The city of Reading and its outside consultants have come up with a new tax plan using a complex and untested state law to pay for the 49 percent hike in pension contributions the state is requiring it to make in 2013.
Essentially, Act 205 says cities facing sudden dramatic pension-cost increases can levy a so-called distressed pension tax, either as a separate property tax or a separate earned income tax. But every nickel collected has to be used to pay off that obligation, not spent anywhere else.
At City Council’s Wednesday night budget session, the consultants recommended applying it to the earned-income tax – using the same rate for both residents and commuters – since the administration and council don’t like the 15 percent property tax hike that’s already in the budget.
Gordon Mann, a consultant for Public Financial Management who is leading the team, said the tax cap is based on a complex formula comparing pension contributions and city payroll for three years.
Mayor Vaughn D. Spencer’s administration said Monday that the Reading’s 2013 budget might need not only increases in the earned-income and commuter taxes but also a higher property tax hike: 20 percent instead of 15.
City Managing Director Carole B. Snyder said she doubts the city will need all three increases.
But she also said it’s better to get enabling ordinances ready now and cut them later if circumstances allow because the taxes can’t be raised later without starting the process over.
“We’re setting the stage, so we can get a balanced budget,” Snyder said.
Reading’s outside consultants told City Council on Monday that total city revenues likely would drop by $2 million from 2013 to 2017, largely because of shrinking property tax money and a recovery plan calling for cuts in the earned-income tax rate.
The property tax, at $18 million, and the earned-income tax, at $13 million, are the two largest city income sources, said Gordon Mann, senior consultant with Public Financial Management Inc., Philadelphia, which is leading the state-hired Act 47 financial recovery team.
He said the problem with the property tax is that assessments essentially are flat, but about a half-percent of city properties go tax exempt each year.
More than 30 percent of city properties now are tax exempt.