Tax complexities evident in capital city case

Tax complexities evident in capital city case

The Tax Foundation recently released a study on reforming Pennsylvania’s tax code for the 21st century.  Besides covering state level taxes, the study spent a good deal of time on the state’s system of local taxation which involves “multiple layers of local tax authority and extends different degrees of taxing power to local governments based on population and other factors.”  Counties, municipalities and school districts tax and/or share taxes on property, earned income, local services, deed transfers, gross receipts and others.

The different degrees of taxing powers and the other factors are playing out currently in the state capital of Harrisburg.  But this involves the actual city, which is currently in distressed status.  As a result of distressed status, Harrisburg is able to have a higher than normally permitted local services tax, which falls on residents and non-residents who work in a municipality and is normally levied at $52 annually but, when in distressed status, can be levied at $156 a year.  It also levies a earned income tax of 1.5 percent (2 percent total with the school district portion); if not in distressed status, the maximum would be 0.5 percent.

Due to time limitations on how long a municipality can stay in distressed status Harrisburg is currently slated to exit in September 2021.  But there is a strong push by city officials to maintain the distressed status taxes even after exiting.  So in addition to lobbying state officials, city officials will take a strong look at adopting a home rule charter as a way to have a higher than normal earned income tax (likely a 2 percent total rate).  To that end an ordinance calling for a ballot question on creating a government study commission was introduced last week.

As noted by the Foundation study, “The most far-reaching exception is for home rule localities, which are exempt from the cap [on the earned income tax].”  Voters in Harrisburg will have to consider that if they are asked to vote for a home rule charter.