Philly’s wage tax is the highest in the nation. Here’s everything you need to know about it.
Philadelphia has the highest local wage tax in the country. Why is that the case, and what could city officials do to change it?
Philadelphia has the highest local wage tax in the country — and the city relies on it for about 44 percent of its annual revenue.
“No other jurisdiction comes particularly close in levying a wage or income tax at the local level at such rates,” said Jared Walczak, a senior policy analyst for the Tax Foundation.
The tax rate, currently 3.8809 percent for Philadelphia residents and 3.4567 percent for nonresidents who work in the city, gets reduced a little bit every year. But don’t expect big savings — for someone with a $50,000 salary, the reductions planned for fiscal year 2020 would mean about $5 less in wage taxes. The rates are expected to decrease by a quarter of a percent, beginning July 1.
A reader asked about the wage tax through Curious Philly, a forum through which Inquirer reporters answer questions. So here’s everything you need to know about the tax, planned reductions in its rates, and arguments for and against more dramatic changes.
Why is Philadelphia so reliant on the wage tax?
In 1939, Philadelphia became the first city nationwide to implement a wage tax, at a rate of 1.5 percent. The tax was made possible by the Sterling Act, a Depression-era state law that allowed the city to earn revenue by passing special taxes.
The wage tax grew over time, reaching its highest rate of 4.96 percent for residents in 1985. The city first reduced it in 1995 under Mayor Ed Rendell, who said at the time that cuts were needed to make Philadelphia competitive and encourage job growth.
Small reductions, along with cuts to the net income portion of the Business Income and Receipts Tax, have continued. But it remains the highest in the nation; New York City’s top rate, paid by the highest earners, is slightly lower than the current resident rate in Philadelphia.
The Pennsylvania Intergovernmental Cooperation Authority (PICA), established in 1991 to help the city recover from a financial crisis, operates by collecting a 1.5 percent wage tax that is part of the city’s overall rate. PICA functions as an oversight agency and approves the city’s five-year plan annually.
What is public opinion of the tax?
A recent survey conducted for The Inquirer by SurveyUSA found that Philadelphia registered voters are split on whether the tax should change. Asked whether it should stay the same, increase, decrease, or be eliminated, 34 percent of respondents said it should stay the same, while 30 percent said it should decrease, and 20 percent want it eliminated.
The wage tax has long been considered a possible factor in driving businesses and residents away from the city.
“Our rates, they are high, they’re kind of spooky for anyone who wants to come here,” Finance Director Rob Dubow said at a City Council hearing this month. “So reducing the rate is important, and even if the reduction in a single year isn’t really large, it’s part of a continued commitment, and over the years those incremental reductions have added up to something major.”
Why not make a larger reduction in the wage tax?
Because wage-tax collections are such a large portion of the city’s revenue, Dubow said, reducing it more than a fraction of a percentage per year would be a strain to the city’s budget.
“It’s always a balancing act between how much money you want to commit to wage-tax reduction and how much you want to commit to various initiatives we have in our five-year plan,” he said.
The planned reductions in the five-year plan in the wage and business taxes will result in losing an estimated $136 million in revenue through fiscal year 2024, according to city spokesperson Mike Dunn.
A more drastic change, as many officials and local leaders have long called for, would require a rethinking of the city’s tax structure.
A different tax structure wouldn’t necessarily be a bad thing for the city budget, Budget Director Anna Adams told Council members.
“We’ve seen during the recession that if we’re too dependent on a highly volatile tax it also causes some instability," she said. “So I think trying to get that balance between more stable taxes like property tax and a more volatile tax like business and wage tax is something that we need to probably strike a better balance than we have.”
There are also arguments for and against changing the wage tax.
Councilman Allan Domb said the high taxes deter businesses from coming into the city and can cause people to move to the suburbs.
Councilwoman Helen Gym pushed back on those arguments at last week’s budget hearing, saying it would be unrealistic to replace the wage tax entirely by taxes on Philadelphia residents, such as the property tax.
“Many people who work here live in other places, but they take the benefits of our city,” she said, such as using public transit, driving on roads that are in need of upkeep, and relying on police services.
Are there other proposals to rethink the city’s taxes?
The city is reviewing its tax incentives to determine if they could be changed to better stimulate job growth. Domb said he thinks tax incentives are just attempts to offer relief from the high tax burden.
“Is there an appetite in the administration to deal with the cure vs. the Band-Aid?” Domb asked at last week’s budget hearing. “The real cure is the city wage tax. ... Unless we’re going to attack these issues we’re going to keep having Band-Aids.”
Dubow agreed that the study of tax incentives is worthwhile and raises a legitimate question: “Would we be better off with lower [tax] rates and fewer incentives?”
Why have past proposals for reform failed?
Over the years, proposed tax reforms have failed to come to fruition. Center City District president Paul Levy and Gerard Sweeney, president and CEO of Brandywine Realty Trust, proposed imposing a higher tax rate for commercial properties than for residential properties, and would use it to offset lower wage and business-income and receipts taxes.
Levy and Sweeney’s plan would have required an exception to state law requiring tax rates to be uniform. A bill to do that failed to get traction in Harrisburg last year.
The state’s uniformity clause is often cited as a roadblock to tax reform in Philadelphia, especially when comparing its tax structure with other big cities. In a growth plan announced this month, Mayor Jim Kenney said working with state lawmakers to change the uniformity clause is a priority.
What about municipalities outside the city?
Most other municipalities in Pennsylvania have a 1 percent cap on earned income tax rates. And many officials in counties and towns outside of Philadelphia are not fond of the city’s wage tax.
That’s because other municipalities can’t collect income tax money from residents who work in Philadelphia.
If a resident works in one municipality but lives in another, the town where the person works sends the earned income tax payment back to the town of residence. But Philadelphia keeps the taxes paid by nonresidents.
Officials in Bucks, Montgomery, Chester, and Delaware Counties have lobbied to change state law so they can recoup that money, but Philadelphia officials have opposed such a change.