Pennsylvania communities won’t be able to ease their pension burdens by raising taxes only on commuters after a judge struck down an attempt to raise a special tax on nonresidents.
Pennsylvania communities won’t be able to ease their pension burdens by raising taxes only on commuters after a judge last week struck down Scranton’s attempt to raise a special tax on nonresidents.
The city tried to implement a 0.75 percent earned income tax on people who work in the city but live elsewhere, under a provision of a state law that authorizes tax increases to shore up moderately or severely distressed municipal pensions.
Scranton’s police, fire, and non-uniformed pension obligation epitomizes severe distress: collectively, they have one of the worst funding ratios in the state, meaning the city is obligated to pay vastly more than it has saved. Pennsylvania Auditor General Eugene DePasquale released an audit of the pension funds in August and found that they could run out of money in three to five years, possibly bankrupting the city.
But Senior Judge John Braxton from Philadelphia ruled in Lackawanna County Court on Sept. 30 that although the distressed pension law that enables the tax — known as Act 205 — is silent about whether it can be applied only to commuters, other state tax laws show that it can’t.
“It is clear to this Court that there is no authority for the City to impose an earned income tax under Act 205 exclusively on nonresidents,” he wrote.
Scranton’s leaders do not want to raise taxes on residents by an equivalent amount because the city’s earned income tax — 2.4 percent to the city plus 1 percent to the school district — is already among the highest in the state.
The ruling is a blow to Scranton’s financial recovery plans but it is unlikely to have sweeping ramifications for other municipalities because the city’s proposed tax hike was unusual.
More than 40 Pennsylvania municipalities have used a tax to fund their distressed pensions, according to a recovery proposal written for Scranton by Henry J. Amoroso, a consultant with a reputation for helping cities turn around their struggling finances. But Scranton was the first one to enact it only against commuters, Bill Jones, an attorney for the tax opponents, said.
State courts have expressed concern “whenever there is a tax on somebody that can’t vote,” Jones said. “It’s easy to pass it on to somebody that doesn’t have a voice.”
The ruling could have implications for Easton, where Mayor Sal Panto Jr. proposed to increase the city’s earned income tax on commuters to fund pensions the day after Judge Braxton struck down Scranton’s tax.
William Rhodes, who heads the municipal recovery initiative for the law firm Ballard Spahr in Philadelphia, said Pennsylvania municipalities will continue to consider imposing earned income tax increases under state laws for distressed cities and pensions.
“But if anyone was thinking about imposing it solely on the commuters, they’ll look at this case and say, ‘We can’t do that,’” he said.
A distressed communities bill that is close to passage in the General Assembly should also discourage other cities from trying to duplicate Scranton’s failed tax hike. The bill would prohibit cities from applying a tax increase on commuters under Act 205 without raising taxes on residents by an equal amount in the same year.