Inside Take: Bold Wolf/Nutter Budgets to Collide with Political Reality in 3, 2, 1…

Uncertainty over Harrisburg's plan complicates life for Nutter & Council.

(Editor’s note: This is an opinion column from a Citified insider.)

Ladies and gentleman, I now welcome you to what I call the “Guessing Game” portion of the City’s budgeting process.

On Tuesday, March 3rd, Governor Tom Wolf presented his budget plan to the General Assembly. It is big and bold, to say the least. And it has huge implications for Philadelphia: doubling the homestead exemption for property tax, eliminating the City’s $2 cigarette pack tax (but raising the state’s cigarette pack tax by $1), reducing the City portion of the sales tax from 2% to 1.4% (but raising the state portion so the overall sales tax rate in Philly would stay at 8%), and reducing the wage tax rate by almost half a percentage point. In exchange for these local tax cuts, Philadelphians, and all Pennsylvanians for that matter, will be asked to pay more in personal income taxes.

However, whether Wolf’s budget proposal is DOA is TBD. Perhaps some parts of it will pass, but it’s likely that his plan will drastically change due to compromise over the next few months. Remember, Republicans dominate both the state House and Senate, and many of them consider Wolf’s budget proposal to be exactly what they would expect of a “tax and spend” liberal.

So what does all this mean for Mayor Michael Nutter’s swan song budget? Judging by his March 5th budget address, the Mayor seems to be firmly hitching his cart to Governor Wolf’s big bold plan. Specifically, Nutter proposes raising the property tax rate from the current 1.34 percent to 1.465 percent, to raise an additional $105 million for the beleaguered School District. However, the Mayor claims that if Governor Wolf’s budget proposal (especially the increased homestead exemption part) comes to pass, property tax rates will only go up in 2016 before going back down again in 2017.

Well that’s a big “if.” So is Nutter’s budget proposal DOA as well? Still TBD.

So how might all this unfold? Let’s consider three scenarios:

  1. Things go according to plan, and both the Governor’s and Mayor’s budget proposals pass. This could be a boon to the City, and cities in general, and a huge boost to the School District of Philadelphia, which is elated by the Governor’s proposal. That being said, some individuals and businesses will likely end up paying more in taxes.
  2. Some parts of the Governor’s and Mayor’s plans pass, but some parts don’t. Let’s say the Governor’s proposed doubling of the homestead exemption isn’t approved, but the the Mayor’s proposed local property tax hike is.. On top of this, the City is supposedly doing reassessments this year (see the last sentence on page 25), which will be reflected in property tax bills next year (and for many, capturing an increase in property values leading to higher property tax bills regardless of a rate change). So, instead of property owners seeing a slight increase in 2016 and decrease in 2017, they may in fact get a “double whammy” increase in 2016 due to the rate hike and reassessments, and no relief in 2017. Another potential scenario: let’s say the state legislature doesn’t fully meet the Governor’s proposed additional $159 million in basic and special education funding for Philadelphia. Will the City have to pick up the slack? If so, how? Council members are already balking at raising property taxes (again), so maybe they’ll find another tax to raise, or something entirely new to tax. Plastic bag tax, anyone?
  3. Very few, if any, parts of the Governor’s and Mayor’s plans pass and the legislatures call the funding shots. I honestly have no idea what this would look like, but I worry that due to decisions at the state level that are out of our control, it would mean extremely painful cuts to the School District and even cuts for the City if Council is not willing to solely raise taxes to fund the District.

I predict that some version of Option #2 is how things will play out over the next few months. Given that the Governor has strategically put some things into the budget that appeal to Republicans, I think he will have some success with his proposals. Also, Republicans got the message that former Governor Tom Corbett lost his re-election bid in part due to education cuts. At the local level, it’s an election year for Council members, and they’ll need to weigh the importance of funding our schools and the unpopularity of increasing property taxes yet again. It’s likely they’ll find more money for the School District, but whether it’s the full $103 million the District says it needs from the City (or more, if state funding doesn’t come through), and whether that money comes primarily from increased property taxes remains to be seen.

Happy budget watching, everyone!

Rachel Meadows used to do budget analysis as a staffer to former Councilman Bill Green, and she currently helps teach a graduate-level budgeting course at Penn’s Fels Institute of Government. You can follow her on Twitter @rachelmeadows.