Philadelphia Wage Tax Reduction: What Does It Mean for Workers?

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Housing, gas, groceries: costs are rising.

One that may be about to fall – never so little – is Philadelphia’s payroll tax. The city council is ready to approve a fall on Thursday when it adopts the budget for fiscal year 2023.

The payroll tax is Philadelphia’s largest single income. The intake plunged with COVID closures and remote work, but it has crept up again. Of the $ 3.8 billion expected city tax revenue in FY2023, over $ 1.6 billion is estimated to come from payroll tax.

Whether you are a Philly resident or a non-resident working in the city, the interest rate cut will not have a meaningful impact on your wallet.

Council and Mayor Jim Kenney’s administration also agreed to cut the net income portion of the BIRT (Business Income and Receipts Tax) – which applies to any person or business seeking profit – from 6.2% to 5.99%. This has been celebrated by some as a great gain for attracting businesses to the city.

Meanwhile, the budget is expected to include tax breaks for property owners, following new assessments published in May that saw property values ​​rise by an average of 31%.

What is the rationale behind these cuts and how will it affect you? Read on.

How much will Philly workers save?

The payroll tax rate is set to drop from 3.84% to 3.79% for urban workers, and the average annual household income for Philadelphia is around $ 49k.

With that household income, you would pay $ 1,886 a year in payroll tax below the current rate. Under the new rate, your annual total will be $ 1,862.

That’s a saving of about 47 cents a week – almost enough to buy a banana.

For non-residents, the savings are more minimal. That’s just a 0.008% drop in payroll tax for non-residents working in Philly, to 3.44%. Spent on an average household income of about $ 90,000 in large parts of the suburbs, the drop comes out to about 14 cents a week.

When Mayor Kenney proposed a payroll tax cut in May, he had proposed a larger cut for residents, bringing the rate down to 3.7%. That would have saved a typical Philly household about 64 cents a week.

Who benefits from the tax breaks?

Supporters of payroll taxes and BIRT reductions hit them as a way to help the small business community.

Five regional chambers of commerce and other local business coalitions came together earlier this month to push the city council in this direction. Employers often cite these taxes as a reason to place their business just outside the city limits.

Following the Council’s provisional approval of the budget last week, several lawmakers highlighted the business acumen of the measures they had just proposed, noting that city owners feel hit by the pandemic and the pressure of inflation.

Leaders of chambers of commerce celebrated the proposal. They have argued that business-friendly measures will ultimately create jobs and help curb poverty rates.

Who loses then?

Tax revenues fund many urban services, so some worry that lowering rates could negatively impact those services.

This time, councilors Kendra Brooks, Helen Gym and Jamie Gautier did not support BIRT and the payroll tax.

“The payroll tax proposal saves only 45 cents a week for the average Philadelphia employee, while most of the $ 11 million in the broad-based BIRT tax cut will be taken by large corporate entities, none of which will make relocation or business decisions because of it,” he said. Gym in a statement to Billy Penn.

“When we’re trying to return as a city, I was not comfortable taking this revenue away from the city’s services,” Gauthier told KYW.

Wage tax revenues are expected to grow by a total of 6.95% according to Kenney’s original budget proposal from March, which for the first time exceeds pre-pandemic levels.

What does this have to do with property taxes?

Back in May, Kenney framed the payroll tax cut as a way to ease the burden on property valuations. Although property tax rates have not actually increased, the new estimates mean that many people will get a bigger tax bill for March 2023.

Another way to ease the burden? Increase Homestead Exemption, which allows you to knock a fixed amount from your property value when calculating the tax.

For the city’s residents living in the property they own, these changes are at least much more meaningful than the payroll tax cut. Kenney proposed increasing the exemption from $ 45k to $ 65k, but the Council is taking it further.

Under the budget that is expected to pass, the Homestead exemption is $ 80k, which can save over $ 1k a year.

The proposed budget also includes a boost to the Longtime Owner Occupants Program, which limits the rate at which the appraised value can increase for long-term property owners.

What was the effect of the pandemic on payroll taxes?

It took a big hit.

In the fiscal year 2021, which ended in June 2021, the city reported a $ 124 million decrease in payroll and income tax revenues compared to the previous year.

Some of it has come back in FY2022. Employers appear to be holding back more this year, Tax Commissioner Frank Breslin told Billy Penn earlier this spring. And people can only get payroll tax refunds if they have to work outside of Philadelphia. Many suburbs were forced to do so in 2020 because of COVID, but had an office to return to this fiscal year.

Still, long-term changes in workplace culture are likely to affect Philly’s ability to collect.

The city could miss out on $ 572 million in non-resident payroll tax revenue between 2022 and 2026, according to a May report by the Pew Charitable Trusts, relative to what the revenue would have been if not the pandemic. The number of jobs located in Philadelphia has fallen by 6%, Pew said in his June report.

The city received $ 1.4 billion from the U.S. Rescue Plan Act to replace that revenue, but it will eventually run dry, the Pew report noted.

Payroll taxes also fell last year, right?

Yes. The payroll tax has existed since 1939.

The current rates came into effect on July 1, 2021, a slight reduction from the previous rates of 3.87% for residents and 3.50% for non-residents.

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