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Pennsylvania Removes Cap on Local Tax Levies in Distressed Communities

Pennsylvania now provides exceptions to the cap on taxes that a municipality may  impose if it has a home rule charter or is financially distressed under the new language of Act  No. 76 of 2020 (the “Act”). The Act amends the Local Tax Enabling Act (“Act 511”) to (a)  prohibit an amusement or admissions tax on revenues from passengers riding for-profit rail lines whose major business is freight; and (b) authorize exceptions to the tax limit under Act 511 for  taxes imposed under (i) the Municipalities Financial Recovery Act (the “Recovery Act”), (ii) the  Municipal Pension Plan Funding Standard and Recovery Act (the “Pension Act”) or (iii) under  the authority of a home rule charter in compliance with 53 Pa.C.S.§2962(b). The Act was  sponsored by Sen. John P. Blake (D-22) who advised colleagues in his June 1, 2020  Memorandum related to SB 1188 (the “Memo”) that the proposed legislation will (a) clarify “the  application and the interpretation of the provisions dealing with the calculation of the aggregate  amount of all taxes imposed under section 320 of [Act 511]” and (b) “safeguard  …municipalities…against legal challenges which could result in the bankruptcy of many  municipalities around the state.” The Act was approved with bi-partisan support and designed to  protect the City of Scranton in a suit that successfully challenged the amount of taxes it levied.  Without the Act, the City would not be able to fulfill municipal services outside bankruptcy.  

The impetus for the Act comes from a decision dated December 16, 2019, by Judge  James Gibbons of the Court of Common Pleas of Lackawanna County, Pennsylvania. He held  that the City of Scranton exceeded its tax limit under Act 511. Judge Gibbons further ordered the  City to place approximately $50 million in escrow to cover overcharges levied from 2015  through 2019, to include that amount in its budget and to stop overcharging taxes in future years (the “2019 Decision”). To understand the legal and factual background of the 2019 Decision we  should briefly review Act 511, the nature of local taxes that a Pennsylvania municipality may  levy and the specific position of the City. Pennsylvania municipalities have only those powers  granted by the Pennsylvania legislature. Accordingly, any action undertaken by a municipality  must be supported by state authorization.  

The City is a City of the Third Class with a home rule charter. Because it has a home rule  charter, the City is not strictly bound by the Pennsylvania Third Class City Code. Further, the  Department of Community and Economic Development (“DCED”) declared the City to be a  financially distressed municipality in 1992 under the Financially Distressed Municipalities Act,  Act 47 of 1987 (the “Distress Act”). That status authorizes the restructuring of a municipality’s debt and obtaining government loans. Some of the taxes the City may levy are designated under  Act 511 and known colloquially as “nuisance taxes.” Under Act 511, school districts and  municipalities may choose to levy designated taxes, each with specific limitations. Those taxes  include taxes on (1) amusements such as golf courses, (2) gross receipts, (3) juke boxes, pinball  and video games, (4) one (1) percent on the sale of real estate, (5) per capita levied on adults, (6)  real property, (6) the value of mortgages, (7) occupational privilege, (8) up to one (1) % on  earned income, (9) payroll, and (10) entry to a publicly funded sports facility in the City of  Pittsburgh. These taxes are subject to a maximum aggregate amount. 

Under section 320(a) of Act 511(53 P.S. § 6924.320(a)), nuisance taxes levied by a  municipality may not exceed the product of 12 mills (1.2%) and the aggregate of assessed values  of real estate in the municipality (the “12 Mill Limit”). Under section 320(b) of Act 511 (53 P.S.  § 6924.320(b)), municipalities that levy more in dollars than permitted by the 12 Mill Limit are  given certain duties to abate taxes which may be enforced by taxpayers. First, the municipality  must reduce the rate to stay within the aggregate dollar amount. Taxpayers may sue in the local  court of common pleas by an action in mandamus to compel the government unit to comply with  the duty to reduce tax rates. Tax dollars received over the limit must be “deposited in a separate  account” for expenditure in the following year. The rates of nuisance taxes imposed that  following year must be reduced so that with the extra segregated funds, the total amount of  nuisance taxes collected does not exceed the 12 Mill Limit. 

The City of Scranton appealed Judge Gibbons decision to the Pennsylvania  Commonwealth Court. Absent that appeal or if the City lost on appeal, it would have to raise  revenues through increased real estate taxes or a new, high-cost, debt issuance and try to cut  expenditures. Alternately, the City could file for bankruptcy. Instead, Sen. John P. Blake built a  consensus in the Senate to modify Act 511 by appealing to public officials whose districts included municipalities similar legally and factually to the City. Sen. Blake identified those  communities in the Memo as “the Cities of Beaver Falls, Carbondale, Coatesville, Easton, Farrell, Harrisburg, Mahanoy, McKeesport, New Castle, Reading, Shamokin, Sharon, Warren,  Washington, Wilkes-Barre, as well as the Boroughs of Cassandra, Rankin, Youngsville and  Upland.” 

The Act specifically excludes from the calculation of the aggregate amount of all taxes  levied under Act 511 the following: 

“(1) Any revenues derived from a tax rate in excess of the tax rates authorized under  this chapter which is levied under the act of July 10, 1987 (P.L. 246, No. 47), known  as the “Municipalities Financial Recovery Act,” or the act of December 18, 1984  (P.L. 1005, No. 205), known as the “Municipal Pension Plan Funding Standard and  Recovery Act.” 

“(2) Any revenues derived from the levy of a state tax by a home rule municipality in  compliance with 53 Pa. C. S. §2962(b) (relating to limitation of municipal powers).” 

53 P.S. § 6924.320(d). Accordingly, if the excess taxes are levied under the Distress Act, the  Pension Act or the home rule charter, Act 511 is not violated and the municipality must not  reduce taxes and escrow the amount over the 12 Mill Limit that would have been considered an  overcharge under Act 511. Each applicable municipality should recite that new authorization in  its tax legislation. 

The Act also limits the amount of amusement tax that may be levied under Act 511 on  railroad lines. Municipalities and school districts shall not have the authority thereunder “[t]o  levy, assess or collect an amusement or admissions tax based on a charge imposed for movement  of passengers by a for-profit railroad that operates as a common carrier of freight subject to the  jurisdiction of the United State Surface Transportation Board if the freight constitutes a majority 

of the movements handled by the railroad measured by both income and volume and the for profit railroad transports more than 20,000 revenue carloads annually while offering tourist or  passenger service.” 53 P.S. § 6924.301.1(F)(17). This provision did not appear in the Memo and  serves to limit municipalities. According to Sen. John P. Blake, it arose as an amendment to SB  1188 offered by Sen. David Argall (R-29) in support of the Reading Blue Mountain and  Northern Railroad which runs through Jim Thorpe. 

Sen. Blake sponsored SB 1188 which became Act 76. Named co-sponsors include Sen. Tim Kearney (D-26), Sen. Judith Schwank (D-11), Sen. Lisa Boscola (D-18), Sen. Wayne  Fontana (D-42), Sen. Jay Costa (D-43), Sen. Scott Hutchinson (R-21), Sen. Thomas Killion (R 9), Sen. Lindsey Williams (D-38) and Sen. Christine Tartaglione (D-2). SB 1188 was approved  unanimously in the Senate and in the House and signed on July 14, 2020, and Governor Wolf  approved the Act on July 23, 2020. It became effective 60 days thereafter during the pendency of  the appeal by the City of Scranton. The Act clarifies that levies under by local authorities under  the Distress Act and the Pension Act are not subject to the 12 Mill Limit nor are taxes levied by a  home rule charter municipality in compliance with 53 Pa.C.S.§2962(b). 

The Commonwealth Court ruled in favor of the City of Scranton on Monday, November  9, 2020, in an opinion by Judge Ellen Ceisler which relies on Scranton’s status as a home rule  municipality and the Act. That decision may be appealed to the Pennsylvania Supreme Court.  The Act will protect the City of Scranton and other distressed or home rule charter municipalities  from future, similar suits based on the 12 Mill Limit for nuisance tax levies. Further, it frustrates  what has been called “a taxpayer revolt” in Scranton. The Act represents a policy balance  between taxpayer protection by the 12 Mill Limit and the need for affected communities to  provide essential municipal services.  

© 2020 Robert J. Hobaugh, Jr.