would be less demand for office space and less property tax revenue. Likewise, there would be considerably less payroll preparation tax revenue.

Commuters are also a built-in customer base for restaurants, bars, retail shops and many services. By spending money in the City, commuters help boost the number of employers in the City, who in turn—through property and earned income taxes—raise the City’s tax base.

Once and for all, the City needs to study, in a systematic and thorough way, the use of services by commuters and demonstrate convincingly the cost per commuter. Simply dividing expenditures in each category by the number of commuters is not a defensible methodology. Then it needs to calculate the amount of revenue derived from commuters through all their spending and contributions to the City’s tax base. Unless the cost of services is greater than the contribution to revenue, the idea of a 0.3 percent wage tax or any other tax on commuters should be abandoned.

What are the long-term ramifications of adding yet another tax to the City’s already unfriendly business climate? It is not possible to predict specifically what will happen, but it is certain that the City’s continual requests for more revenue sources necessitated by its refusal to get per capita spending in line with other cities will not bode well for Pittsburgh’s ability to attract businesses. Being known for ever higher tax burdens is a reputation the City ought to be shedding.

In all likelihood, the Legislature will view this attempt to tax commuters as a non-starter. Considering the amount of money they have given the City and new taxes provided over the last two decades, they should give any delegation lobbying for higher taxes short shrift, exactly what it deserves. Asking non-residents to pay for the City’s profligate spending and mismanagement that have produced enormous debt and legacy costs is unseemly.
Jake Haulk, Ph.D., President FrankGamrat, Ph.D., Sr. ResearchAssoc.

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