What are the varied and myriad taxes collected by local governments? Try connecting the dots to draw a picture and the results would be... mind-boggling.
To describe Pennsylvania local taxation as a "system" of taxation
does violence to the English language. “Random collection” might be more
Municipal and school district governing bodies individually select from an extensive menu of tax options, including taxes on amusements, real estate transfers, business gross receipts, a person’s place of residence, a person’s place of work, a person’s income, and the title of a person’s occupation. Counties’ tax choices are much more restricted.
The authority for all local taxation lies within state law designating what taxes can be levied and specifying limits on rates and bases. Local governments must work within these parameters, but that still leaves a wide array of possibilities – leading to a disjointed and confusing system.
What tax generates the most revenue locally?
The real estate tax. The property tax accounts for about two-thirds of all local taxes. In fact, the property tax is, by law and for all practical purposes, the only source of tax revenue for almost every county government. It’s a tax on the appraised value of land and buildings owned by individuals and businesses. These values are established by county assessment offices that (ideally) appraise each property’s market value and then apply a predetermined ratio. That ratio, which determines the assessed value, could range 20-100% of market value, depending on the county. Each taxing jurisdiction then levies a uniform tax millage rate on the appraised value of each property. Because of differences in assessment policies and practices, millage rates can’t be compared from county to county. Further, county administrative practices across Pennsylvania regularly generate charges of unfairness.
The earned income tax, usually called the local wage tax, is levied by municipalities and school districts on wages, salaries, commissions, net profits, and other compensation (income from interest and dividends is excluded). This tax covers employed individuals, unincorporated businesses, partnerships, and professional persons and generally applies only to those who reside in the taxing jurisdiction. (Philadelphia is the biggest exception, but that’s another story. Click here for more on the wage tax in Philadelphia) Most Pennsylvania residents pay a maximum of 1% of their earned income, and the school district and the respective municipalities generally share the revenues evenly. Higher rates exist in Philadelphia, Pittsburgh, Scranton, and selected home rule municipalities, as well as several municipalities with special circumstances.
State law gives municipal governments and school districts the authority (with some exceptions) to levy a wide variety of other local taxes. These include:
- Millage-based occupation taxes – based on the locally-assessed value of occupations.
- Flat occupation taxes – levied at a flat rate on adult residents.
- Emergency and municipal services taxes – replaces the OPT and is levied on individuals employed within a taxing jurisdiction.
- Real estate transfer taxes – imposed as a percentage of the selling price of real property.
- Per capita taxes – levied at a flat rate on adult residents of the taxing jurisdiction.
- Local business taxes – levied on business gross receipts.
- Amusement taxes – based on admission prices to places of amusement, entertainment or recreation.
- Mechanical devices taxes – levied on coin-operated machines
- Local sales taxes – levied in Philadelphia and Allegheny counties at a 1% rate using the same base as the state; authorized by state law.
- Other special taxes – levied on a very limited basis across the state.
Each municipal government and school
district can mix different sources from this broad menu, but within a set of
complicated restrictions and guidelines – and with all sorts of exemptions.
Click here to see IssuesPA Scorecards on municipal tax collections
and school tax collections.
So what does all this mean?
With the myriad of local taxes, it’s easy to confuse what government entity is imposing which tax. The picture is complicated further by the fact that most local governments can and do use different sets of taxes than their neighbors. When combined with state taxes, this contributes to misunderstandings, a poor perception of Pennsylvania’s overall tax system, higher administrative costs, and lost accountability.
Bottom line? It’s not a good picture, indeed, for a state such as Pennsylvania pursuing economic competitiveness in 2006.