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Decisions for Philadelphia

Robert P. Inman is a finance and economics professor at the Wharton School Mayor Nutter and City Council will be asking residents and employees to make sacrifices to keep the city budget in balance in the coming months.

Robert P. Inman

is a finance and economics

professor at the Wharton School

Mayor Nutter and City Council will be asking residents and employees to make sacrifices to keep the city budget in balance in the coming months.

How should we think about the city's tough choices? Here are some tough guidelines.

Sizing up services

In contrast with 1992, when we faced our last fiscal crisis, in today's budget, there are no obvious inefficiencies that will yield big savings with no sacrifice. As the recent debate over the possible closing of local libraries made very clear, every dollar spent by the city helps someone.

The question is this: Does a dollar of spending on a city service provide benefits that residents believe are worth at least a dollar in city revenue? The honest answer is yes only if city residents are willing to pay for the service on their own, either with voluntary contributions or by saving money on another neighborhood service.

If the answer is no, then the service should be discontinued or scaled back to help close the city's deficit. This is the tough guideline that the mayor and Council members should use to evaluate all neighborhood services, whether libraries, swimming pools, recreation centers or trash collection.

Labor's job

New labor contracts will be coming up for negotiations this summer, and sacrifices will be essential here as well. Among the nation's cities, Philadelphia has one of the highest ratios of public employees to residents. By most measures, Philadelphia's city employees are paid well in salary and particularly in benefits. And, in contrast to the private sector, most city jobs are protected by tenure or seniority rules.

In these hard times, it would be fair to hold city wage increases to zero for the remainder of the recession (most likely through 2010). The city also should ask employees to make contributions to their health and pension plans that are comparable to those of their counterparts in other cities and the private sector.

Given a relatively frugal pay-and-benefits package, will city employees honestly choose to leave their seniority- or tenure-protected city jobs? If the answer is no, then the savings from such a package are an acceptable sacrifice. This is the tough guideline that the mayor, the unions and arbitrators will need to apply in coming negotiations.

Trouble with taxes

In a recession, tax increases should be a last resort. Tax cuts, not increases, are the best way to stimulate the economy and mitigate the damage of this deep recession.

Nutter has already decided to halt scheduled reductions in the wage and gross-receipts taxes. This seems like a reasonable sacrifice to ask of the private sector.

I have estimated that the last 14 years of modest cuts in the wage and gross-receipt taxes - including during the recession of 2001 - saved the city more than 35,000 jobs, or about 2,500 a year.

The decision to temporarily stop the tax cuts will, therefore, cost the city's private economy 2,500 jobs. This is on top of job losses from the recession. This is a significant contribution from the private sector and a particularly painful burden for Philadelphians looking for jobs.

What about an increase in property taxes? My comparison of family tax payments across the metropolitan region ranks Philadelphians as the 11th most-taxed. In our region, only residents of such communities as Darby, Chester, Coatesville, Norristown and Yeadon are taxed more heavily. Among large cities nationally, only the residents of Bridgeport, Conn., are more highly taxed; Newark, New York and even Detroit have lower residential taxes.

While our property-tax rate is low, residents pay the wage tax in its place. It's the total tax burden that matters, and the average Philadelphian already pays more than 14 percent of family income in city taxes.

Burden vs. benefits

Any increase in our residential property tax will, therefore, reduce our ability to attract or retain homeowners, many of whom are also facing rising mortgage costs. And home values will fall. I estimate that a $100 million increase in city revenue from the residential property tax - requiring at least a 7 percent increase in the residential rate - will reduce the value of a typical city home about 3 percent, or $3,300. That's on top of depreciation caused by the recession.

When debating tax increases, the mayor and City Council need to apply this tough guideline: Will the extra city revenue provide city services whose benefits to firms and families exceed the burden of the tax increase?

That firms and families have left the city following every tax increase - and returned following every tax reduction - strongly suggests the answer will be no.

All this guideline might allow is a temporary increase in residential-property taxation, perhaps for one year, backed by a credible commitment from the mayor and Council that the increase is really temporary.

Just as family members meet at the kitchen table to discuss the mutual sacrifices needed to keep a household budget in balance, the mayor and Council will be meeting with city residents and employees to debate and decide our city's sacrifices. Families work when we are honest with each other about the costs of our sacrifices and share them equally. Our best cities work the same way.