Public hearing addresses income tax dispute between Philly and its suburbs

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Matt Schickling / Wire photo – State Reps. Scott Petri (left) and Todd Stephens authored bills to lift Philadelphia’s broad taxing authority on surrounding municipalities.

Several state representatives and local officials met at the Bensalem Council Chambers on Wednesday to discuss how suburban municipalities can get out from under Philadelphia’s broad taxing authority.

In a public hearing led by state Rep. Bernie O’Neill (R-29), chairman of the House Finance Committee, legislators discussed three bills proposed by state Reps. Scott Petri (R-178) and Todd Stephens (R-151) that would amend the Sterling Act, a law many see as outdated and unfair to Philadelphia’s collar counties.

The act, originally passed to help Philadelphia rebound from the Great Depression, led to Philadelphia passing the nation’s first city wage tax in 1939. As suburban communities grew through the 1960s, they, too, were were able to levy earned income taxes up to 1 percent under the Local Tax Enabling Act.

As more towns and boroughs in the Philadelphia region pass income taxes, some have taken issue with a point in the Sterling Act — it allows Philadelphia to tax their residents who work in the city without returning anything back home.

“We do respect what the city provides all of our residents,” said Melissa Murphy Weber, a former state representative and current supervisor in Whitpain Township, during her testimony.  “The flipside is that … we are being restricted in our taxing ability.”

“We’re giving, in a way, money to the city of Philadelphia that should be brought back to the townships,” she added.

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Matt Schickling / Wire photo – Bensalem Mayor Joe DiGirolamo gives testimony during the hearing. 

Philadelphia Mayor Jim Kenney and City Council President Darrell Clarke submitted a letter to the House Finance Committee in strong opposition to the legislation, saying it “could have a devastating impact not only on Philadelphia, but on the entire Southeastern Pennsylvania region.”

The letter said that the city’s Department of Revenue estimated that if each surrounding jurisdiction levied a 1-percent earned income tax, the city would lose about $180 million in existing tax revenue.

Supporters of the legislation pointed out that the figure is only about 4 percent of Philly’s $4 billion operating budget, suggesting that there is some wiggle room. This notion was countered by Rob Dubow, Philadelphia’s finance director, who gave testimony on behalf of the city.

Dubow said that though it seems a drop in the bucket from the outside, at least a quarter of the budget is allocated to fixed cost items like pensions, and there’s little flexibility for discretionary spending.

“We understand that our governments are facing real financial challenges, and we’re happy to have ongoing discussions,” Dubow said. “We just can’t face legislation that costs us $180 million a year.”

Others argued that suburban towns struggle with the same issues.

“All of our municipalities are facing all the same financial pressures that you are, yet they’re not getting the favorable treatment the state law is providing the city of Philadelphia,” Stephens said.

For example, Bensalem Council passed a 1-percent earned income tax this year to balance a $5.9 million gap in its operating budget. Exempting Philadelphia of the reciprocity provisions for wage taxes that all other Pennsylvania municipalities abide by, Bensalem Mayor Joe DiGirolamo said, leaves $2.7 million in earned income tax revenue on the table.

DiGirolamo estimated that approximately 5,300 of Bensalem’s 60,000 residents work in Philadelphia and pay its 3.5-percent income tax.

“The inherent unfairness of this arrangement is exacerbated by the fact that this lost/unrealized revenue ultimately has to be made up by either Bensalem wage earners who don’t work in Philadelphia, or, in the alternative, by a property tax increase imposed on all of our property owners,” he wrote in a letter of testimony to the House Finance Committee.

The Bucks County Association of Township Officials was also well-represented during

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Matt Schickling / Wire photo – House Finance Committee Chairman Bernie O’Neill led the hearing.

the hearing. The group submitted data as testimony, citing a total loss of $6.4 million in revenue in 2014 because of the Sterling Act, and that figure does not include school districts, which also benefit from local wage taxes.

State Rep. John Lawrence (R-13) called the wage tax “the ultimate taxation without representation,” because nonresidents pay taxes to Philadelphia, but are not able to vote for council members who vote on city spending.

Philadelphia officials noted that the city houses more than one-third of the five-county region’s jobs. A loss in tax revenue of this size, the letter from Kenney and Clarke said, would cause tax increases to compensate that could drive jobs or businesses away from the city.

In order to give Philadelphia time to adjust, some considered the idea of phasing out the Sterling Act over a reasonable time period.

“None of us in our communities would want to see a revenue stream come to a halt immediately,” said Elam Herr of the Pennsylvania State Association of Township Supervisors. “That’s a reasonable approach, at least from our standpoint, if you agree that what we’re asking is a reasonable ask.”

State Rep. Jake Wheatley (D-19), Democratic chairman of the House FInance Committee, suggested finding a solution that does not pit Philadelphia and its surrounding suburbs against each other.

O’Neill said that this is just the start of the conversation. He plans to bring together representatives from all parties to come to a solution that all can agree with.

“The townships are being heard,” he said.

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