Pennsylvania local income tax collection is complex, fragmented and inefficient. Pennsylvania is unrivaled in the number of jurisdictions levying local income taxes, which - at almost 2,900 - more than quadruples the state with the next highest number. About 560 local Earned Income Tax (EIT) collectors are used to collect and distribute over $1.9 billion in annual revenue. Lack of standardized practices, coordination, reporting and accountability among and between jurisdictions and collectors plague the process. The severe fragmentation creates unnecessary burdens for residents and businesses. Such complexity contributes to the perception that Pennsylvania is a difficult state in which to do business, hindering its ability to attract and keep needed jobs.
Loss of revenue hurts our competitiveness. A recent PEL review estimated that as much as $237 million in EIT tax revenue is not collected annually by municipalities and school districts. Lack of uniform withholding, varying thoroughness of tax collectors’ records, training, and failure to coordinate lead to a loss of local revenue and pressure to increase other taxes on those that do pay. Southwestern PA, with a comparatively large number of local earned income tax collectors, is particularly hard hit by this problem. This ineffectiveness is confusing to businesses and residents, has high associated administrative costs and forces up other tax rates or curtails services. This puts Pennsylvania at a competitive disadvantage as companies consider where to locate or expand their operations and create jobs.
Consolidating the collection of earned income tax into 69 new locally established collection bureaus provides significant improvement of collection efficiency and reduction of waste.
The collection of earned income tax collection within these new tax collection districts would be through locally established tax collection bureaus: nonprofit public entities for the administration and collection of EIT. These bureaus would not be a function or department of existing county government, but an independent public bureau to service the consolidated EIT collection district.
In addition, consolidation of collections would not affect the status of elected municipal tax collectors whose primary duty is to collect local real estate taxes. The consolidation entailed in Pennsylvania Senate Bill 1063 has been described as “a balance between state uniformity and local autonomy” and exemplifies progress that’s consistent with the Economy League’s efforts to improve government efficiency in Pennsylvania. Senate Bill 1063 legislates the principles contained in the PEL review.
Senate Bill 1063 includes a number of important improvements that will:
- Consolidate the system into 69 independent tax collection districts roughly congruent with counties, but not a function or department of county government;
- Establish uniform withholding, remittance and distribution requirements;
- Require that employers withhold all local income taxes imposed on the compensation of their employees and remit those taxes to only one collector, even if an employer operates in multiple counties;
- Institute a continually updated, comprehensive tax register, maximum twice-yearly rate changes, a uniform definition of taxable income and a system of appeals;
- Strengthen reporting requirements so that each tax dollar is tracked from the time it is withheld until it is received by the appropriate taxing jurisdiction;
- Require that the Commonwealth issue one set of rules and regulations that apply to all collectors, taxpayers and employers;
- Require that the Commonwealth develop uniform forms, notices, reports, returns, schedules and codes for school districts, municipalities and tax collection districts;
- Require 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 provide for more accountability, transparency, oversight and enforcement;
- Allow full implementation to start in 2012 with 2011 being a transition year.
The recovery of more than $237 million each year in uncollected local EIT may result in lower real estate tax burdens. Citizens and businesses throughout Pennsylvania can benefit dramatically from the expected increase in predictability and uniformity of EIT collection and reduced reporting requirements for business and individuals. Businesses and taxpayers should be aware of this important proposal to reduce the governmental burden on Pennsylvania citizens and create a business climate that can compete with other states.
Note: SB 1063 passed the PA Senate in May. The House Finance Committee considered the bill on June 16th and sent it to the full House for a vote.
Since 1936, the Pennsylvania Economy League, Inc., an independent, nonpartisan, nonprofit, public policy research and development organization, has provided critical information, perspective and support to the business, civic, and governmental leadership of our communities and our state in their efforts to make Pennsylvania a better place to live, work and do business.
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