City Council members will face a tough choice in coming weeks: As part of council’s 2025 budget legislation, should they raise the earned income tax, or EIT, by three tenths of a percentage point, 0.3, or by half a point, 0.5?
A hike of 0.3 point would generate enough additional revenue for 2025 and 2026, but council might have to raise taxes again as soon as 2027, city Director of Administrative Services Tina Campbell told members at a special budget meeting Thursday evening.
With a hike of 0.5 point, on the other hand, along with prudent financial management, projections suggest the city could go a full decade or more with no further tax hikes being necessary.
City Council has leverage over the EIT rate thanks to home rule, which city voters approved in last week’s election. Under the city’s current governance structure, the EIT is capped under state law at 0.6%. Beginning Jan. 1, under the home rule charter drafted over the past year, that is no longer the case, and City Council can raise it.
On Thursday, Campbell presented two budgets for council’s consideration, reflecting EIT hikes of 0.3 point and 0.5 point, respectively. (The total EIT is currently 1.1%, with the School District of Lancaster receiving the other 0.5%. The new total rates would thus be either 1.4% or 1.6%.)
For more information
Lancaster’s 2025 draft budget and supplementary information, including Tina Campbell’s presentation and the capital budget presentation, are available under the “2025 Budget” heading on the Lancaster’s Budget & Budget Documents web page.
Shifting some of the city’s tax burden to the EIT has two advantages, proponents say. First, homeowners on fixed incomes need no longer face the prospect of constantly increasing property tax rates. Second, because incomes tend to increase naturally over time, the city can garner more revenue from year to year through the EIT without raising the rate.
General fund spending is nearly identical in both scenarios Campbell presented: $76.7 million in the one, $76.8 million in the other.
WIth a 0.5 point EIT hike, the city would be able to maintain a handful of additional staff positions. It would also be able to make donations to the Lancaster Public Library and Lancaster EMS.
Lastly, rather than use all $3.4 million of its remaining American Rescue Plan Act funding to eke out 2025’s revenue, it would be able to put $1 million toward capital projects: namely, park renovations.
The real difference in the two scenarios is seen tin the city’s multi-year outlook. With an EIT hike of 0.3 points, the city could expect deficits to appear by 2026 and widen thereafter, exhausting its reserves as soon as 2030. At 0.5 points, deficits don’t appear until later and remain modest, allowing the city to reach 2035 with reserves projected at $14.4 million.
Projections through 2035 of Lancaster city finances based on the enactment of an earned income tax hike of 0.3 percentage point (left) or 0.5 percentage point (right). Click each chart to enlarge. (Source: City of Lancaster)
Both scenarios reflect conservative assumptions, Mayor Danene Sorace said: No change in city staffing, no expansion of government or change in the scope of services.
Campbell emphasized that the figures are just projections, and actual future budgets could be much different. Still, they are suggestive. Moreover, other home rule cities have been able to forego tax increases after an initial EIT hike; a couple have even been able to reduce rates.
Median income in the city is around $60,000. For an individual earning that amount, raising the EIT 0.3 point would increase 2025 taxes by $180, from $360 to $540. Raising it by 0.5 point would bump the increase to $300, from $360 to $660.
Asked how her staff arrived at 0.5 point, Campbell said numerous scenarios were gamed out. They included an initial 0.3-point hike followed by a 0.2-point hike later— that one didn’t work, but 0.5 did, she said.
Enterprise budgets
Along with the general fund, which covers core city services like public safety, street maintenance and so on, the city has four “enterprise” funds that cover services supported by fees: Water, sewer, stormwater and trash pickup.
The 2025 budget proposes a 10% increase in trash and recycling fees, or about $8 per quarter for typical households; and a sewer rate increase that works out to about $5.25 a month. In addition, the city plans to seek permission early next year from the Public Utility Commission to raise water rates for its suburban customers.
Sorace and Campbell will formally submit the 2025 budget to council on Tuesday, Nov. 26. City Council is scheduled to vote on it at its second December meeting, on Tuesday, Dec. 17.
Capital budgeting
Under home rule, Lancaster’s administration must present City Council not only a regular budget, but a capital budget for its review. On Tuesday, joined by his deputy directors, Public Works Director Stephen Campbell did so.
Generally speaking, public works capital projects are paid for with a mix of revenues from bond issues and grants. Street, park and city building projects are covered under the general fund; water, sewer and stormwater projects are covered under their respective enterprise funds.
Projects include both “baseline” maintenance work and new projects. All told, the city is looking to spend about $200 million on its capital infrastructure over the next six years, raising the money through bond issues in 2025 and 2028, Campbell said.
The problem: Based on a recently completed facilities assessment and other analyses, the amount of work is needed is more on the order of $290 million.
That means the city will need to strategize, Campbell said. In some cases, it will need to delay or scale back projects. It will also continue to do everything it can to secure grants.
The administration is in the process of developing a debt policy, Tina Campbell said. In general, debt payments should account for no more than 10% of general fund spending and no more than 40% in enterprise funds.
With regard to the latter, “we are trying to ensure that rates stay affordable,” she said. The goal is to keep them as close as possible to 2% of median city income (or $1,200 a year) and in any case, no more than 4% of median income.
The challenge is complicated by a number of federal mandates. Lancaster is under a federal consent decree to eliminate the discharges of sewage into the Conestoga River that occur during heavy storms. Moreover, new federal requirements are calling for the elimination of all lead pipes in municipal water systems and the reduction of “forever chemicals” to extremely low levels.
Complying with those mandates will require many tens of millions of dollars of upgrades, Deputy Public Works Director Christine Volkay-Hilditch said.
