November 1 2007

Many Jurisdictions Plus a Complicated Process = $237 Million Lost Each Year

Pennsylvania is unrivaled in the number of jurisdictions -- almost 2,900 -- levying local earned income taxes. According to the Pennsylvania Department of Community and Economic Development (DCED), municipalities and school districts in the Commonwealth use 560 tax collectors to collect and distribute more than $1.9 billion in annual earned income tax revenue.

Tax collectors in Pennsylvania currently are working in what has been described as the most fragmented tax collection system in the country. A significant number of municipalities, 285, have a different earned income tax collector from their school district, substantially increasing duplication of effort for employees, employers and collectors, with the interaction of as many as three local tax collectors required at times. That fragmentation combined with lack of standardized practices, coordination, reporting and accountability among and between jurisdictions and collectors creates a complicated process.

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Severe fragmentation creates unnecessary burdens for employees and businesses and contributes to the perception that Pennsylvania is a difficult state in which to do business. This perception can hinder Pennsylvania’s ability to attract and retain needed jobs.

Fragmentation has a big impact on the bottom line. The Pennsylvania Economy League of Southwestern Pennsylvania estimates $237 million in local earned income tax revenue goes uncollected annually by municipalities and school districts. Lack of uniform withholding, varying thoroughness of tax collectors’ records, insufficient training and resources, and failure to coordinate all lead to loss of local revenue and pressure to increase taxes on those that do pay.

To put that annual loss of revenue in context: $237 million is enough to put 3,000 more police officers on the streets and 3,000 more teachers in our classrooms – all without raising any taxes.

How is $237 million lost each year? A significant number of employees do not file their local earned income tax returns with the correct tax collector(s), and some fail to file at all. Some tax collectors return taxes paid by employers in error, rather than forwarding those receipts to the correct tax collector, forcing businesses to handle such payments multiple times until they finally find their way to the correct taxing jurisdiction. Southwestern Pennsylvania, with its exceedingly large number of local tax collectors, is particularly hard hit by this problem.

The current ineffective and complicated system of local tax collection is confusing to businesses and residents, has high associated administrative costs, and forces up other tax rates or leads to curtailed services. Again, unnecessary fragmentation and complexity put our region at a competitive disadvantage as companies consider where to locate or expand their operations and create jobs. In a 2004 report, DCED recommended centralized, statewide collection of the earned income tax, but legislative support for such a highly consolidated tax collection plan was not forthcoming despite the apparent benefits. Rep. David Levdansky (D – Allegheny) introduced House Bill #1550 and Sen. Jane Earll (R – Erie) introduced the companion Senate Bill #1063 this summer, which would bring uniformity, clarity and fairness to local income tax collection. The bills have bi-partisan support.

Important provisions of both bills include:


  • consolidating the 560 collectors into 66 tax collection districts roughly congruent with counties, but not making EIT collection a function of county government; 
  • requiring that employers withhold all local income taxes imposed on the compensation of their employees and to remit those taxes to only one collector, even if an employer operates in multiple counties;


  • establishing uniform withholding, remittance and distribution requirements; 
  • requiring that the Commonwealth issue one set of rules and regulations that applies to all collectors, taxpayers and employers; 
  • requiring that DCED develop uniform forms, notices, reports, returns, schedules and codes for school districts, municipalities and tax collection districts; 
  • instituting a continually updated, comprehensive tax register, maximum twice-yearly rate changes, a uniform definition of taxable income and a system of appeals;


  • strengthening reporting requirements so that each tax dollar is tracked from the time it is withheld until it is received by the appropriate taxing jurisdiction; 
  • requiring that tax collectors keep a record of all public monies received and distributed, and submit monthly reports to each taxing jurisdiction and the tax collection district that must be reconciled with other records in an annual audit; and 
  • providing for more accountability, transparency, oversight and enforcement.

Employers differ in local tax withholding practices for employees. Some withhold only for employees who reside in the jurisdiction where their workplace is located, as is required by state law. Others provide voluntary withholding for all employees. Employers that do not currently provide voluntary local tax withholding for all employees will need to adapt their payroll processes if this proposal is successful.

The proposed legislation seeks to minimize the impact of new administrative requirements by introducing uniformity to the process. Employers that already provide voluntary withholding will benefit from the streamlined process and may be able to invest withholdings short-term and mitigate additional administrative costs. A welcomed benefit for citizens, the filing of quarterly income statements and payments will no longer be required of employees whose local tax was previously not withheld by employers. The bills provide for full implementation of consolidated local income tax collection to start in 2011 or 2012, with the prior year being a transition year.

--Article contributed by the Pennsylvania Economy League of Southwestern PA