Earned Income Tax Collection in Pennsylvania

Recently, the Local Government Academy conducted the 2007 Taxation Update Program, where one of the topics was PA Senate Bill 1063 and its House companion, Bill 1550. The PA Senate Finance Committee has unanimously approved the bill, which consolidates the local collection of earned income tax revenue across the state. Currently, tax collection is conducted by 560 collectors, and the bill reduces this number to 66, or one per county. This excludes Philadelphia, which has previously consolidated tax collection.

Below are two opinions on this bill by Brian K. Jensen, Program Manager, Pennsylvania Economy League of Southwestern Pennsylvania, and Mary L. Abbot, President of Pennsylvania’s Earned Income Tax Officers, Administrators, and Collectors (PEITOAC) and Tax Office Manager of Mount Lebanon, PA. Read these opinions and post your responses!

 

Submitted by:
Brian K. Jensen, Ph.D.
Program Manager
Pennsylvania Economy League of Southwestern Pennsylvania
Phone: (412) 281-4703 ext. 3134
E-mail: bjensen@alleghenyconference.org

    It’s human nature to make life easier by consolidating and streamlining processes. Consider our personal choices. We welcome one-stop online bill payment opportunities. And we applaud customer service when one representative can efficiently handle all of our needs without having to pass the call to six other representatives. In business and retail administration, consolidation is considered a good approach when efficiencies are enhanced and dollars are saved. Back-office operations—payroll, purchasing, benefits administration—are often managed with a shared services approach, particularly when multiple branches or locations are involved. Wasted effort is reduced and economies of scale save money. Savings can provide for additional hiring and better benefits for employees and strengthen the businesses’ competitiveness. Consolidation’s benefits are obvious.

    Even in matters of tax collection, the benefits of consolidation and streamlining are apparent: having Pennsylvania’s personal income tax withheld from our wages and salaries. If SB 1063 is passed, Pennsylvanians will have the chance to appreciate the same streamlined efficiency in the collection of school district and municipal earned income taxes.

    The Pennsylvania Economy League of Southwestern Pennsylvania concludes that businesses and citizens of Pennsylvania will benefit dramatically from the recovery of $237 million in earned income tax revenue that falls through the cracks every year. Such a significant amount of lost annual revenue—money that, if recovered, could result in more teachers in classrooms and police on the streets, or could go towards reduction of other local taxes—merits attention and careful consideration of why consolidation of earned income tax collection can be a win for Pennsylvania employers, taxpayers and local taxing jurisdictions.

   

If Pennsylvania adopts a consolidated approach to earned income tax collection, tax collection won’t shift from a municipal function to a county function. Pennsylvania’s 560 earned income tax collectors will be streamlined to 66 collectors. This number corresponds with the number of Pennsylvania counties to be affected by the change (Philadelphia is not included as it already has consolidated earned income tax collection). While tax districts would generally align with county boundaries, earned income tax collection will not be a county government function. The process for choosing tax collectors will be a function of tax district committees comprising municipal and school district representatives.

    The lack of a complete and coherent paper trail, at this time, contributes to taxes failing to arrive at their intended destinations. Consolidation and standardization will reduce the loss of revenue for countless municipalities and school districts—revenue that is rightly theirs. Consider how one Pennsylvania businessman—frustrated by the cumbersome current earned income collection approach— recently admitted, “Our company has multiple sites across the state, and we don’t withhold for any of our employees—even if we are in a location where withholding is required. It’s just too complicated to go through the process.”  Consolidation will make it easier for employers to do the right thing consistently.

   

Taxes withheld by employers will reach their respective tax districts at least as fast— or faster—than they currently do. Currently, on average, only 15 percent of residents live and work in the same municipality—a percentage which does not offer significant tax revenue impact. Conversely, 69 percent of residents live and work in the same county. Thus, an earned income tax collection system consolidated by county reduces the number of times tax revenue must change hands.    

  Successes already in place underscore that a state-wide earned income tax consolidation has benefit and demonstrates that it can succeed. Consolidated tax collection is operating efficiently on a county-wide basis in ten Pennsylvania counties. In another 26 counties, consolidation is on its way to becoming a reality.

   

Beyond regulated control of tax money moving more speedily back to municipalities and school districts that depend on it, the greater community that is the Commonwealth will become more attractive to business developers. Consider again our consumer habits. We gravitate toward products or services that are current and cutting edge, not those that are cumbersome or obsolete. We don’t select dial-up over DSL, and we listen to our music on iPods, not LPs. Recognizing our personal penchants for efficiency, speed and dependability, it’s easy to understand why businesses seeking to relocate to or expand in Pennsylvania would prefer a consolidated earned income tax collection system to the current fragmented approach.    

    Earned income tax consolidation provides clear solutions. With consolidation, payroll administration burdens will be lighter for employers, and the guesswork surrounding withholding is gone. Standardized tax withholding practices benefit all working Pennsylvanians, and those who currently contend with tedious and sometimes costly quarterly tax payments will find relief from this responsibility.

   

Every municipality and school district across Pennsylvania deserves its complete and fair share of earned income tax revenue—dependably distributed. For the common good, the time has come for earned income tax consolidation across the Commonwealth.

Submitted by:
Mary L. Abbott
PEITOAC President      
Mt. Lebanon, Pa. Tax Office Manager
Phone: (412) 343-3745
E-mail: mabbott@mtlebanon.org

    The Pennsylvania Earned Income Tax Officers Collectors and Administrators Association, PEITOAC, opposes both House Bill 1550 and its companion bill Senate Bill 1063. While both of these bills have provisions in common with House Bill 1458 which consolidates offices at the school district level, these two bills would consolidate taxing districts at the county level. Our organization opposes county wide consolidation for many reasons.

    Existing tax collection bureaus that represent entire counties or a large portion of any one county were formed by the voluntary participation of each municipality or school district involved. Districts within those bureaus have the right to exercise other collection options if the bureau does not meet their needs or expectations. HB 1550 and SB 1063 are both bills of no return and give local districts no options other than the countywide bureau.

    Countywide tax collection committees would be formed and each taxing district within a county would have a delegate on the committee. In Allegheny County the tax collection committee would have over 170 delegates. Mandating countywide collection bureaus will create another layer of bureaucracy and further the distance between taxpayers and their municipalities and school districts.

    We believe that taxes withheld by employers would be delayed reaching the proper districts since employers would be given the option of remitting taxes for all employees to one taxing district regardless of where the employees might be employed or reside. These tax dollars would then have to be forwarded to the proper county bureau and then on to the proper district.

    Smaller, less affluent districts would be left with little or no input into the operation of a countywide bureau. Voting in each district would be weighted by either percentage of collections or by percentage of total population in the county. These districts depend upon this tax revenue for providing local services yet they will effectively be disenfranchised by these bills.

    While the DCED may be committed to assisting with startup costs as well as with technical assistance, there is no guarantee that adequate state funding will be available to properly establish effective and efficient county bureaus that will meet the needs of member districts. Without these funds municipalities and school districts may have to budget for these startup costs while at the same time paying to maintain their current collection systems.

    For these and other reasons we strongly urge support of House Bill 1458 which would effect positive change in the collection of the local earned income tax while keeping control of these funds in the communities who rely on them to provide the services upon which we have all come to depend.

    We agree and have long advocated many of the uniformity issues addressed in HB 1550, SB 1063 and HB 1458. Uniform rules and regulations along with standardized forms are items PEITOAC has promoted for many years. Strict penalties for tax collectors who do not follow those rules and regulations have also been a goal of our organization.     

    Pennsylvania’s Earned Income Tax collectors are professionals dedicated to the collection of local earned income taxes with both pride and integrity. Our organization would welcome the opportunity to work with the Pennsylvania legislature in the spirit of commitment, cooperation and compromise to effect meaningful changes while maintaining local control over tax collections.

Update:

Pennsylvania Governor Ed Rendell has signed Senate Bill 1063, which will consolidate earned income tax collection in Pennsylvania. Consolidation will be phased in starting in 2010 and should be completed in 2012. To read some articles and opinions on the passing of the bill, click on the links below:

http://www.post-gazette.com/pg/08185/894492-53.stm

http://www.psats.org/news_eit_legislation.html

http://www.legis.state.pa.us/cfdocs/billinfo/bill_history.cfm?syear=2007&sind=0&body=S&type=B&bn=1063

http://www.pittsburghlive.com/x/pittsburghtrib/news/mostread/s_575566.html

Comments

[Paul Bauer]

I believe the Legislators have merely ignored the small problems with EIT collection, and are just trying to create a new and bigger problem that has nothing but confusion on it. If a new machine breaks down and only needs a few parts, we don't throw it away and buy a new one. There is only two things needed to correct the EIT problem, One, is to have one set of
rules and regulations for all eit offices. Two, one final return for all eit filings across the state. This is a very easy fix.

[MaryLouise Bittner]

I have long been a proponent of state-wide collection of EIT--by the Dept of Revenue. Although I agree that many of the EIT collectors are professionals, it is a difficult tax to collect by its very nature of being self-reporting.

Requiring that all employers withhold EIT for all employees and remit to the state seems to be the best solution to the issue.

Providing a "county" solution is an interim step that will, I believe, eventually give way to state collection. Why spend time and money setting up that interim step? The issue brings to memory the 911 consolidations that eventually led to the (almost) county-wide 911 system in Allegheny County.

[E Endresen]

Both perspectives are valid and well thought out. The amount of savings is suspect which should be taken with a grain of salt. And the taxpayers should have the option, not the State mandating what will be. Taken to the extreme, we are talking about another State Income tax, not local. I do not believe local taxpayers would be fairly represented by a larger entity.

[K Bastian]

I agree with E Endresen, it will eventually be a State tax. One other thing that has never been addressed is how many jobs will be lost! Where will others come from for those needing to support families or just themselves! The State cannot afford more unemployment or people on welfare. This entire process has not been thought out properly on many levels and we as the PETIOAC organization have requested and supported uniformity across the state with rules, regs and forms for years, so why now does it seem the State is saying Countywide collection/uniformity is the only solution when we weren't heard before!

[Rosemarie Nonnemacher, Macungie Borough EIT Collector]

Some comments made by Brian K. Jensen cry out for rebuttal:

1. "Consider how one Pennsylvania businessman—frustrated by the cumbersome current earned income collection approach— recently admitted, “Our company has multiple sites across the state, and we don’t withhold for any of our employees—even if we are in a location where withholding is required. It’s just too complicated to go through the process.”
This type of attitude is part of the real problem: where withholding is required, why is the tax collector not forcing compliance with the law? What is so difficult about withholding 1% from wages and filing with each site's tax office? If a company is that large, they should have the resources to perform such payroll functions.

The law should be changed so that it is REQUIRED that every municipality collect both resident and non-resident tax withheld. Then the tax would be withheld from every employee and turned over to the collectors for distribution--no more trying to collect money from taxpayers, which is really where the "lost revenue" comes in.

2. "Taxes withheld by employers will reach their respective tax districts at least as fast— or faster—than they currently do. Currently, on average, only 15 percent of residents live and work in the same municipality—a percentage which does not offer significant tax revenue impact. Conversely, 69 percent of residents live and work in the same county. Thus, an earned income tax collection system consolidated by county reduces the number of times tax revenue must change hands".

The proposed law allows employers to withhold the taxes and pay for all their locations through their main site's tax office. That will NOT keep the taxes within the county where people work! For example- every employee of every Turkey Hill Minit Market could have their taxes paid to a tax office half way across the state.

3. "Earned income tax consolidation provides clear solutions. With consolidation, payroll administration burdens will be lighter for employers, and the guesswork surrounding withholding is gone. Standardized tax withholding practices benefit all working Pennsylvanians, and those who currently contend with tedious and sometimes costly quarterly tax payments will find relief from this responsibility".

Standardization of the local tax went out the window when the state legislators began tinkering with the E.I.T. to allow higher rates. What used to be a fairly consistent 1% tax now can vary from one municipality to another. Employers are even more confused, withholding the higher rate imposed where they are located on employees who don't live in that municipality, resulting in more tax refunds being issued by local offices. The guesswork is gone? I don't think so!! Just go to the DCED website and look up a few municipal tax rates. Employers are expected to withhold all those different rates of local tax for their employees. Looking at that site is what is frustrating to employers.

4. "Philadelphia is not included as it already has consolidated earned income tax collection".

Philadelphia does not levy it's tax under the same tax act, and has all kinds of special rules written just for them; nothing in the proposed reforms would apply there, anyway. And, by the way, the Philadelphia tax rate is higher than the state and other local taxes combined!

[Mark Sampoga, Council President, Green Tree Borough]

Earned Income Tax Collection in Pennsylvania

Ms. Abbott makes some excellent points about problems with pending House Bill 1550 and Senate Bill 1063. The issues she cites of potential delays in receipt of funds, disenfranchisement of smaller taxing bodies, and elimination of personal, locally administered customer service are just a few of the drawbacks.

Let’s look at this legislation from an employer’s viewpoint. Think about businesses of various sizes: a small restaurant with 10-25 employees; a medium sized manufacturer with 100 employees; and a national company with thousands of workers in Pennsylvania. The restaurant workers live in 4 different municipalities and school districts. The manufacturer’s employees live in 3 different counties, 35 different municipalities and 30 different school districts. The national company has 2300 workers living in 32 counties, 187 municipalities, and 150 school districts.

Each municipality and school district can have a different EIT rate, so the employers need to collect all of this information from each worker & look up the rates on the State’s website and enter them into their payroll system.

Since the small and medium companies are privately owned, they probably have a small administrative staff, if any, with either a manual or off-the-shelf, PC-based payroll package. Can their payroll software be modified? Will they be required to purchase new software or an upgrade to accommodate this plethora of data? Did we mention new hires, employee turnover, or changing residency? What if the company relocates to a new county? Think of all the day-to-day effort required to maintain a database containing this information.

The national concern likely has an IT staff that writes custom code for their payroll system and HR database. They will spend many man-hours writing and de-bugging this in-house software.

The cost for Pennsylvania employers to comply with this proposed legislation will minimally run into tens of thousands of dollars annually. The extra man-hours spent will be completely non-productive and would not add a cent to corporate profitability. Far from being an incentive to locate a business in Pennsylvania, this legislation could have quite the opposite effect.

Currently, there is no requirement for employers to withhold EIT. Paying Earned Income Tax has been, and always will be, the responsibility of the taxpayer. If local taxing bodies are not collecting their fair share of revenue from EIT, it is their duty to investigate why and correct the situation.

Rather than replacing the current system with an entire new bureaucracy, the State needs to make a few minor changes so that local collection of EIT can be more efficient. Two simple steps in this direction would be:
1. Statewide standardized EIT tax forms.
2. Issuance of more timely reports to School Districts and Municipalities so that they can cross-check residents’ income and tax payments. Only School Districts receive this information now, but since the data provided is two years old this is not an effective tool for enforcement purposes.

County-wide consolidation of Earned Income Tax collection does not make sense for Pennsylvania employers. It merely imposes additional overhead costs that lessen their competitiveness. For taxpayers, consolidated collection means reduced customer service. For School Districts and Municipalities, it means more red tape, less control, and potentially delayed income. We urge the state legislature to re-think House Bill 1550 and Senate Bill 1063.

[Nancy Rhodes EIT Western Beaver, Beaver County]

My agreement is with Mary Abbott. A very good commentary and rebuttal. Let's hope our legislatures reconsider and listen to the other side!

[craigslist36@gmail.com]

Good points, lousy legislation. A countywide consolidation practically guarantees commercial collection rather than appointed local entities.

A more efficient solution would have been consolidation on a school distric-wide basis. Of course, all this could have been avoided had the politics of collection been removed, compliance with local law enforced and quarterly distributions been mandatory.

Employers may believe they will benefit however since most use (code based)payroll services, little will change in that regard.

I am personally aware of one small community that relies on "unclaimed funds" as a large part of their budget, receiving and retaining in excess of $2,000,000 since the distribution laws were passed.

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