Act 32 intended to streamline local tax collection
By Liz Hayes
Published: Sunday, Jan. 8, 2012,
Ideally, taxpayers won't have to do much of anything to comply with the requirements for collecting the earned income tax.
Starting this year, employers are required to withhold the tax -- typically 1 percent of an employee's salary -- from paychecks and send the money directly to the tax collection agents for employees' hometowns.
The tax usually is split evenly, with half the money going to the home school district and the other half to the home municipality.
Previously, most residents were responsible for paying this wage tax to their local tax collectors, on a quarterly basis or in one lump sum by April 15 the following year. Some employers withheld the tax, but that primarily occurred for employees who lived in the same community in which the business operated.
A state law, Act 32, established the withholding requirements in 2008, but they didn't go into effect until this year.
The law removed the responsibility of collecting the state's estimated $1.9 billion in tax revenue from 560 municipal tax collectors.
In most counties, a single tax collection agent was appointed to collect the earned income tax for municipalities and school districts within that county.
"Before Act 32, local tax collectors had no standard procedures," said Sean Sanderson, a local government specialist with the Governor's Center for Local Government Services, a branch of the state Department of Community and Economic Development.
"Now, all the forms regarding local earned income tax collection and distribution are standard, and the procedures are standard," Sanderson said. "We should see an improvement in collection, efficiency and accuracy."
The Pennsylvania Economy League of Southwestern Pennsylvania, a research affiliate of the Allegheny Conference on Community Development, estimated as much as $237 million in wage tax revenue was lost annually statewide due to varying accuracy in records provided to tax collectors and varying thoroughness in collectors' efforts to collect the tax.
"Southwestern Pennsylvania, with its exceedingly large number of local tax collectors, is particularly hard hit by this problem," the league reported in 2008. "This ineffectiveness is confusing to businesses and residents, has high associated administrative costs and forces up other tax rates or curtails services."
Sanderson said Act 32 created 69 tax districts, one for each county except for Philadelphia, which collects its wage tax, and Allegheny County, which was divided into four tax districts.
The Alle-Kiski Valley's communities in Allegheny County are in the Allegheny North district except for the municipalities in the Riverview and Plum school districts, which are located in the Allegheny Southeast tax district.
Although there are 69 districts, Sanderson said there are only 21 tax collection officers statewide because many counties chose the same large collection agencies.
Bangor-based Berkheimer Tax Administrator, for instance, will collect taxes for nearly two dozen counties, including Butler and Westmoreland.
The Allegheny North and Southeast districts chose Keystone Collections Group, which is collecting taxes for about a dozen tax districts. Armstrong County selected Central Tax Bureau of Pennsylvania, which will handle collections in 10 other counties, too.
"Act 32 does not change taxing authority. It does not change tax rates. It is not a new tax. It is not tax increase," Sanderson stressed. "Act 32 merely helps employees, employers, payroll providers and tax officers collect and distribute the correct tax to the municipalities and school districts."
Examine your pay stub
For the most part, taxpayers should have handled their small share of the responsibility in facilitating the change in tax collection.
Employers should have collected certificates of residency from their employees, forms that indicate where a worker lives. Employers will use these forms to ensure the taxes paid, monthly or quarterly, to the county's tax collection agent are directed to the proper community.
Jim Hunt, director of sales and client services for Berkheimer, advised employees to review their first paycheck this year to ensure the proper rate is being withheld.
Brian Eshbaugh, Lower Burrell's treasurer, suggested residents double-check the political subdivision (PSD) code on their residency forms to be certain the taxes will be paid to the correct community.
If the money is sent to the wrong community, a resident still is responsible for paying the tax in his hometown, Eshbaugh said.
The DCED provides an informational section on its website that includes an address search that will help residents determine the proper PSD code and amount of wage tax that should be withheld.
The only other responsibility a taxpayer has is to file a local earned income tax return with the new tax agency -- not the former tax collector -- by April 15 of the following year. Any discrepancies in tax payment should be reconciled then.
Hunt said his agency has had no problems with the transition.
"Out in the western part of the state, it's going well," Hunt said. "We've received the files from all the collectors."
Hunt said Berkheimer is opening an office in Butler; the company has locations in the Derry Area School District in Westmoreland County, as well as in Pittsburgh. Hunt said they will continue to review their staffing needs at all 24 locations statewide to ensure they can meet the increased workload.
Collection effect awaited
Municipal officials are waiting to see how the change in collection will affect their bottom lines, this year and in the long run.
Local tax collectors still are collecting the 2011 wage tax; most won't close the books on last year until after this April. They still will be reconciling delinquent collections from 2011 and prior years.
"We still have an extensive amount of work to do with wage tax, at least for the next two years," said Arnold Treasurer Joseph Puet, who expected to collect about $280,000 in wage taxes for 2011.
Puet said the city will not be replacing his retiring clerk, Sandra Williams. He will be the lone employee in the treasurer's office, which still collects an array of other taxes and fees.
"In Arnold, I'm still going to have a full workload to do, and I'll continue to do it to the best of my ability," Puet said. "I've spent 30 years here, and I've always tried to operate my office as efficiently and effectively and productively as I possibly could."
Puet believes the centralized collection ultimately will benefit the city. Arnold will see a 40 percent reduction in salaries from his office -- down from about $72,600 to just Puet's $41,500 salary.
Additionally, Puet believes the 1.45 percent commission paid to Berkheimer will be less than the city's costs of collecting wage taxes, especially once the commission fees paid to the former agency that collected delinquent taxes are factored in.
The commissions paid to taxing agencies range from 1.42 percent to Keystone in Allegheny North to 1.85 percent to Central Tax in Armstrong County.
"Most definitely, we're going to come out ahead," Puet said. "The new system can be very effective if they get full cooperation from employers. It will be a financial benefit to all of the municipalities."
Puet said Arnold could even see a one-time windfall this year because he will be collecting the 2011 wage tax as usual, but Berkheimer should begin dispersing the quarterly 2012 payments, as well.
And officials anticipate direct reporting by employers could lead to municipalities catching residents who have evaded paying the tax in the past.
"I think it's going to be easier to collect," New Kensington Treasurer Patti DiCello said. "Now we have to chase after it, which is a lot more time-consuming."
Anticipating the reduction in the workload, New Kensington made cuts in DiCello's office. Her pay was reduced nearly 50 percent, down to $23,000 per year, and her office will lose two clerks by mid-year who each earned about $18,000.
DiCello, who has been treasurer for 12 years and worked in the office since 1990, said she and two remaining clerks will absorb the office's remaining tax collections.
She believes there may be some lag time in receiving the tax money this year as New Kensington's estimated $850,000 in wage tax revenue is collected and distributed. Since New Kensington collected the tax quarterly, she does not anticipate the 2012 windfall that Arnold could see.
Brian Eshbaugh in Lower Burrell said there were no staffing or salary changes in his office relating to the wage tax collection.
His office, which collected about $2.2 million in wage tax annually, will continue to have two full-time employees and one part-time worker.
"So far, it's gone very smooth," Eshbaugh said of the transition.
Elsewhere in the A-K Valley
Other local officials reported no major problems.
"I don't want to overly optimistic, but I don't have grave concerns," said Mary Papik, Saxonburg's borough manager.
Papik said Butler Area School District switched over to Berkheimer last year, which acted as a trial run for the rest of Butler County.
"They worked out a whole lot of the bugs for the rest of us," Papik said.
Papik estimates the borough will collect about $110,000 in wage tax revenue this year. She said it's too early to tell how revenue will compare with prior years until the first distributions begin in a few months.
Springdale Borough Manager Ron Borczyk said he budgeted about $162,000 in wage tax collection this year. He reduced last year's estimate by about 10 percent to allow for any glitches this year.
But he believes the borough should see a long-term increase in wage tax revenue.
Faith Payne, executive secretary for Harrison, also reduced her budgeted wage tax revenue slightly this year. She's estimated the township should collect $690,000 this year.
"We know there are going to be hitches," she said.
Act 32 assistance
The Pennsylvania Department of Community and Economic Development provides fact sheets on Act 32 for taxpayers, employers and municipalities on its website, www.newpa.com/node/6710 .
Additionally, many of the tax collection agencies provide information on their websites.
Here are the agencies appointed for each county:
• Allegheny North and Southeast: Keystone Collections Group, www.keystonecollects.com , 724-978-0300.
• Armstrong County: Central Tax Bureau of Pennsylvania, www.centaxgroup.com , 800-4-CENTAX.
• Butler and Westmoreland counties: Berkheimer Tax Administrator, www.hab-inc.com , 866-701-7206
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