Inquirer – Philly’s wage tax is the highest in the nation. Here’s everything you need to know about it​ – May 15, 2017

Originally published in the Inquirer on May 15, 2019.

Philadelphia has the highest local wage tax in the country — and the city relies on it for about 44 percent of its annual revenue.

“No other jurisdiction comes particularly close in levying a wage or income tax at the local level at such rates,” said Jared Walczak, a senior policy analyst for the Tax Foundation.

The tax rate, currently 3.8809 percent for Philadelphia residents and 3.4567 percent for nonresidents who work in the city, gets reduced a little bit every year. But don’t expect big savings — for someone with a $50,000 salary, the reductions planned for fiscal year 2020 would mean about $5 less in wage taxes. The rates are expected to decrease by a quarter of a percent, beginning July 1.

A reader asked about the wage tax through Curious Philly, a forum through which Inquirer reporters answer questions. So here’s everything you need to know about the tax, planned reductions in its rates, and arguments for and against more dramatic changes.

Why is Philadelphia so reliant on the wage tax?

In 1939 Philadelphia became the first city
nationwide to implement a wage tax, at a rate of 1.5 percent. The tax was made possible by the Sterling Act, a Depression-era state law that allowed the city to earn revenue by passing special taxes.

The wage tax grew over time, reaching its highest rate of 4.96 percent for residents in 1985. The city first reduced it in 1995 under Mayor Ed Rendell, who said at the time cuts were needed to make Philadelphia competitive and encourage job growth.

Small reductions, along with cuts to the net income portion of the Business Income and Receipts Tax, have continued. But it remains the highest in the nation; New York City’s top rate, paid by the highest earners, is slightly lower than the current resident rate in Philadelphia.

The Pennsylvania Intergovernmental Cooperation Authority (PICA), established in 1991 to help the city recover from a financial crisis, operates by collecting a 1.5 percent wage tax that is part of the city’s overall rate. PICA functions as an oversight agency and approves the city’s five-year plan annually.

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