A City Council Plan B proposal to raise wage taxes instead of property taxes to solve the city’s $1.38 billion, five-year budget hole is “off the table,” officials said Thursday.

Finance Director Rob Dubow informed Council that the city did not meet the criteria in state law that would allow Council to raise wage taxes without state approval. The law governing how state casino proceeds are distributed for tax relief states that Philadelphia cannot raise its wage tax unless revenues dropped 2 percent or more, as certified by the citys finance director.

That clause prevents the city from using state gaming proceeds to pay for government services and blocking the intent of the 2004 gaming law, which was to provide wage tax reductions to Philadelphia and property tax relief to other areas of the state. The 2 percent gives the city leeway in a financial crisis. But even in the current economy, Dubow said the expected revenues for the year ending June 30 fell by 1.94 percent, from $2.74 billion to $2.60 billion.

“I think the wage tax is effectively off the table,” Republican Minority Leader Brian J. O’Neill said after Thursday’s Council meeting.

Nutter wants to balance the budget with a combination of a three-year, 1-percentage point sales tax increase, with a two –year property tax hike. Property taxes would rise 19 percent the first year beginning in July, going down to 14.5 percent above current levels in the next year and returning to the current tax rate in July 2012.

Council countered this week with its Plan A -- extend the sales tax increase to 5 years and borrow against those revenues to pay bills in the next two years. The sales tax money would eliminate the need for a property tax increase.

But wage tax was also offered as the next-favored, Plan B alternative – Council would freeze the 3.93 percent resident wage tax and raise the wage tax for non-residents. These rates otherwise would decline as gaming revenues continue to fund tax relief.

There was some question about whether Council would accept Dubow's calculation or accuse him of using politics in his calculations. But there is none of that today.

"The numbers are what the nubers are, and I think it was a fair manner the way he did it," said Charlie McPherson, Council's chief financial officer.

Now, with the wage tax idea dead, it appears Council and the administration will haggle out their strategies on the sales* tax. O’Neill said that the two sides have been working more closely this week to come to an agreement on the budget. Council is expected to hire a consultant in the next few days to bolster its arguments.

*corrected from an earlier version that said wage tax.

Click here for Philly.com's politics page.