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March 03, 2015

Wolf proposes lowering long-criticized wage tax

The governor's sweeping budget proposal also asks for increases to the sales and income tax

In his first budget address since assuming office in January, Gov. Tom Wolf on Tuesday proposed a far-reaching overhaul of Pennsylvania's finances involving a variety of tax increases and a sharp reduction in Philadelphia’s wage tax.

Wolf wants to reduce the wage tax by about half a percentage point, which would bring the rate for residents down from 3.92 percent to just under 3.5 percent. Non-residents who work in the city would also see their rate fall from its current 3.5 percent to around 3.1 percent. If Wolf’s plan succeeds, the tax will decline to its lowest level since the 1970s.

“The proposal I’m unveiling today is a different kind of budget,” said Wolf. “Above all, it recognizes that Pennsylvania will not improve until we rebuild the middle class.”

Philadelphians who live and work in the city and make $100,000 a year currently pay $3,920 for the city's wage tax. Under Wolf's proposal, the tax burden is cut by $440, according to Josh Sevin, the managing director for regional engagement with the Economy League of Greater Philadelphia. 

In addition to the decrease in the wage tax, Wolf is asking the Republican-controlled Legislature to approve increases in the state’s sales and income tax. Under his budget, the state’s sales tax will increase from 6 percent to 6.6 percent. State income taxes will rise from about 3.1 percent to 3.7 percent. An extraction tax for natural gas is also planned.

Along with tax code changes, Wolf wants to substantially increase funding for public education and business development.

Critics of the wage tax blame it for pushing jobs out of the city and providing a barrier for companies who want to do business in Philadelphia. Bob Inman, a finance professor at Wharton, told the website Technical.ly that between the 1960s and 1990s, the city probably lost about 150,000 jobs because of the wage tax.

The change could lead to job growth, some local experts said, although it is one piece of many that could help grow the city’s economy.

“If this whole state package can allow us to get a more rapid wage tax reduction without impacting the general fund, that is a really good deal for the city,” said Sevin.

“This has been a tax that has troubled both the city and the region for a long, long time.”

The tax does generate a great deal of revenue for a city, which faces constant budget problems and a troubled, underfunded school system. According to Mayor Michael Nutter’s budget planning document, the wage tax is expected to bring in about $1.24 billion directly to the city or about 15 percent of this year’s total budget of $8.24 billion.

While the wage tax does present an obstacle for business development, it is not the only consideration when a business considers where to locate, according to economist Joel Narcoff.

“A reduction in the wage tax will remove one of the larger competitive disadvantages of locating in Philadelphia,” said Narcoff. “But the benefits will take time to see. But over time, this should accelerate growth in Philadelphia and that is critical for the region and the state.”

Shaun Miller, a stylist at Duke Barber Co. in Northern Liberties and a resident of Philadelphia, said regardless of what the tax change is he’s “fine with it.” 

“If in the long run it helps to put more schools in my neighborhood and it keeps my streets clean then I trust that it’s money spent wisely,” Miller said. “Now, if I didn’t live in the city and had to pay a city wage tax then that would be a different story.”

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Duke Barber Co. Stylist, Shaun Miller, 30, of Philadelphia. 
Thom Carroll/Phillyvoice.com

The wage tax started in 1939, well before the city went through a steady population decline, from which it just recently started to emerge. As people moved out, the city was met with corresponding job losses, which were linked in part to the wage tax. Previously, jobs were connected to heavy, unmovable industries such as manufacturing that used to have a strong foothold in the city.

But as time passed and jobs became more mobile, the tax was considered by some to be a heavy economic burden that pushed businesses away.

And the tax impacts the city’s reputation, Sevin said.

“The wage tax has been as much of a psychological burden as a true bottom line burden,” said Sevin. “It has been a double hit in some ways.”

Previously, Mayor Michael Nutter proposed incrementally decreasing the wage tax but Wolf’s plan would do such much more quickly.

“We are talking a historic decrease in the wage tax,” said Benjamin Waxman, spokesman for State Sen. Vincent Hughes, D-Philadelphia. “Something people will see -- if it passes -- in their paychecks.”

Steve Lucchesi, owner of Sole Control, a shoe store, and a resident of Philadelphia, said he sees the overall budget proposal as a win, particularly given the wage-tax increase.

“I hate paying wage taxes, it keeps us on the grind,” Lucchesi said, “and I get it - we need taxes - but if you’re trying to survive in a city like this on minimum wage, like many of us are, then any tax decrease, even a little, I’m a huge fan of.” 
As for the 20 percent increase in state income tax, he said, “If you don’t make any money anyway, like most of us don’t, than it’s negligible.”


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Sole Control owner and Philadelphian Steve Lucchesi. Thom Carroll/Phillyvoice.com

Some of Wolf's tax proposals have failed individually before but the newly elected governor hopes  they will attract enough support to pass. For example, he has wrapped tax increases with more conservative-friendly measures such as a corporate tax decrease and property tax cuts. Property tax relief in Philadelphia will be felt by way of the wage tax reduction.

“My budget actually reduces the total tax burden on average middle class homeowners by 13 percent,” Wolf said.

The $29.9 billion proposed budget includes $2.5 billion of net tax increases for fiscal 2016, including  a 5 percent tax on the state's booming natural gas extraction industry, using the estimated $1 billion of annual revenues to increase public education funding, as Wolf has promised since taking office in January.

Wolf also wants to increase the state's share of local education funding from the current 35 percent to 50 percent, a level not seen in about four decades and called for an increase in the state's minimum wage from $7.25 an hour to $10.10 an hour as part of a larger goal of creating jobs that paid a living wage.
              
Wolf's budget would also cut property taxes by $1,000 annually for the average homeowner, he said.

He also wants to reduce the corporate net income tax rate to 5.99 percent from 9.99 percent in January 2016, and to 4.99 percent by January 2018, while closing major business tax loopholes. 
              
Republicans, who lead the state legislature, did not agree with Wolf's overall proposal, saying it would actually increase taxes over the next two fiscal years by $1,000 for every person in Pennsylvania.

"Governor Wolf is fixated on taxing and spending his way out of the state's problems," said Senate President Pro Tempore Joe Scarnati in a statement.     

Wolf also wants to save nearly $1.3 billion over the next five years by reducing "excessive fees to Wall Street managers" for the state's public pension system.
              
"Simply investing this money in a safe, conservative account would produce a similar return over the long term," he said.

And he called for the state to issue $675 million of bonds to pay for energy, manufacturing and economic development loans.

Reporting was contributed by Staff Writer Elisa Lala and Reuters.

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