Wage tax refunds could be coming soon for Philadelphia’s poorest workers

Philadelphia City Council took a step Wednesday toward offering relief from the city wage tax for low-income workers when a committee unanimously voted for legislation that would offer tax refunds to them.

The bill, sponsored by Councilman Allan Domb, would allow poor residents and nonresidents who work in Philadelphia to receive refunds on a portion of the tax. Officials say about 51,000 taxpayers would qualify, and the average refund would be $41 per month.

The Finance Committee voted for the bill over the objections of the Kenney administration, which urged lawmakers to allow more time to work out how best to offer and implement a relief measure.

“Our issue is not with the intent of the bill; our issue is, we want to make sure we’re providing that relief in the most effective way possible,” Finance Director Rob Dubow told the committee. “We’d like to have those discussions as part of [next year’s] budget process.”

But Domb and other Council members argued that Philadelphia could not wait to offer relief to its poorest workers, because the wage tax has the highest rate of any local income tax in the country.

“We should not be taxing people who cannot put food on the table,” Domb said. “It’s just wrong. And whatever we can do to correct that and fix it, we need to do.”

The bill will now go to the full Council for a vote. If passed, it would take effect in the 2021 fiscal year, which begins in July 2020. Council President Darrell L. Clarke supports the bill and on Wednesday called it “an effort that’s long overdue.”

The city’s wage tax, currently 3.8712% for residents and 3.4481% for nonresidents, is the largest source of revenue to the general fund, raising about $2 billion per year. It has long been a source of ire for businesses and workers. Dubow said the proposed refunds would cost as much as $25 million.

Eligibility would be set by the income levels for the state’s tax forgiveness program. Those levels vary based on the number of adults and dependents in a household. A family of two adults and two children, for example, can qualify if they earn up to $34,250 per year, and single parents of two children qualify if they earn up to $27,750 per year.

The legislation would reduce the wage tax rate to 1.5% for eligible workers. They would receive full refunds on the wage tax beginning in 2023, when the 1.5% portion of the tax dedicated to the Pennsylvania Intergovernmental Cooperation Authority (PICA), a state board that oversees the city’s finances, is set to end.

Some cities and states have local income tax rates that vary, so the rate at which workers pay taxes depends on the amount they earn. But in Pennsylvania, a provision in the state constitution requires all tax rates to be uniform. Dubow said the proposed legislation would not violate the state’s so-called uniformity clause because it takes the form of tax refunds, not a change in tax rates.

The city already offers a 0.5% wage tax refund to low-income residents. But Pauline Abernathy of Benefits Data Trust, who testified Wednesday in support of Domb’s bill, said less than 2% of eligible workers take advantage of that refund.

“The city can do so much more to get the word out about the wage tax refund,” Abernathy testified.

Council approved a different wage tax relief bill in 2004 for low-income workers, in an effort championed by the late Councilman David Cohen. The measure was repealed before it was implemented. As Council members noted Wednesday, Philadelphia is better off financially than it was when Cohen’s legislation was repealed, and has even had recent budget surpluses.

Dubow questioned the bill’s inclusion of nonresidents in the refund program and noted that the limited resources the city can spend on tax relief measures should be focused on residents.

He also said the implementation of the refund program would be complex. It would require income verification from employers who file wage taxes on behalf of their workers, he said, and the Revenue Department would need to hire two employees to process refunds. The average refund of $41 a month, Dubow said, would be “a help, to be sure, but likely not enough to lift many out of poverty.”

Members of the Finance Committee said it’s still money.

“I agree $41 is not enough to lift someone out of poverty, but … I think $41 is a start,” Councilwoman Cindy Bass said. “And I think that start should begin as quickly as possible.”