U.S. Supreme Court decision imperils a portion of wage tax in Philadelphia and Wilmington; Officials unwilling or unable to estimate likely budget impact

Thanks to a ruling this year from the Supreme Court of the United States, Philadelphians who earn out-of-state income may qualify for a break on their city wage taxes – a break that could cost the city untold millions in tax revenue.

The Supreme Court invalidated a provision of Maryland’s income tax scheme in May, placing the constitutionality of similar provisions of Philadelphia’s income taxes – the wage taxearnings tax, and net profits tax— into question.

At issue is the possibility of a double taxation on income Philadelphians earn in other states.

But more than six months after the Supreme Court’s ruling, Philadelphia officials cannot say what the budget impact would be if—as legal experts believe—local courts require Philadelphia to provide credits to residents who currently pay income taxes to other states.

In Comptroller of the Treasury of Maryland v. Wynne the Court reached a 5-4 decision crossing ideological divides, ruling that Maryland’s failure to provide a credit on the county segment of the state income tax violated the Constitution by exposing residents with out-of-state income to the risk of double taxation.

Wynne also imperils Wilmington’s earned income tax and similar taxes across the United States. Philadelphia and Wilmington employ nearly identical tax structures; only the rates are noticeably different. Philadelphia taxes residents’ income 3.9102 percent regardless of where it was earned, and taxes non-residents working in Philadelphia 3.4828 percent. Wilmington taxes residents and commuters alike 1.25 percent.


The Court has long held that the Constitution’s Commerce Clause, which gives Congress the power to regulate commerce “among the several states”, contains an implicit, negative corollary prohibiting states from discriminating against interstate commerce. It’s why states can’t impose tariffs. When a state uses its tax scheme to prefer in-state activities over interstate activities, that also violates the dormant Commerce Clause.

On behalf of its counties, Maryland imposed a 3.2 percent income tax on residents, regardless of where it was earned, on top of a state income tax that maxed out at 5.75 percent. Maryland also taxed non-residents on the income they earned in each county. Maryland taxpayers received credits on their state level income taxes for income taxes they paid to other states, but offered no relief from their county level taxes.

Most state income taxes provide a credit for income taxes paid in a different state. Those credits prevent double-taxation, or paying the same tax in two states on the same income. Without the credit, the Maryland tax exposed residents to the risk of double taxation: If another state adopted the same tax scheme, taxpayers who worked across state lines would pay both the residential tax and the commuter tax, more than their neighbors who worked in-state.

“The Philadelphia tax works identically to the tax invalidated in Wynne”, said Ruth Mason, the Hunton & Williams Professor of Law at the University of Virginia. Mason, who focuses on tax law, co-authored amicus brief in Wynne with Penn Law professor Michael Knoll.

As far as the Constitution is concerned, local laws and state laws are essentially the same, so a city tax can violate the dormant Commerce Clause the same as a state tax.

In another amicus brief on behalf of the International Municipal Lawyers Association, former Solicitor General Paul Clement warned that Maryland’s income taxes operate like dozens of other state and local taxes, including Philadelphia’s earnings tax.

While the Philadelphia wage tax has faced numerous legal challenges in the past, none had previously challenged the tax for violating the dormant Commerce Clause.

In response to Wynne, Maryland now offers taxpayers credits on the county-level tax to match income tax payments made to other states.


While hearings have not yet been scheduled, tax appeal petitions based on Wynne have been filed before the Philadelphia Tax Review Board, said Stewart Weintraub, attorney for one such petitioner. Weintraub, acting on his client’s wishes, did not release the petitioner’s name.

Employees at the Tax Review Board told PlanPhilly that pending petitions could not be provided to the press.

Weintraub, who chairs the tax practice at Chamberlain Hrdlicka and formerly served as chief of the tax division in the Philadelphia Law Department, expects to appeal any Tax Review Board decision to the Court of Common Pleas, which—unlike the Tax Review Board—has the authority to rule on the law’s constitutionality.

Assuming no additional appeals, the entire process could take upwards of two years. Further appeals could add two to three more years to the process.

Weintraub’s client might not need to wait that long, though. Should the petitioner ultimately prevail – Weintraub said he was merely “cautiously optimistic”, but legal experts interviewed for this story were far more certain – the city of Philadelphia would be liable for tax credits going back to May, when the Supreme Court issued its opinion in Wynne.

Appeals from the city Law Department would only delay the inevitable.

Philadelphia could take proactive measures to provide credits, as Iowa and Kansas already have.

“I think the [Revenue] department knows there is a problem,” said Steve Blazick, a partner in Reed Smith’s state and local tax group. “I think they’re kicking it down the road, [for the Kenney administration.]”

“I think they’ll have to take some action in the new year and address out-of-state taxes,” Blazick added.

While Philadelphia and Wilmington would have “a lot of discretion in how to remedy [the] unconstitutionality,” said Mason, offering a credit for income taxes paid on out-of-state income would be “the easiest way to fix the problem with the tax.”

Already, Maryland and a few other affected states are doing just that. Kansas issued guidance on credits in August, as did Iowa in November.


Assuming Philadelphia and Wilmington follow the example set so far and offer credits for out-of-state income taxes, a small, yet not insignificant, subset of taxpayers will benefit.

For most Philadelphia residents—even those who work in different states—the likely changes will have no impact on their tax bill.

Only Philadelphia and Wilmington residents who pay income taxes to another state (or out-of-state locality) will be eligible.

That will probably exclude Philadelphia residents who work in New Jersey. Pennsylvania has a tax reciprocity agreement with New Jersey, which means residents of one state don’t have to file or pay income taxes in the other.  

In addition to New Jersey, Pennsylvania has reciprocal agreements with Indiana, Maryland, Ohio, Virginia and West Virginia.

In Maryland, similar reciprocal agreements with Virginia, West Virginia, and Washington, D.C. has limited refund eligibility.

Requiring an out-of-state credit would, however, benefit Philadelphia residents who travel out-of-state frequently for work.  Like suburbanites today who usually work in Philadelphia but occasionally travel elsewhere, they would be able to track how much of their income is earned outside the state and gain a credit.

Philadelphia residents who really do treat the city as New York’s sixth borough might have the most to gain. New York imposes some of the highest income taxes of any state.

The likely credits would also be a boon to partnerships and LLCs earning out-of-state income and are either based in Philadelphia or Wilmington, or have partners living in those cities. They would get credits for the net profits tax. In 2014, Philadelphia received around $27.5 million from the net profits tax.


Wynne has been costly for Maryland’s county governments. An estimated 55,000 residents are eligible for refunds for overpayments in the last few years that could total $200 million. Going forward, Maryland counties will forego $42 million a year in revenue. Montgomery County, Md., with the highest share of residents earning out-of-state income, expects a loss of $24 million a year.

So what does this mean for Philadelphia’s public coffers? How much does the city stand to lose?

City officials either cannot or will not say. The Nutter Administration declined repeated requests for comment.

If the City cannot provide this information, it cannot do so despite having had six months since the Court handed down its opinion to crunch the numbers. Whether that is a failure of foresight – an inability to recognize Wynne’s implications for Philadelphia – or a failure of financial record keeping – an inability to calculate an estimate due to missing or inaccurate tax revenue data – PlanPhilly cannot say.

Because City officials won’t tell us.

It isn’t even clear what portion of Philadelphia’s tax revenues come from Philadelphia residents working outside the city, let alone the state.

PlanPhilly obtained the following figures based on data provided by the City Revenue Department to Pennsylvania Intergovernmental Cooperation Authority (PICA), which purports to break down wage tax revenue among Philadelphia residents working in Philadelphia, non-residents working in Philadelphia, and Philadelphia residents working elsewhere. PICA provided the following approximated breakdown based on the City’s payments file for 2014 and the percentage of residents and non-residents from the 2013 W-2 file; “residents who work outside of the city pay the earnings tax”:

Wage Tax Receipts 2014    

% of total collections

Residents live here, work here



Non-Residents – work here, live elsewhere    



Total Wage Tax Collections CY2014


Earnings tax:  $ 15,394,343

These figures would suggest a very small budgetary impact. The only problem is that these numbers are undoubtedly inaccurate.

According to commuting data from the Census Bureau, around 144,000 Philadelphia residents commute outside the city to work, including 32,000 that travel outside Pennsylvania. Using annual mean wage data from the Bureau of Labor Statistics, all Philadelphia residents working outside the city should pay somewhere closer to $290 million a year, not $15 million.

It’s likely that earnings taxes from Philadelphia residents working outside the city were mislabeled and included in the $1 billion figure. Or Philadelphia may be failing to properly collect the earnings tax, which is self-assessed by the taxpayer.

Earlier this year, Philly.com reported that the Revenue Department faced difficulties ensuring compliance with self-assessed taxes, such as the wage and earnings tax, and that it was still “working on” sharing tax return with state and federal authorities.

Wilmington officials also did not respond to requests for comment sent. Wilmington’s income tax is the city’s largest revenue stream.

As the Kenney administration takes office next month, one of its first tasks will be to figure out the size of this likely budgetary hole and then figure out a way to fix it.

When asked about the budget shortfall the next administration can expect inherit, Kenney spokeswoman Lauren Hitt provided the following statement:

“We are fully aware of the possible implications of the Wynne decision for Philadelphia’s budget. We have been working for some time now with our Finance Team to get an accurate estimate of potential revenue lost and devising different scenarios of how that could be accounted for in the budget. However, this underscores the importance of the Nutter administration holding off on committing to a UCC contract or any other new significant, long-term commitment of City dollars.”

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