By Kirstin Downey
Washington Post Staff Writer
Wednesday, March 12, 2008 11:41 AM

Alexandria, grappling with tough fiscal choices after the disintegration of a state transportation spending plan, is putting off a key decision on property tax rates as officials weigh how to plug a gap in the city budget.

Last night, the City Council was scheduled to set the advertised real estate tax rate for fiscal 2009, a regular step in the budget process. In February, City Manager James K. Hartmann had proposed a $534.8 million budget with no tax-rate increase, maintaining it at 83 cents per $100 of assessed valuation. Officials had expected to stay at that rate or increase it only slightly.

Instead, the council decided to defer any decisions until it has more information following the Feb. 29 state Supreme Court ruling that invalidated a system set up to collect taxes for regional transportation needs.

"We were counting on funds to meet our local transportation needs," Mayor William D. Euille (D) said. "It's very challenging. Very depressing. Very devastating."

Bruce Johnson, director of the city's office of management and budget, told council members that the city might be as much as $21 million in the hole.

Council member Justin Wilson (D) urged city officials to review the entire budget to see whether the city's spending priorities should change.

"We may get lucky and the General Assembly will do its job, but it's better to assume they will not," Wilson said.

"This really throws the budget up in the air, in my view," council member Paul Smedberg (D) said.

Budget officials across the region are reeling from the impact of the real estate slowdown, which has depressed property assessments. Fairfax County decided this week to advertise a tax-rate increase of 3 cents, Prince William County is proposing a 22-cent increase, and Loudoun County is considering a 26-cent increase.

The one new source of funding that local governments were relying on to meet the needs of the growing population was the transportation package negotiated in Richmond last year. Now, Alexandria must face the prospect that millions of dollars in transportation funding has been lost, including the $1 million the city needed to pay for the trolley service it hopes to operate on King Street to promote tourism in connection with the National Harbor project.

Vice Mayor Redella S. "Del" Pepper (D) said the city has been placed in a bad situation because it has made arrangements for the trolley to start service on the assumption that transportation money was forthcoming.

"The trolley is here; it has been ordered," she said.

Now the city will also need to deal with the implications of raising taxes on commercial properties. That's one of the few remaining tools it has to raise transportation funds, officials said.

A city-sponsored commercial-tax task force told officials that such a tax should be modest -- perhaps 2 to 4 cents more than the general real estate tax rate -- and that the city needs to find a way to reduce taxes elsewhere on small businesses, particularly retailers, so they can cope with an increased tax burden as the economy is slowing.

Fairfax and Arlington counties, which have many large businesses, are proposing increases of about 12 cents for their commercial property tax rates.

The council will take up the issue of the advertised tax rate at its meeting Saturday. The hearing on the budget will be April 14, and the public hearing on the tax rate is set for April 22.