In The Lead: Working / In Pennsylvania, a wage tax heritage
Most of the U.S. does not impose such a charge
May 15, 2014 12:20 AM
By Patricia Sabatini / Pittsburgh Post-Gazette
In case you needed another reason to moan about taxes, here's a big one.
While residents of Pennsylvania are used to forking over a percentage of their pay in wage taxes to the municipality in which they live, most workers across the country have no such tax.
That's right. The vast majority of U.S. cities, towns and other local jurisdictions do not impose a wage tax.
In Pennsylvania, some 97 percent of municipalities and 94 percent of school districts levy a wage tax, according to the Tax Foundation in Washington, D.C. The tax, which generally is capped by state law at a flat 1 percent, usually is owed to the municipality and split with the local school district. (Home rule cities incorporated under their own unique charter, such as Pittsburgh, can charge more.)
The only other states in the nation that come close to the level of saturation in Pennsylvania are Indiana and Maryland, whose residents all pay wage taxes at the county level; and Ohio, where 64 percent of municipalities levy a wage tax, Tax Foundation figures show.
Overall, 33 states have no local wage taxes. In most of the rest of the states, only a smattering of locales do. In New Jersey, for example, the only local wage tax is in Newark, where it is imposed on employers.
Referred to as a local earned income tax in Pennsylvania, the levy covers wages, salaries, tips and bonuses, but not unearned income, such as interest and dividends.
In Allegheny County, most jurisdictions impose a flat 1 percent. Roughly a dozen municipalities with home rule charters or that are classified as distressed areas have higher rates, such as the city of Pittsburgh at 3 percent; Bellevue, 1.5 percent; Bethel Park, 1.4 percent; Mt. Lebanon, 1.3 percent; McKeesport, 1.7 percent; and Penn Hills, 1.75 percent.
So how did residents of the Keystone State come to be so lucky?
Philadelphia was the cornerstone of the movement, becoming the first city in the nation to impose a local wage tax in 1939 as a way to avoid bankruptcy.
The idea gradually spread to select cities elsewhere in the state and in a handful of other states.
Pittsburgh got things rolling in earnest in Western Pennsylvania in 1954 when the city, facing a budget crisis under Mayor David Lawrence, initiated a 1 percent wage tax.
The tax was bitterly opposed by citizens and labor organizations at the time. But the decision got the blessing of the Pennsylvania Economy League, which called the move "drastic" but "both sound and honest," after concluding that another hike in property taxes would be detrimental to the city's growth.
"The city will be on its mettle to do the best possible service job in order to live down the unpopularity of the tax and gain acceptance of it," a December 1953 Pittsburgh Press article quoted from an economy league report.
The league outlined its top reasons for supporting the tax, including No. 1: "It will work."
The league also said the tax would "fill the gap in city revenue no other apparent tax source can close," and "inspire — if anything will — continuous citizen interest in local government."
Pittsburgh's wage tax spurred surrounding suburbs to move quickly to pass their own earned income taxes. Under state law, residents owe wage taxes where they live. But if their community doesn't assess the tax and they are employed in a municipality that does, they pay where they work. (The tax rate for people living outside the community typically is lower than the rate for residents.)
"The city's tax gave a lot of incentive for almost all municipalities to enact their own tax" so they could capture tax monies that would otherwise go from suburban residents' pockets to the city of Pittsburgh, said Christopher Briem, regional economist at the University of Pittsburgh's Center for Social and Urban Research.
In states where local wage taxes are rare, municipalities primarily rely on property taxes for funding, Mr. Briem said. School districts outside of Pennsylvania also may get more money from the state government than they do in here, he said.
"At the local level, the property tax is one of the oldest taxes. In Pennsylvania, it dates to the 17th century," he said.
Mr. Briem said it is hard to say what the consequences are of imposing local wage taxes across Pennsylvania when so many other places don't have the tax. "That's too big a question. There are thousands [of pages] of boring academic stuff written about tax competition."
Taxation matters, he said, but widespread differences in tax structure make comparisons extremely difficult.
Unlike Pennsylvania, some states don't have state income or inheritance taxes, for example, but may instead tax personal property such as cars, or intangible personal property such as stocks, bonds and mutual funds.
"Public finance has very little consistency across the nation," Mr. Briem said.
So after outing municipalities in Pennsylvania for their odd penchant for taxing paychecks, what's the likelihood of a repeal movement?
"Like all taxes, it would have to be replaced by something," Mr. Briem said.
"It's a pretty big chunk of most municipal budgets. You would have to find a new tax source, and that is very difficult."
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