In 1932, the state legislature stepped in, passing the first Pennsylvania law allowing local governments to levy income taxes, the Sterling Act.
The early 1930s were a dark time for Philadelphia. The Great Depression hastened the flight of a once-powerful textile sector. Only 40 percent of the workforce was employed full time and 90,000 families had lost their homes. City government deficits mounted.
In 1932, the state legislature stepped in, passing the first Pennsylvania law allowing local governments to levy income taxes, the Sterling Act. The broadly worded Act gave special powers to Philadelphia and Pittsburgh. Fast forward to 2016, Pittsburgh’s powers under the Act have been phased out, but Philadelphia still takes a 3.49 percent cut of wages earned by non-residents under purview of the Sterling Act.
According to a spokesman for Philadelphia Mayor Jim Kenney, the city collected $655.7 million in wage taxes from all non-residents in 2014, the most recent year data is available.
“If the four counties realize the amount of EIT [Earned Income Tax] revenues they’re missing, I think they’d be pretty appalled,” said Dan Rattigan, chair of the Upper Makefield Township board of supervisors and president of the Bucks County Association of Township Officials (BCATO).
BCATO has launched a lobbying effort to try to bring attention to what officials say are millions of dollars of revenues municipalities in southeastern Pennsylvania are losing. Their ultimate goal is to phase out or reform the Sterling Act.
A ton of municipalities in Pennsylvania have wage, or earned income, taxes. But in all other cases across the commonwealth, if you work in a place that has an earned income tax but live in another place that also charges an earned income tax, the town where you work sends what it takes out of your paycheck back to the government of the place you reside. Similar reciprocity agreements exist between states, say New Jersey and Pennsylvania, when it comes their state income taxes.
However, if you work in Philadelphia and live in say, Bensalem, no dice.
Residents of Bensalem that work in Bensalem pay that municipality a one percent earned income tax. If Bensalem residents work in another town with an earned income tax, say Newtown Borough, the municipality where the employee lives gets first dibs on the tax revenue. And even though the “commuter tax” collected by Philadelphia is larger than earned income taxes in places like Bensalem, because of the Sterling Act, none of that money flows back to the home municipality.
Because that tax isn’t also collected from Bensalem residents who work in Philadelphia, township government and the local school district are not able to collect an additional $2.7 million in annual tax revenue according Mayor Joe DiGirolamo.
“The inherent unfairness of this arrangement is exacerbated by the fact that this lost/unrealized revenue ultimately has to be made up by either the Bensalem wage earners that don’t work in Philadelphia, or…by a property tax increase,” he wrote in a March 3rd letter asking for residents and local officials to support changing the Sterling Act.
For Upper Makefield, a much smaller township, Rattigan said the amount of annual missed revenue is $440,000.
For municipalities and school districts around southeastern Pennsylvania dealing with stagnant education funding, ballooning pension costs and a limited ability to raise property taxes, having another lever to pull for revenue, the wage tax, is attractive. Changing the distribution of wage taxes paid to Philadelphia would give them more revenue without having to raise taxes themselves. As Pennsylvania’s tax code evolved and the Great Depression waned, there were several attempts to pull the plug on Philadelphia’s special tax, to no avail.
Amidst Philadelphia’s current climate of economic scarcity, even those burdened by the Act understand that the city and the its school district are not in a position to give up money.
“The reality is the City of Philadelphia has significant financial issues that they’re dealing with,” said Rattigan. “For them to forego revenues …could be potentially catastrophic.” He and DiGirolamo are advocating for a gradual phase out of the non-reciprocal aspect of the tax, which would allow for up to one percent of the wage taxes collected in Philadelphia to flow back to where workers live.
Philadelphia isn’t likely to let go of any cash without a fight. “The city continues to pay for services received by workers coming into Philadelphia, from streets and roads to public safety,” said Mike Dunn, spokesman for Mayor Jim Kenney. “We oppose any efforts to reduce the city’s revenues and taxing authority, especially when we continue to struggle with state cuts to our education system.” In the 1940s, city officials fought off attempts to strip them of this tax revenue by arguing that workers from the Main Line could “well afford” to pay the tax in return for “high pay” and “conditions we have in Philadelphia.”
Some municipalities may even see Philadelphia and the Sterling Act as a model for pulling out of their deep financial holes. In 2014, Scranton tried to impose its own .75 percent tax on workers who commute, earmarked to help pay that city’s pension deficit. Less than a day before the tax was to go into effect, a judge ruled the city could not selectively impose a wage tax; residents would have to pay too. Scranton decided not to go through with it.
So far, six municipalities in Bucks County have expressed a commitment to lobbying for the change, according to DiGirolamo. He said BCATO is doing its “due diligence” before going to Harrisburg, shopping around a petition to residents and encouraging other municipalities to pass resolutions in support of a change.
To educate residents on the Sterling Act, BCATO is hosting a meeting May 5th at the Doylestown Country Club.