Time to change antiquated Pa. tax system, municipal league says

Jan. 17—In 1965, Lyndon Johnson was president of the United States, the country was involved in a war in Vietnam, and the Fab Four — The Beatles — held what many consider to be the first stadium rock concert in New York City.

Without as much fanfare, Pennsylvania leaders that same year adopted the state's local taxation structure, which spells out how communities collect money from workers, residents and property owners in order to provide services.

And, while the world has changed over the past six decades in terms of politics, foreign relations and music, the Keystone State has been sitting at a virtual standstill in terms of tax collection.

Leaders of the Pennsylvania Municipal League, a nonprofit group formed in 1900 to advocate for the state's third-class cities, think that needs to change, and at least one municipality in Western Pennsylvania has taken advantage of its status as a Home Rule municipality to glean tax revenue without relying on changes to its property tax rate.

Murrysville officials last year raised taxes for the first time in 14 years. But it wasn't a bump in property taxes — rather, it was a small bump, less than 1%, in Murrysville's earned income and real estate transfer tax assessments.

"By virtue of being a Home Rule municipality, we have more latitude setting our own policies, laws and ordinances," Murrysville Chief Administrator Michael Nestico said. Though it is a lengthy and sometimes costly process, home rule allows a town to essentially write its own ordinances, rather than the wholesale adoption of state code for boroughs and townships.

In making the decision to raise different taxes, Murrysville officials cited what Nestico and finance director Jacie Milchak said was the regressive nature of property taxes, which in Westmoreland County are tied to something called the common-level ratio.

"It takes the assessed value of a house and dates it back to the last countywide assessment, which was 1973,"

Milchak said. "They release a common-level ratio, and it adjusts any new purchases back to what would've been their 1973 value."

Nestico said each year that passes without a countywide reassessment creates a bigger disparity in the impact a flat property tax rate can have on a town's budget.

"A reassessment costs millions of dollars, so it makes sense that the county would struggle with the decision to do one," Nestico said. "But it also creates a growing disparity for taxing bodies like Murrysville."

'Nearly total reliance'

Nestico has seen the limits of local taxation from several angles. He came to Murrysville from Tarentum, which as a borough does not have the same option as Murrysville to bump earned income taxes, among others. Generally speaking, the primary vehicle for raising additional revenue in boroughs is to hike property taxes.

Before he worked in Tarentum, Nestico was a manager for Jeannette, where he helped community officials bump their share of earned income taxes because of a provision allowing municipalities to raise it due to financial distress.

We were only able to do it because of our underfunded pension plan," he said. "That was one of the allowable ways for the city to raise its earned income tax above 1%."

For Pittsburgh, the state's only second-class city, the largest growth in new revenue has come in the "other tax" category, which includes the Allegheny Regional Asset District (RAD) sales tax and the payroll tax, as well as the city's parking tax, according to the Pennsylvania

Municipal League study. The "other tax" category accounted for about one-third of total taxes in pre-

pandemic 2019, with property tax revenue dropping from more than 50% of total taxes to just 30%.

Neither sales nor payroll tax is available to most Pennsylvania municipalities, prompting the study presented by the Pennsylvania Municipal League and Pennsylvania Economy League at the PML's annual conference. Titled, "It's Not 1965 Anymore — State Tax Laws Fail to Meet Municipal Needs," it urges state legislators to modernize the ability of local governments to raise new revenue by means other than property taxes.

"Local officials are creative and innovative in spite of not having the resources to provide essential services for the public that deserves and expects results," said PML Executive Director John Brenner. "In order to make our commonwealth truly economically competitive, we must give local leaders a menu of revenue options that steers us away from nearly total reliance on property taxes."

Pennsylvania municipalities — except for those specifically designated as "Home Rule" municipalities such as Murrysville and Penn Hills — only have these new powers available once a community has become fiscally distressed.

Case studies in the report include Altoona, Bradford, Hermitage, Lancaster, Lock Haven, Pittston, Upper Chichester Township and Indiana Borough.

Nestico said Murrysville's decision to become a Home Rule municipality in 1976 was to move away from the constraints of the state's township and borough codes.

"Home Rule gives you the opportunity to approve a municipal charter through council meetings and the voters, and it gives you more autonomy and flexibility," he said.

'Antiquated tax system'

In Murrysville, officials said property taxes have not been the primary source of revenue since 2012 and that earned income tax revenue regularly outpaces property taxes in the budget.

In Pittston, voters approved a Home Rule Charter roughly a decade ago, and Mayor Michael Lombardo said that today, revenue from earned income tax is twice the amount the city receives from property taxes.

"We've gotten no pushback at all on our earned income tax increase," Lombardo said. "It's not noticed. If we had not done Home Rule to reform our taxes, we would not be at the point we are now."

Part of the reason residents may not notice a bump in earned income taxes is because it fluctuates naturally along with salary and cost-of-living increases, Milchak said.

"You can make the assumption that it will go up steadily rather than relying on a regressive tax like property taxes," she said.

In laying out the proposal for the earned income tax hike, former Murrysville Chief Administrator Jim Morrison said the increase each year would help the municipality compensate for rising overhead expenses.

"It's a way to raise revenue and keep pace with costs that are beyond the control of the municipality," Morrison told council.

Nestico said that, ultimately, earned income tax is a more direct reflection of changes in the local community and economy.

"The antiquated tax system we have is just not keeping up with the times," he said.

Patrick Varine is a Tribune-Review staff writer. You can contact Patrick by email at pvarine@triblive.com or via Twitter .