Tax law proves its worth by bringing in lost revenue
With tax day comfortably in the rearview mirror for most, odds are there was one part of the ordeal that was a lot less taxing on residents.
Pennsylvania is at least two years into a system for collecting local earned income taxes. It includes mandatory withholding of the tax — typically 1 percent — from workers' paychecks, and collection by a single local collector or tax officer.
That means no longer having to come up with an annual payment, or paying the tax based on quarterly income estimates and having to reconcile it on an annual return.
The change was brought about by Act 32, “the most significant local government tax collection legislation in a generation,” said Lindsay Kensinger, a spokeswoman for the state Department of Community and Economic Development.
Passed by the state Legislature in 2008, Act 32 was meant to make the collection of earned income taxes more efficient and consistent — and recover an estimated $237 million that was being lost annually statewide.
So far, it seems to not only be working, but working out well for all involved — taxpayers, employers and governments, said Brian Jensen, executive director of the Pennsylvania Economy League of Greater Pittsburgh, the public policy research affiliate of the Allegheny Conference on Community Development.
“We've heard good things from everybody so far,” Jensen said. “These kind of things don't happen very often.”
From 2012 to 2013, total earned income tax collections were up by about 23 percent in Third Class cities throughout the state, according to information the DCED received from local tax collectors.
“Through the successful implementation of Act 32, providing for the more efficient collection of local income taxes, local government revenues are expected to increase without having to raise earned income tax rates,” Kensinger said.
While Jensen's organization supported the plan from the start, Allegheny Township Manager Greg Primm was among those who weren't so sure.
“Everyone was scared of Act 32 and the ramifications of it,” Primm said.
But Allegheny Township's collection of current earned income taxes has increased by about 15 percent, according to Primm. And delinquent collections have skyrocketed — from less than $1,000 annually to between $12,000 and $15,000.
This year, because of the boost in revenue, Allegheny Township did not have to take out a tax anticipation note — basically a bank loan to pay its bills in the first quarter of the year until tax money starts coming in.
The township also was able to put money into a fund for health benefits for retired police officers, something it should have been doing and wasn't.
“It should have happened a long time ago,” Primm said. “I see nothing but positive results from Act 32.”
While the earned income tax is split evenly between municipalities and school districts, it plays a much bigger role in municipal budgets. With higher real estate tax rates, school districts get more money from property taxes.
Some municipalities, though, like West Deer, are the opposite and collect more in earned income tax than property tax.
West Deer saw its earned income tax go up nearly 24 percent, from $1.18 million in 2011 to $1.46 million in 2012. In 2012, the property tax brought in less, about $1.25 million.
The 2013 earned income tax collection was still higher than before, at about $1.38 million.
“I think it's working well. I was on record saying I didn't think it would succeed,” West Deer Manager Daniel Mator said. “Overall, we're happy with it here in West Deer.”
Most counties in Pennsylvania have one company hired to collect the earned income tax, chosen by a committee of local elected officials. Berkheimer Tax Administrator is the collector in Armstrong, Butler and Westmoreland counties. In Armstrong, Berkheimer took over from Central Tax Bureau, which collapsed.
Allegheny County was divided into four tax collection districts. The collector for the Allegheny North district, which covers the Alle-Kiski Valley area of the county, is Keystone Collections.
Keystone Collections' annual earned income tax collections are up significantly in all 15 countywide districts it serves, said Joe Lazzaro, vice president and general counsel for Keystone Collections Group.
In the Allegheny County North district, most communities had increases of more than 16 percent above pre-Act 32 tax collections projected by the state, Lazzaro said. After the start of Act 32, Keystone continued to increase tax revenue on average across the district by another 5 percent from 2012 to 2013.
“In addition to the tax collection increases that result from mandatory employer withholding, advanced technologies at Keystone allow us to receive, process and distribute that tax at a very rapid pace,” Lazzaro said. “Keystone makes tax distributions to cities, boroughs, townships and school districts at least weekly.”
Mandatory withholding will reduce the number of taxpayers who become delinquent on the earned income tax. By auditing tax rolls, companies like Keystone have been able to recover high delinquent tax revenue from residents who failed to file or failed to pay in past years.
“These delinquent recoveries will be coming while at the same time communities are seeing overall current revenues increasing and moving more quickly into the municipal accounts where they are needed,” Lazzaro said.
New Kensington expected to get $875,000 last year. Instead it brought in nearly $1.1 million, or about 20 percent more.
“We're receiving more than we expected because they're doing a great job collecting on delinquents,” Councilman Todd Mentecki said.
Saxonburg Borough Manager Mary Papik said municipalities had been warned that at the start that they'd see big increases in delinquent earned income tax collections, which would then drop off. That's what happened.
Saxonburg's total earned income tax collection jumped by about 18 percent, from $142,000 in 2011 to $167,000 in 2012. It settled down to about $152,000 in 2013.
While delinquent collections went down, current collections went up.
“We're getting it current instead of it becoming delinquent. That's the whole theory behind why they did it,” Papik said. “There's not going to be any more delinquent, or very little delinquent. I'm not going to see that again. It's not a long-term windfall.”
An Economy League analysis found that far less than what was owed in earned income tax was being collected before Act 32.
“A lot of money was being left on the table or falling through the cracks,” Jensen said. “What that meant is either services aren't provided or a municipality has to find other revenues. That means increasing other taxes, upping fees, whatever it may be.
“That's not fair. The people who owe ought to pay.”
Dependable, predictable earned income tax collection could stave off property tax increases, or mean contributions to libraries and fire departments aren't cut, Jensen said.
Frazer Supervisor Lori Ziencik said additional earned income tax the township is collecting, about $20,000 a year more, is helping keep real estate taxes steady and the homestead property tax exemption in place.
“It's the best tax change that's come along in a long time,” she said.
Brian C. Rittmeyer is a staff writer for Trib Total Media. He can be reached at 724-226-4701 or firstname.lastname@example.org.