Local officials praise state's new method of collecting earned income tax

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Alan Bennett said he wasn’t surprised that regional collection of wage tax translated into more revenue for the Moon Area School District.

Before he came to Moon Area as director of fiscal and school services, he had worked in Lycoming County, which has used a similar system for many years.

Earned income tax revenues in Moon Area rose 17 percent, or $674,000, for the first year in which employers withheld the tax from all employees, Mr. Bennett said. “These were revenues that should have been available but were not,” he said.

Some of the growth was the result of new housing. The school district gained 100 new families who moved into single-family homes during the year, he said.

Moon Area also is home to many apartment dwellers and other short-term residents. Some of them apparently had been failing to file wage taxes.

Calls to other municipal and school district business managers across southwestern Pennsylvania suggest that Moon Area’s double-digit revenue growth was not typical. Those officials are, however, reporting favorable results since the new system of collecting wage taxes was fully implemented in 2012.

‘Positive feedback’

“I’m hearing positive feedback from across the state,” Jay Himes said. He is executive director of the Pennsylvania Association of School Business Officials. During this same period, the state, like the nation, has continued a slow recovery from the worst economic downtown since the Great Depression. Like most other officials contacted, Mr. Himes said it was difficult to determine how much of recent increases resulted from the new employer-based method of collection and how much came from an improving employment picture.

“Clearly some efficiencies have been realized,” Mr. Himes said.

Since at least Jan. 1, 2012, employers have been deducting earned income tax for all of their workers and forwarding the proceeds to new county and district collectors. Those regional collectors then distribute the funds to communities and school districts.

Under the old system, employers deducted local wage tax only from workers who were living in the community where the employer was located. The rest of their employees were responsible for paying the wage tax on their own each quarter to their home communities and school districts.

The new system, mandated under a 2008 state law called Act 32, had the potential to cut administrative costs and to raise more than $200 million more annually in uncollected earned income taxes, advocates said.

The new law also reduced the number of wage tax collectors from 560 to 69 with revenues being collected on a roughly countywide basis in most places. The exception is Allegheny County, which has been divided into four collection districts.

Educating residents

Resident education was one key in Cranberry to successful implementation of countywide collection of earned income tax, township manager Jerry Andree said.

“Before employers started withholding the earned income tax, we had to educate residents to make sure they recorded the right jurisdiction on their residency certification forms,” Mr. Andree said. Cranberry’s six-digit political subdivision code, or PSD, is 100802, and every working resident had to provide it to employers to ensure that their earned income taxes, known by the initials “EIT,” would be forwarded to the township and the Seneca Valley School District.

The likely result has been a 2 to 3 percent increase in EIT revenue since the new countywide system was implemented.

That has not been enough to translate into a cut in property tax millage rates, but it has helped the township keep up with inflation, Mr. Andree said.

Scott Burchill, business administrator for Washington County’s McGuffey School District, said he used to work with nine different wage-tax collectors. “This new system has really streamlined collections, helped cash flow and improved accountability,” he said. Mr. Burchill serves on the executive committee of Washington County’s tax collection district.

“It’s still early to talk about [increases in tax collection] percentages,” he said, with long-overdue wage taxes still coming in. Like Mr. Andree in Cranberry, Mr. Burchill said the higher EIT revenues would not be enough to allow a reduction in property-tax rates. They would help counterbalance the effects of inflation, stagnant state aid and higher pension costs, he said.

Brian Jensen, executive director of the Pennsylvania Economy League of Greater Pittsburgh, said he needed to see several years of data before coming to firm conclusions on how the new Act 32 collection system was working.

“My impression is that it is working fairly well,” he said. “With every employer withholding wage tax and sending the money in, the process should be more certain and efficient.”

Worries that local governments would lose control of their systems and that private tax-collection agencies would be slow in forwarding revenues to local governments and school districts do not seem to have materialized, Mr. Jensen said.

Marshall is another one of the places where additional earned income tax revenue has helped boost the municipal budget. Estimated revenue for 2013 of $5.9 million included an additional $300,000 in EIT revenues, manager Neil McFadden said. That number represents a 5 percent jump in revenue from wage tax.

Fewer delinquents

Mandatory withholding by employers has not resulted in dramatically more revenue in Mt. Lebanon, but it has meant more people are paying their earned income taxes on time. That phenomenon has been matched by a dramatic reduction in delinquent accounts. “We don’t have to chase after people,” Mt. Lebanon tax office manager Mary Abbott said.

The numbers are striking. The South Hills suburb has about 20,000 wage earners. Traditionally, about 15,000 regularly mail in their quarterly tax payments on time, Ms. Abbott said. Statistics from Jordan Tax Service, the agent for Allegheny Southwest Tax Collection District of which Mt. Lebanon is a part, showed that 19,350 wage earners had paid in 2012. “That represents some 4,000 people we don’t have to pursue,” she said. “With automatic deductions, they don’t have to worry about coming up with quarterly payments.”

Ms. Abbott serves as chairwoman for Allegheny Southwest Tax Collection District, and she said she is hearing similar stories from other communities.

She estimated that once delinquent accounts are collected, her municipality would see a 2.5 percent jump in wage tax revenues resulting from the new system.

Municipal officials in Bethel Park are including a 2.5 percent increase in wage tax revenues in the 2014 budget recently approved. That increase helped council maintain the property tax rate, finance director Joe Villella said. The automatic withholding and regular payments from Jordan Tax Service also have helped the community maintain a consistent cash flow, he said.

Mr. Andree, the Cranberry manager, agreed.

Butler County’s collection agent, Berkheimer Associates, sends electronic payments to municipalities as often as twice a week, he said. “I’m not hearing complaints [about slow payments] from other communities,” he said.

Mr. Andree also serves as president of the Butler County Tax Collection Committee.

Advance planning was another key to the successful introduction of countywide withholding. “We have 72 independent taxing jurisdictions and getting everybody on board was quite a challenge,” Mr. Andree said.

The selection of Berkheimer Associates as the collection agent made the task easier, because that firm already had about one-third of county communities as clients.

Standardized process

Sean Sanderson, local government policy manager with the Governor’s Center for Local Government Services, said he is hearing good news from around the state on the effects of countywide tax collection. The Governor’s Center is part of the state Department of Community and Economic Development.

From both anecdotal reports and in face-to-face meetings with local officials, Mr. Sanderson said he has been hearing positive feedback about the amount of money collected and improved cash flow. “The standardization of the process has enabled municipalities and school districts to receive revenue many times on a weekly rather than on a quarterly basis,” he said. Both accuracy and accountability have improved, he said.

As is the case in other places, higher EIT revenues in Moon Area have not translated into tax cuts. “The extra money basically has helped us avoid a tax increase as our costs are increasing,” Mr. Bennett said.

He called regional, employer-based collection of wage tax a very effective financial tool.

“I was anxious to see how it would work out across the state,” he said. “It is the right way to collect wage taxes.”

Len Barcousky: lbarcousky@post-gazette.com or 724-772-0184.

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