In a decision that could deny Scranton millions of dollars in much-needed revenue and derail its financial recovery, a Lackawanna County judge ruled the city's home rule charter does not trump state law that caps the amount of certain taxes it collects.

Judge James Gibbons's ruling Friday does not end the case, but essentially guts the city's defense of a lawsuit that alleges it illegally collected millions more in taxes than it was entitled to receive over the past few years, said John McGovern, attorney for eight residents who filed the suit.

"It's not completely over, but the ruling is a major hurdle we got over," McGovern said. "It's basically just a math problem. There is nothing for us to prove at this point."

In an email, Kevin Conaboy, attorney for the city, downplayed the significance of the ruling, saying it is merely a preliminary decision that allows the case to proceed.

"With all due respect to Mr. McGovern, the case is far from over," Conaboy said. "The city will continue to defend the case and hold the plaintiffs to their burden of proof. This preliminary ruling does not change that. There continues to be a long way to go for the plaintiffs to prove their case."

Attempts to reach Scranton Mayor Bill Courtright for comment were unsuccessful.

The dispute centers on whether the city is limited in the amount of Act 511 taxes it collects, which include wage, real estate transfer, amusement, business privilege/mercantile and local services taxes.

Gary St. Fleur, the lead plaintiff, and seven other residents filed suit in March, alleging the city violated a state law that says Act 511 taxes cannot exceed 1.2 percent of the city's total market value as determined by the Pennsylvania State Tax Equalization board.

Using that formula, the suit alleges the city could not collect more than $27.3 million in 2015, when it actually collected $34.5 million. It also alleges the $36.8 million in Act 511 taxes it budgeted for 2016 and $38 million budgeted for this year exceed the cap.

If the residents prevail, "the flood gates open," McGovern said.

The city would have to reduce Act 511 taxes this year to be under the cap or roll over any excess amount it collects into next year to reduce the taxes. It also could be ordered to refund excess taxes it collected in prior years, McGovern said.

The city sought to nix the lawsuit at the onset. In a motion to dismiss, Conaboy argued that because the city is a home rule charter municipality, it could set tax rates at whatever it wishes.

Gibbons disagreed. In an eight-page ruling, he found the home rule charter is subservient to state law, therefore the cap on Act 511 taxes "cannot be superseded by the home rule charter law."

"The city said we can do what we want because we are a home rule charter and there's nothing you can do about it," McGovern said. "The judge made it clear. You can't do what you want."

McGovern said Gibbons ruled on the key issue in the case, so the only issue that remains is whether the city exceeded the caps. That issue already has been established, he said. He intends to ask Gibbons to issue a final ruling in his clients' favor.

If the judge sides with his clients, it could have a major impact on the city's plan to exit its Act 47 distressed status because it would not be able to collect as much taxes, McGovern said.

"They voted to get out of distressed city status without any consideration of how this suit would affect it," McGovern said.

Gerald Cross, executive director of the Pennsylvania Economy League, the city's recovery coordinator, declined comment.

Councilmen Wayne Evans and Tim Perry could not be reached for comment on Friday night. Councilmen Bill Gaughan and Pat Rogan declined comment until they had a chance to review the ruling.

City Council President Joe Wechsler said he is certain the city would appeal if the final ruling goes against the city.

"If the city ultimately is unable to collect the Act 511 taxes at the level now outlined in the budget, the only alternative would be to increase real estate taxes and no one wants to do that," he said.

DAVID SINGLETON, staff writer, contributed to this report.

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