Battle Over Sterling Act Shaping Up?

Battle Over Sterling Act Shaping Up?

The term “commuter tax” has generated discussion over the decades in Pittsburgh and southwestern Pennsylvania (here we are limiting the term to apply to a tax on earned income, wages, net profits and not other forms of local taxes that fall on occupations, sales, ownership of real estate etc.).  It was a topic of heavy discussion in the early days of Pittsburgh’s entrance into Act 47 in 2003; a separate statute prevented that so most mentions of the term is just in the larger context of municipal finance and possible reforms.

Outside of Philadelphia, municipalities and school districts levy an earned income tax under the terms of Act 511: a few statutory provisions separate from that allow for higher earned income tax rates (Act 47, home rule, referenda for various purposes, etc.) but by a large the non-Philadelphia situation is this: a person subject to an earned income tax pays a rate of 1%, split 50/50 between the home municipality and school district.  Philly falls under the Sterling Act, a 1932 law that preceded Act 511 and is much broader in that the earned income tax falls on residents and non-residents working in the City of Philadelphia.  A 1977 court case limited rate increases on non-residents to a portion levied on residents (for a thorough discussion of earned income taxes, the laws, and provisions related to residency, crediting, rates, etc. see this publication on pages 25-35).

That brings us to a legislative proposal on reform of the Sterling Act’s provisions on what gets credited to a non-resident working in Philadelphia where the home municipality/school district levy the tax.  The one page bill would instruct “a city of the first class (Philly is the only one) that imposes a non-resident wage tax [to} remit to the non-resident’s resident municipality and school district an amount equal to the amount of tax imposed on earned income and net profits by the non-resident’s resident municipality and school district”.  The co-sponsorship memo on the bill notes “…unlike the imposition of local taxes in other taxing jurisdictions, none of the non-resident City wage tax is returned to the non-resident’s home district”.  Based on the current tax schedule from the City of Philadelphia the rate on a resident of Philadelphia is 3.8097% and the rate on a non-resident working in Philadelphia is 3.4654%.