To Pa. towns, Philly wage levy a taxing matter

If you live in Cheltenham but work across Montgomery County in Lansdale, like a good neighbor Lansdale sends your earned income tax back to Cheltenham.

Not so if you commute to Philadelphia. The city keeps all 3.5 percent of the city wage tax paid by non-residents.

That's a hit on tax revenue elsewhere, local officials say – to the tune of more than $19 million throughout of Montgomery County.

At a time when revenue is tight everywhere, communities throughout southeastern Pennsylvania are joining together to push for change.

"We're trying to right a wrong, basically," said Dan Rattigan, a supervisor in Upper Makefield Township and president of the Bucks County Association of Township Officials, which is leading a multi-county effort to change state law.

Dozens of municipalities outside of Philadelphia passed resolutions this spring urging lawmakers to amend state tax law and allow them to recoup up to 1 percent of income tax paid by residents who work in the city.

"It just makes sense," said Rep. Scott Petri (R., Bucks), who introduced two bills this week to make that change. "Our communities continue to face increasing costs and they're trying to figure out how to pay for them without increasing taxes."

But it's a proposal Philadelphia officials are sure to fight.

"We continue to oppose any efforts to reduce the city's revenues and taxing authority, especially when we continue to struggle with state cuts to our education system," said Mike Dunn, a spokesman for Mayor Kenney.

The state's Sterling Act, passed in 1932, grants Philadelphia - Pennsylvania's only first-class city – taxing powers that its surrounding communities do not have. In 1939 as it struggled to recover from the Great Depression, Philadelphia passed the nation's first city income tax. It is now among the highest in the country.

Surrounding municipalities can enact earned income taxes, capped at 1 percent. But they don't receive that money from residents who work in Philadelphia, or from workers who live in the city.

City officials argue that wage taxes go toward expenses such as road maintenance and public safety, and commuters use those services.

But officials outside the city say they have to pay the same bills in their own backyards.

"This probably shows some of the signs ... of the fiscal difficulties that suburban communities are facing," said Steve Wray, executive director of the Economy League of Greater Philadelphia, "and their frustrations and lack of flexibility in revenue sources."

Those pushing acknowledged in interviews this week that the region's economic health depends on Philadelphia, and insisted they do not want to hurt the city or its schools.

"All we're asking is for everyone to be treated equally," said Rep. Todd Stephens (R., Montgomery), who also introduced legislation this year to amend the Sterling Act. "I think it's going to be hard to defend preferential treatment for just one municipalitiy out of the thousands in Pennsylvania."

Either way, the impact is significant.

The city projects $1.4 billion in wage tax revenue in fiscal year 2017, according to Kenney's proposed budget. Remitting wage taxes to other communities would shave millions off that revenue stream.

Bucks County communities with earned income taxes lose more than $5.4 million annually to Philadelphia, said Jamie Gwynn, executive director of the Bucks County Association of Township Officials.

Northampton Township, for example, lost nearly $1.2 million to Philadelphia on the $232 million its residents earned in Philadelphia in 2014, according to Gwynn's analysis of tax data.

"On a budget of $30 million, $1.2 [million] is significant," said Larry Weinstein, chairman of the township's board of supervisers.

An analysis of Chester County tax data showed its municipalities and schools lost $8 million of would-be tax revenue to Philadelphia in 2014.

In Montgomery County, the impact is even greater. Its residents earned a total of $3.6 billion in wages in Philadelphia in 2014, officials say, and a change to the Sterling Act could bring $19.3 million more per year to it municipalities and $5.6 million to its school districts.

Pennsylvania school districts do receive some reimbursement from the state for money that their workers pay in Philadelphia wage taxes because it is factored into the education funding formula, Petri said. But the amount fluctuates, and he said his legislation would ensure they receive a more consistent amount.

Although Pennsylvania and New Jersey have a reciprocal tax agreement that exempts residents who work in another state from paying income taxes in both, New Jersey residents still pay Philadelphia city wage taxes.

But efforts to change the law for Pennsylvania communities have fallen short, even as the city wage tax has decreased in recent years and economic experts have suggested that the wage tax drives jobs outside of Philadelphia and has a negative impact on the city's economy.

Ernie Holling, a superviser in West Pikeland Township, Chester County, said he hoped the latest push for change could be successful if paired with other changes to Philadelphia's tax structure.

"I think the time is right to make the adjustment," he said.

Wray, of the Economy League, said local officials are reluctant to raise taxes, even when facing rising expenses. So it's logical, he said, for them to seek money already collected from their residents in Philadelphia.

"They don't have to raise taxes on somebody, that appears to be a highly attractive option," Wray said. "But there are other implications for it, particularly for the city."

lmccrystal@phillynews.com

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@Lmccrystal

Correction: A previous version of this article incorrectly described the obligation of New Jersey residents to pay Philadelphia city wage taxes.