Act 72 of 2004, the Homeowner Tax Relief Act, targets some of the anticipated revenues from slot machines for local property tax relief in Pennsylvania. However, this new law impacts more than homeowners’ tax bills. IssuesPA investigated the impact on local tax collection.
(April 2005) Act 72 authorizes using receipts from slot machines to pay for local tax relief in communities throughout Pennsylvania. Yet in addition to the headline-making issues of property tax relief and the back-end referendum, Act 72 could further complicate Pennsylvania’s fragmented tax system, making it even more difficult and costly to collect local taxes.
Three key factors make tax collection difficult: multiple tax rates, multiple tax collectors, and multiple tax bases. The dilemma begins with the collection of state and local income taxes. Currently, businesses must collect and remit local earned income taxes to local tax collectors and the state income tax to state government. The state income tax is the easy part - one taxing authority, one rate, one tax base. However, in Pennsylvania, calculating local taxes is much more complicated and often creates added costs for the initial tax collector - employers.
What’s the impact on local income taxes?
State law allows local governments, including municipalities and school districts, to use a variety of earned income tax (EIT) rates. Current state law permits most communities to impose a rate up to 1% on residents or non-residents who work within the local government boundaries, and that 1% often - but not always - is shared by the school district and the municipality. Other municipalities and school districts can have higher rates for a number of reasons, such as:
1. Separately legislated limits in Philadelphia, Pittsburgh, and Scranton;
2. Special provisions for financially distressed communities;
3. Municipalities that purchase and preserve open space;
4. Home rule municipalities; and
5. School districts that have elected to trade higher earned income taxes for lower property and occupational assessment taxes.
Earned income tax? Personal income tax?
Buried in Act 72, either explicitly or implicitly, are provisions that will add significantly to the number of tax rates. First, rate changes will be numerous. To qualify for gambling dollars, school districts must increase their EIT rate by at least 0.1% - whether or not they levy an EIT currently. School districts could adopt - or may be required by referendum to adopt - a greater EIT rate to provide additional property tax relief. The only limit on that rate is the ceiling for meeting the full homestead exemption.
Act 72 also permits school districts to impose an income tax using the state personal income tax (PIT) base instead of a wage tax base. A PIT would have yet another different rate to raise the same revenue as an EIT - and would tax more kinds of income than the EIT. For districts selecting this option, there will be a PIT rate for the school district and an EIT rate for the municipality.
What’s the impact of all these potential new taxes and rates? The potential for thousands of municipal and school district income tax rate combinations across Pennsylvania’s communities.
Currently, there are more than 550 earned income tax collectors; 99 school districts use more than one. About 80% collect taxes for only one or two taxing jurisdictions. There’s no consistency statewide in who collects the tax: it ranges from individuals collecting for a handful of jurisdictions to contracted private companies collecting under individual contracts or under contract with multiple taxing authorities, consolidating their efforts and spreading collection costs. The result is a lack of consistency. Employers with multiple locations and with employees living in different municipalities may have to deal with hundreds of tax collectors, a situation almost unique to Pennsylvania.
Adopting the provisions of Act 72 won’t change the current complicated system. In fact, it’s possible yet another tax collector could be involved. Some EIT tax collectors may not be prepared to take on a new local PIT tax.
Further, the current tax base isn’t defined consistently across boundaries. The definition of "income" effectively depends on where you live. For example, an employer with employees in different school districts, some of which levy the EIT and others that levy the PIT, would have to decipher different withholding rules for multiple employees.
So how does this all add up?
Multiple rates, multiple tax collectors, and multiple tax bases mean a burden on employers’ resources. These are costs generally not borne by their competitors in other states. For small businesses, it’s even a bigger problem because they may not have the staff capable to meet all local tax obligations.
So what’s the answer? In the short term, taxpayers and business must play the cards they’re dealt. Act 72 adds to the size of the deck. For municipalities and school districts using new dollars to pay for services, the costs of collecting taxes will increase, leaving fewer funds for education, property tax reduction and other services. The even larger costs of added burden to business will go unmeasured. These are costs that have an impact beyond dollars and cents for schools.