In the most recent township meeting notes, there was discussion of a report from Keystone Collections about the potential impact of a Local Earned Income Tax. I thought I’d delve into the complexity of the Local Earned Income Tax. I’m not a tax lawyer, so I’m probably missing some of the intricacies. Like most legislation, we’re wading into a murky, murky mess of decades old, badly written legalese modified by decades of court opinions.
Although its been modified by later legislation, the Local Tax Enabling Act of 1965 seems the clearest basis for the tax.
Section 311. Limitations on Rates of Specific Taxes.–No taxes levied under the provisions of this chapter shall be levied by any political subdivision on the following subjects exceeding the rates specified in this section:
(1) Per capita, poll or other similar head taxes, ten dollars ($10)…
(3) On wages, salaries, commissions and other earned income of individuals, one percent.
(4) On retail sales involving the transfer of title or possession of tangible personal property, two percent.
(5) On the transfer of real property, one percent…
(7) Flat rate occupation taxes not using a millage or percentage as a basis, ten dollars ($10).
(8) Local services taxes, fifty-two dollars ($52).
I’ve excerpted parts of it here, but we see the $10 per capita tax and the $52 local services tax that people are probably familiar with. But line 3 gives a tax on wages, salaries, commissions and other earned income of 1%.
Section 317 is also important,
Section 317. Payment of Tax to Other Political Subdivisions or States as Credit or Deduction; Withholding Tax.–(a) Payment of any tax to any political subdivision pursuant to an ordinance or resolution passed or adopted prior to the effective date of this act shall be credited to and allowed as a deduction from the liability of taxpayers for any like tax respectively on salaries, wages, commissions, other compensation or on net profits of businesses, professions or other activities and for any income tax imposed by any other political subdivision of this Commonwealth under the authority of this act.
This section contains several lines whose purpose is to insure that if you pay a local earned income tax in one place, you are exempt from having to pay it in another. One more section in section 512 is critical,
(iii) Employees working in the City of Philadelphia shall be exempt from the provisions of this section to the extent they are subject to the act of August 5, 1932
This line means that if you pay earned income tax to Philadelphia, they get to keep it. Philadelphia had an earned income tax long before any other municipality so they’ve been grandfathered in. If you work in another state, you’re also exempted because Pennsylvania can’t require entities outside its borders to collect its taxes.
There’s later laws involving school districts, but that’s even more complicated. I think the end result was that the school district can hold a referendum to collect half of the 1% Earned Income Tax that a municipality could collect.
How Does It Work
Once a municipality imposes an Earned Income Tax, they can collect up to 1% from both residents who live in their municipality as well as nonresidents that work in their municipality. But the catch is that even if the municipality a nonresident lives in collects the EIT, their home municipality gets to keep the money. So if I live in South Media and work just a few streets over in Media, Media is currently collecting the 1% from my wages. If Nether Providence passed an EIT ordinance though, that money would be kept in Nether Providence and Media would get nothing.
The big asterisk is that Philadelphia, Delaware and New Jersey are exempted. If you live in Nether Providence and work in any of these locations, they get to keep the taxes, Nether Providence gets nothing.
But the big attraction of passing this tax is that some number of people that live in Nether Providence already pay the tax elsewhere. Once Nether Providence passes it, we get to keep the money here instead of it going elsewhere and the people paying that tax will not be paying any more than they do now. Nether Providence gets tax revenue at the expense of other municipalities nearby. This new revenue would be used to offset property taxes. Because the 1% tax would increase with wages automatically, future property tax increases would be smaller numbers. But you’d still be paying more, its just the politicians wouldn’t have to vote to increase it – it’d happen automatically.
The downside is that people that work in municipalities that don’t currently collect the tax – like Swarthmore – would be paying a new 1% tax. Another downside is that noone really knows where Nether Providence residents work. How many work in Philly? Media? Swarthmore? That’s apparently not known (although obviously the state must have records) and the report’s estimates are essentially wild guesses. The other downside is that income taxes are much more susceptible to recessions than property taxes. If employment drops mid-year, earned income tax suddenly plummets whereas property taxes are fixed and pretty much guaranteed revenue for the municipality. Therefore the township would have to collect enough revenue that it has a buffer against downturns.
Who Collects It Now
This website allows you to look at who currently imposes an EIT.
Only two school districts in DelCo collect it – West Chester (which includes Thornbury) and Penn Delco.
The municipalities are:
- Chester City (3.75% – they are a city with a home rule charter so not bound to the 1%)
- Chester Twn
- Darby Boro
- East Lansdowne
- Lansdowne (0.5%)
- Marcus Hook
- Prospect Park
- Sharon Hill
I could not find a ready answer to what happens in Chester City’s circumstance. If you work there, a 3.75% tax has to be taken from your payroll, but I’m not sure who gets it – does your resident township keep the 3.75%? Do they keep 1% and Chester gets the excess? There wasn’t a clear answer I could easily find, I’d have to ask a tax lawyer.
Winners and Losers
The big attraction is that if Nether Providence passes an EIT, it gets new revenue at no cost to residents – among those that work in places like Media. Free revenue (although bad news for Media).
So the big winners are people that already work somewhere that collects an EIT like Philly or Media. You’re not paying any more now, yet your property tax drops. Big win! Philosophically this means that people working in Philly or other states are freeloaders. They aren’t paying any income tax to our municipality and wouldn’t pay much property tax either.
Another winner is the wealthy. Those with incomes derived from investments, which is not earned income, won’t be paying anything on that income. But their property taxes go down. Win!
Retirees benefit for the same reason. They have no earned income, but see their property tax decline. Good for them.
But there are losers. Working families would see a hefty tax rise. At least you would if you don’t work in the places that already have EITs.
So generally older, wealthier families would win out and some lower income families would end up paying more. Currently in America, wealth is increasingly concentrated among the Boomers and younger generations are not on track to accumulate the wealth our parents and grandparents had at our age. So its maybe not the ideal time to propose a tax measure that would place a further tax burden on working class millennials to benefit older, wealthier residents.
One last point to remember is that township taxes are only approximately 1/4 of your property tax bill. In a very rough calculation, I estimate that a 1% earned income tax would be enough to offset maybe 10-20% of your overall property tax bill.
The outstanding question is, would the “free” revenue coming from those already paying the tax elsewhere offset the regressive nature of this tax? I’m skeptical. With the exception of Media and maybe Brookhaven, how many Nether Providence residents work in the municipalities listed above? I’m skeptical its many and I find it hard to believe the report is realistic (which keep in mind was produced by a company for free in the hopes they’ll be hired to eventually collect an EIT). It also seems like many of the higher income earners I know work in Philly and Wilmington, so the people that’d pay the most wouldn’t end up contributing.
The state legislature needs to look at overhauling the 1965 law. The rates set there haven’t increased in almost 5 decades. Its time to either scrap these minimal sources of revenue (per capita, local services tax, etc.) or make it more meaningful (they are regressive taxes, so please scrap them). Its also time to end Philadelphia’s special exemption. This would benefit the towns nearest it – like Upper Darby, Darby and Glenolden and prevent a situation where township residents could end up living in the suburbs while paying almost nothing to their home municipality.