Pennsylvania judge asks Harrisburg receiver to justify tax hike

HARRISBURG, Penn. Aug 23 (Reuters) - A Pennyslvania judge on Thursday asked a state-appointed receiver for the cash-poor capital city Harrisburg to explain why she should impose a tax hike on the city that would double residents' income tax to 2 percent.

"This is real money to real people and these are hard, economic times," Commonwealth Court Judge Bonnie Leadbetter told William Lynch, the receiver implementing a financial recovery plan for the city.

"I want some comfort level that other pieces are in the works to provide a real solution," she said.

Lynch took the issue to Leadbetter, who is overseeing the city's recovery plan, after city council members refused to implement the tax increase and take some other steps laid out in the plan.

Leadbetter said it will be at least a week before she issues a decision. She also said that if she finds that Lynch has the power to force the tax hike, she will only allow the additional revenue to be used for vital city services.

Harrisburg is struggling to pay down about $320 million in debt tied to renovations of its trash incinerator.

The city council filed for bankruptcy in October 2011, but the case was later thrown out and can not be refiled until the end of November.

By then, the city could be broke, said Lynch's attorney Mark Kaufman in court on Thursday.

If Harrisburg makes a $3.4 million debt service payment that is due in September, it will be $500,000 in the hole, Kaufman said.

Even if the city skips that payment, it will run out of money for operating expenses, including payroll, by November, he said.

Harrisburg's projected budget deficit for fiscal year 2012, which ends on December 31, is $9.6 million on a budget that calls for $57 million in expenses. That's on top of the $2.8 million deficit the city carried over from the previous year, he said.

If the city fails to enact the tax hike, the deficit will grow to $13.8 million by 2016, he told the court.

Lynch said in court papers that the tax hike is a key component of the recovery plan, already approved by Leadbetter in March, and is "critically needed to help ameliorate Harrisburg's severe operating deficit."

Currently, residents pay a 1 percent earned income tax, half of which goes to the city and half of which goes to the school district.

The increase would take the rate up to 2 percent. It was projected to boost the city's revenue by $1.7 million in fiscal year 2012, and by more than $5.1 million in fiscal 2013, according to court documents.

Attorneys for the city council argued that Lynch has no authority to impose a tax increase, and that the income tax rate is already at its legal limit.

"City council can't do something illegal just because the receiver wants them to," said Lee Morrison, an attorney for the city council.

The plan also calls for the sale or lease if the city's parking garages, its incinerator and for new operators for its wastewater system.

Lynch told Leadbetter that the city was "very close" to finalizing the incinerator sale, and that the city was working on a possible contract to provide electricity to the state.

He also said that he follows the state's recommendations about which bills to pay. The city has been under state supervision since December 2010.