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Another Municipality Appears Poised to Exit Act 47

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Our most recent Policy Brief provided a look back and a look ahead for the City of Pittsburgh as it exited Act 47 distressed status on February 12th.  The Brief noted that Pittsburgh was prohibited from levying a non-resident earned income tax (commuter tax) which many other Act 47 communities have had the power to do.

Reading, which entered Act 47 in 2009, may be prepared to leave Act 47 by June of 2019.  The City amended its recovery plan in 2014.  Like Pittsburgh, it faced deficits and had to make changes through collective bargaining to pensions and health care for new hires and on wages for current employees.  Unlike Pittsburgh, Reading has to end its commuter tax upon exiting Act 47.

At the local level in Pennsylvania, municipalities can levy an earned income tax on their residents; so too can the school district, and in most cases the two entities share a 1% tax rate evenly 50/50.  Home rule and Act 47 for municipalities can alter the municipal share; tax shifts for property tax relief can change the school district share.  Pre-distressed status, the City’s rate (as home rule) was 1.7%, and the school district rate was 1.5% (with a tax shift under Act 1 of 2006) so a resident of Reading paid 3.2% in wage tax.

When Reading entered Act 47, it was permitted to levy an earned income tax on non-residents working in Reading at a rate of 0.3%–in essence, a non-resident rate was 1.3%, but due to crediting requirements under state law for the earned income tax the non-resident would have been credited what they paid to their home community, in most cases 1%, circling back to the typical municipal-school district split.

But Act 47 does not just let a distressed municipality go after non-residents (currently the non-resident rates range from 1.1% to 2% in the Act 47 municipalities levying one), it has to also boost the earned income rate on residents, so the resident rate in Act 47 rose 0.4%, bringing the total Reading resident rate to 3.6%.  That rate could stay upon exiting Act 47 because Reading is home rule and could levy an additional 0.4% on its own residents, but the 0.3% on non-residents would have to go away.  In 2014 Reading budgeted close to $20 million in earned income taxes, with $2.6 million coming as a result of the non-resident commuter tax.

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Allegheny Institute
Allegheny Institute

The Allegheny Institute is a non-profit research and education organization. Our mission is to defend the interests of taxpayers, citizens and businesses against an increasingly burdensome and intrusive government.

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