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Will budget crunch kill big exemptions?

Until the City of Pittsburgh’s financial crisis started making daily headlines, Denise Gaynor didn’t think much about other people’s taxes. She paid her own business taxes punctually on two Liberty Avenue restaurants — Liberty Tavern and tonic bar and grill — and concentrated on making money.

But Gaynor said she was “mortified” to discover many of the city’s largest employers pay nothing in business taxes.

“I know when I write checks from my account for taxes that it’s a hell of a lot of money, but I thought everybody had to pay it,” Gaynor said.

Most Pittsburgh owners of service companies such as restaurants, dry cleaners and barbershops pay $6 in so-called business privilege taxes on every $1,000 of cash — not profit — they bring in. Retail stores such as clothing shops pay $2 in mercantile tax on every $1,000 they take in, while wholesalers pay $1 on every $1,000 in gross revenue.

The business-privilege tax brings in about $42 million a year, while the mercantile tax earns the city about $7.2 million, according to city officials.

But many major corporations — such as PNC Financial Services Group, U.S. Steel Corp. and Federated Investors Inc. — pay neither tax. In fact, 26 of the city’s 27 largest employers, including UPMC Health Systems and Citizens-Mellon Bank, are exempt from the taxes, according to City Controller Tom Flaherty.

Only the parent of Kaufmann’s, The May Co., pays a full load of business taxes, Flaherty said. That disparity led Flaherty and state Rep. Don Walko, D-North Side, to announce plans Friday for legislation to end exemptions for manufacturers, banks and investment brokers.

Some organizations such as the city’s hospitals and universities have tax-exempt status because they are considered nonprofits. Other groups, however, got their free pass through years of corporate lobbying, legal appeals and the city’s own compromises.

Those tax breaks cost the city about $30 million a year, according to the city treasurer’s office. They might be worth even more. In May, Mayor Tom Murphy estimated that closing the exemptions could raise “hundreds of millions of dollars.” PNC Financial Services and Citizens-Mellon Bank have claimed they would owe $13 million and $15 million, respectively, according to state Sen. Sean Logan, D-Monroeville.

As a result of the exemptions, remaining Pittsburgh taxpayers have seen higher taxes and fees on property, business revenue, income, parking, real estate sales and water services than would be necessary under a broader tax base, experts said. A willing Legislature granted the breaks at the city’s expense, said Pittsburgh Public Schools Solicitor Ira Weiss, an expert on the city’s taxing history.

“They’ve created all these exemptions for all these businesses, all these special interests that are infinitely better at lobbying the Legislature than local government, and then they wonder why local real estate taxes go up,” Weiss said. “What special interests have created is a situation where small businesses and basic services like grocery stores are sharing the load.”

Some exemptions were granted at the tax law’s birth in 1968. The original version of the law exempted manufacturers such as steel mills and related industries. Several other industries including newspapers, dairy farmers and takeout pizza shops — but not eat-in pizzerias, which are considered restaurants — later persuaded the courts that they, too, manufacture goods and deserve exemptions.

That law also prohibits local government from imposing business taxes on industries such as insurers, harness racetracks and beer distributors whose revenue is already taxed by the state, according to a 1998 law journal article published by Kevin Forsythe, then an auditor in the city controller’s office.

In February 1969, the securities industry persuaded the city solicitor to exempt revenue earned by stockbrokers and dealers. The state Supreme Court overturned that decision, but the brokers and dealers refused to pay — even though the city spent the next seven years alternately cajoling and threatening the industry, according to Forsythe.

Banks and ultimately the securities industry were exempted by a 1980 state Supreme Court decision. Then, in 1996, the Legislature — with Murphy’s quiet backing — passed a bill to exempt Federated Investors from the tax. Murphy later said he believed at the time that Federated deserved the same exemption as other securities firms, but came to believe none of the companies should be exempt.

Murphy decided this spring against trying to end the exemptions after much of the corporate community balked. But Logan said this week that Philadelphia’s successful closing in 1984 of its tax exemptions for banks, insurance companies, utilities and the securities industry shows it can be done.

If corporations paid the business privilege tax of just $3 for every $1,000 in revenue, remaining taxpayers — grocery stores, flower shops and other small businesses — could see their taxes reduced, perhaps to as low as $3 per $1,000, he said. Legislators and city officials, Logan said, need to think about current taxpayers’ well-being, and not allow themselves to be blackmailed by corporations threatening to leave the city if they are taxed.

“It gets tiring being held hostage by people who purport to love the city and want to stay in the city and want to solve the city of Pittsburgh’s problems,” Logan said. “How much do you really love the city?”


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