Lisa Zhu | Get ready for a fight

In late January, Mayor Michael Nutter announced that the City was contemplating raising taxes in order to close the $1.4-billion budget deficit Philadelphia faces over the next five years. A week ago, he and his team officially unveiled a projected budget and five-year plan intended to close the gap and mitigate the effects of the recession. And true to his word, tax hikes are a key component in the proposal.

Before resident neoliberals or fiscal conservatives trip over one another in a race to disparage the proposed tax increase, it is important to clarify what the mayor's plan actually suggests. Yes, taxes will go up - but temporarily. Specifically, the proposal calls for a 1-percent increase in the sales tax and a 19-percent increase this year and 14.5 percent increase the following year for property taxes. Together, the tax increases will contribute $614 million to the City's coffers. But unlike other times in the past where "temporary" taxes became quite permanent (wage tax, anyone?), the odds of these increases phasing out after three to five years is actually quite good.

"[These tax hikes] should be given the benefit of the doubt for actually being temporary because the five-year-plan operations clearly show the taxes going away," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, that maintains oversight on Philadelphia's budgeting issues.

Finance professor Robert Inman is also optimistic about the local government's intention to enforce deadlines on these tax increases. "It takes a very clear commitment to a particular deadline, and that deadline should appear before an election period, so voters can penalize the politician if they don't keep their promise to cut taxes." And conveniently enough, Nutter's re-election in 2011 coincides with the phase-out deadline of the property tax and the winding down of the sales tax.

Alas, while Nutter's tax hikes do not present a major problem in the long term, the rest of his proposal faces considerably greater opposition.

Specifically, the area where the mayor is likely to run into strong pushback is in negotiations with the municipal workers' unions over wage increases, health care and other benefits. If the overall plan to reduce these costs is approved, it represents a game attempt by city government at reform in the face of a terrible economic situation. But at worst, it's a pie-in-the-sky dream that will get shot down not once, but dozens of times by the myriad parties that must approve it.

Currently, 60 percent of the City's budget goes to some form of employee compensation, whether for salaries or fringe benefits. In particular, the City's pension fund, which makes up $460 million in total expenditures, is spiraling out of control in the face of stock market losses. But while large corporations can get away with dissolving employee-retirement packages with few consequences, the City of Philadelphia is not so lucky.

In order to resolve these compensation concerns, Nutter proposes freezing municipal workers' wages, renegotiating health benefits and asking employees to contribute more to their pension fund. More than any other part of the five-year plan, these proposals represent a true attempt at reform and a more balanced payment structure that will lead to a more sustainable spending scheme in the future.

"You can't change the benefits for people who already retired and people who are already in the system, so you won't see any short-term savings," said Monson. "But in the long-term it'll dramatically reduce the amount the City pays."

Unfortunately, Nutter's goals are subject to approval from state authorities and municipal workers' unions, the latter of which can be notoriously obstinate in making any type of concessions. But in times of financial crisis, a refusal by the unions to hold a reasonable dialogue with the City could lead to a much-less-favorable budgeting alternative - one where thousands of workers are laid off instead.

Ultimately, it all boils down to common sense. Unions should be able to understand that "with the vast share of the City's budget constituted by compensation, you have to hold the line on those [wage] increases," Penn Public Policy and History professor Ted Hershberg said. "It's not a question of whether those workers deserve them; it's a question of whether we can afford them."

Lisa Zhu is a College and Wharton senior from Cherry Hill, N.J. Zhu-ology appears on Thursdays. Her email address is zhu@dailypennsylvanian.com.

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