April 1 2005

Collecting taxes is a necessary function of local government. In Pennsylvania, who does it and how it is done aren’t consistent across government entities. Here’s a primer from IssuesPA.

(April 2005) Tax collection has been a concern among government efficiency advocates for a long time. But it hasn’t registered on the radar screen for mainstream Pennsylvania until recently, when several newspapers in Pennsylvania weighed in with some stories on the issue. To explore the issue of tax collection, IssuesPA put together some background information: Who collects the taxes? What’s good - and what’s not - about the current system? And what’s the future outlook?

So who collects local taxes?

The list of who collects local taxes in Pennsylvania is long and complicated. Almost every municipality has a locally elected tax collector for real estate property taxes. Exceptions are the 56 cities and home rule municipalities that appoint a tax collector. In first class townships, the locally-elected treasurer generally acts as tax collector. The Department of Community and Economic Development counts nearly 2,400 elected tax collectors across the state. Often, these elected municipal tax collectors also collect real estate taxes for the school district and county. A school district with multiple municipalities often will have just as many real estate tax collectors.

However, local governments levy more than just the real estate tax. Collecting Pennsylvania’s second largest local tax source, the earned income tax, involves a different set of collectors. State law gives municipalities and school districts the right to select their own collector for all non-real estate taxes, and they’ve exercised that right in a variety of ways. A diverse group of individuals and organizations collects these taxes, including municipal or school district employees, non- profit joint collection agencies, the local elected real estate tax collectors, private for-profit collectors, or another taxing jurisdiction. There are more than 550 earned income tax collectors.

Initially, it’s the employer who must decipher the complicated local tax system - as an individuals employer generally is the one to figure out the local earned income tax withholding. Multiple rates, multiple tax collectors, and multiple tax bases means a burden on employers - especially small businesses that may not have the staffing capability to meet the local tax obligations.

What works - and what doesn’t - in the current system?

A multitude of tax collectors spread across Pennsylvania ensures that taxpayers have easy access, giving ample opportunities to ask questions and resolve differences easily. And if citizens believe their property tax collector performs poorly, they can have their say at the polls every four years.

In addition to the election process, tax collectors may be accountable through audits, although that is more at the discretion of the taxing authorities. Property tax collectors may be audited by the county controller or other tax authority - or the local government may hire an external, independent auditor. Income tax collectors are subject to an independent audit annually. However, because tax collectors are not considered agents of the state, they are not subject to the disclosure requirements of the Right-to-Know Act. Records can be accessed by the public through the taxing authority eventually - but are not required to be accessible directly from the tax collector.

The sheer number of local tax collectors suggests, however, that Pennsylvania’s fragmented approach comes with a hefty price tag. Costs for collecting the earned income tax are documented in an August 2004 report of the Department of Community and Economic Development, Pennsylvania’s Earned Income Tax System. This report says Pennsylvania’s taxing jurisdictions could save $100 million by taking steps to change the system, such as consolidating collection operations, improving withholding procedures and requirements, advancing the distribution of non-resident tax collections, standardizing reporting requirements, revising and standardizing administration and enforcement, defining the tax base more clearly, and providing additional education and training for taxing jurisdictions and tax collectors.

The Pennsylvania Economy League has documented excessive costs in collecting real estate taxes. Its survey of the cost of tax collections a 12-county area in central and eastern Pennsylvania found that taxing authorities in these counties could save nearly $3 million just by lowering the cost of compensation for all tax collectors to the lowest rate reported in the region. Compensation for tax collectors range from .09% to 17.06% of taxes collected. These savings don’t consider any additional reductions that could be achieved through consolidation or other efficiency-related changes.

Are there changes on the horizon?

Changes come hard. Pennsylvania’s system of collecting taxes is deep-rooted, going back centuries in the case of real estate tax collection. Insufficient awareness of the hidden costs of tax collection by most taxpayers, the role tax collectors play in local politics, the strength of the tax collector lobby at the Capitol, and the desire of many locally elected officials to retain tight control over their tax collection agents: all reasons why change is unlikely. The legislature hasn’t seriously considered changing the system and, in fact, made it more complicated and fragmented when it passed Act 72 of 2004, which will use the anticipated receipts from slot machines to provide local tax relief.

Do you get what you pay for from your tax collector? It’s certainly a question worth considering.