Unanswered Questions About Philadelphia’s Confusing Tax Structure

If you receive emails from Philadelphia’s Department of Revenue, you see the City is lowering the wage tax. The headline on the email shouts: “The City of Philadelphia announces Wage Tax rate decrease for workers that live in the City starting July 1, 2023 . . .

· The new Wage Tax rate for residents of Philadelphia is 3.75% (.0375).
· The Wage Tax rate for non-residents remains unchanged for those subject to the Philadelphia City Wage Tax at 3.44% (.0344).

How much is the reduction? The old rate was 3.8398%. The new one is 3.75%. The cut is 0.0898% or .00898. According to the United States Census, the average Philadelphia per capita income based on data collected in 2021 is $32,344. Multiplying the income times the amount saved, .00898 shows the average annual savings is $26.08, not nearly enough to cover the Water Department’s rate hike.

Perhaps it is not unusual for the revenue department to not calculate the savings. After all, a headline that says the average Philadelphia worker will save $2.17 a month isn’t much of a headline.

Nor is it unusual for the Revenue Department to miss the opportunity to explain why the tax is called a wage tax and not an income tax. We had to do a little digging to find the City’s explanation: “The Earnings Tax is a tax on salaries, wages, commissions, and other compensation paid to a person who works or lives in Philadelphia.” It does not tax interest, rents, dividends, capital gains, or any other “unearned income.” And unlike the Federal Income Tax, it’s a flat rate. No matter how high the wages are, each person paying a wage tax pays the same percentage.

There is a school income tax that taxes some capital gains, interests, dividends, and other forms of unearned income. But you wouldn’t know about it if all you did was read the email the Department of Revenue sent out. It doesn’t mention it.

Nor does Mayor Kenney’s statement about the City Council’s final budget passage. While he says, “I am especially proud that this budget reflects record levels of education funding. No investment is more effective than the investments we make in our City’s children.” He doesn’t say anything about the School Income Tax, the new rate, and how much or little is collected.

The only mention is on the City’s School Income Tax web page: “If you are a Philadelphia resident who receives certain types of unearned income, you must pay School Income Tax (SIT). Taxable forms of unearned income include dividends, royalties, short-term rental income from a duplex/triplex, which is the primary residence of the owner, cash lottery winnings from the Pennsylvania Lottery, and some types of interest.”

The web page doesn’t say if the rate is going up or down next year. It doesn’t tell the collection rate or how much is raised.

Hall Monitor emailed the Mayor’s Press Office, asking what the rate will be. No one answered. Hall Monitor then followed the direction given in the media release announcing the reduction in the wage tax and called the revenue department. We gave up after an hour on hold and a recording that continued to say there were 43 people ahead.

While some Philadelphians talk about a wealth tax, the one tax that taxes unearned income, usually the type of income higher earners receive, is ignored in statements about the new tax rates. The Inquirer reporter covering the budget didn’t write about the School Income Tax. And a random, unscientific poll showed that most Philadelphians don’t know the School Income Tax exists.

Until we can get a statement from the Mayor’s Office, we will not know if the unearned income tax rate went up or down, why it’s not mentioned in the emails sent out by the revenue department, and the collection rate. All issues that impact our schools.

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