When new legislation passes, PSBA is seen as the leader in analyzing it and helping members make sense of it.

Countywide Earned Income Tax Collection

September 2006

Presented to the Pennsylvania House of Representatives Finance Committee
by M. Janet Burkardt, Esq., The Law Offices of Ira Weiss, Pittsburgh

INTRODUCTION
Good morning. My name is Janet Burkardt and I am an associate with the Law Offices of Ira Weiss. I have been actively involved in the representation of municipal and school districts with special emphasis on tax assessment and collection matters for over six years. I currently manage the Tax Collection Department of the Law Office of Ira Weiss in addition to my duties as a solicitor. The tax collection department provides delinquent tax collection services for seven school districts, several municipalities and water and sewer authorities. I also serve as solicitor for the Borough of Bradford Woods, two local zoning hearing boards, and several local school districts in Allegheny and Washington Counties . I would like to thank Chairmen Leh and Levdansky for granting me the opportunity to present comments, on behalf of the Pennsylvania School Boards Association (PSBA), regarding the Department of Community and Economic Development's (DCED's) countywide earned income tax (EIT) collection proposal.

EARNED INCOME TAX COLLECTION
PSBA agrees with the basic finding of the August 2004 report released by the DCED, namely that the present EIT collection system's fragmentation costs taxpayers in lost revenue. A consolidated system of EIT collection would create a more efficient system for the Commonwealth's taxpayers, increase cooperation between municipalities and school districts, and ease administrative burdens on employers and taxpayers.

While a statewide collection system might provide the most efficient system of income tax collection, PSBA acknowledges that making such a huge transition from the current system is remote. Therefore, PSBA supports DCED's concept of establishing a regionalized collection system with local government collaboration. At this time, I would like to address several issues that PSBA has called to DCED's attention in workgroup meetings on the draft amendment to House Bill 1427 and which PSBA maintains should be contained in the final version of the legislation.

TAX COLLECTION COMMITTEES
School districts collect more revenue from the EIT than municipalities, and with the mandatory front-end referendum questions, there may be a significant shift from the property tax to the EIT. As a result, school districts will be collecting even more income tax revenue in FY 2007-08. The Pennsylvania Department of Education reports that school districts collected more than $914 million in EIT revenue in 2004-05. Since school districts receive the highest percentage of the income tax revenue collected, they also pay the most for collection. For this reason, if tax collection committees are used to select a countywide collector, the members' votes should be weighted in direct proportion to the amount of income tax revenues collected in each political subdivision. PSBA notes that the current amendment for House Bill 1427 contains this provision.

REMITTANCE OF TAX PAYMENT
Section 512(4) of the proposed language sets forth a quarterly EIT withholding schedule. It requires employers to remit EIT payments within 30 days following the end of the calendar quarter to the tax officer. Additionally, Section 513(a)(1)(i) and (ii), provides a 60-day turnaround period for the distribution of tax payments from tax collectors to local municipalities and school districts. Add the 60-day turnaround to the employer withholding delay of 120 days, and the result is a 180-day delay for school districts to receive EIT payments.

Act 1 of the Special Session requires districts to grant homestead/farmstead exclusions on the property tax. That reduction in property tax revenues is to be replaced by a tax shift by an increase in the EIT or a conversion to a personal income tax (PIT), which is contingent on voter approval. When the two aforementioned remittance provisions are read in conjunction with Act 1, school districts may be forced to incur costs associated with tax anticipation borrowing in order to meet financial obligations. PSBA would recommend that employers be required to remit payments to the tax collector on the same schedule as they are required to remit for withholding of the state income tax. Although this language is not included in DCED's proposal, PSBA understands that DCED has agreed to change the remittance requirement by reducing both remittance deadlines to 30 days, which would result in a 60-day turnaround on distribution of revenue to school districts. PSBA strongly supports this change.

Subsection 512(5) authorizes employers with facilities in multiple tax collection districts (counties) to pay the total amount of income taxes deducted from employees' wages to the tax collection district (county) where the employers' payroll operations are located. PSBA remains concerned about this provision for two reasons. First, the term "payroll operations" is not defined by the draft amendment. Second, this provision further complicates the issue of cash flow for school districts, as remittance of revenue to the appropriate tax collector will be further delayed. PSBA recommends eliminating the unneeded step in the tax remittance process and require employers to submit EIT revenue to the appropriate tax collector in their employees' tax collection districts.

PSBA also recommends changes to tax enforcement, in particular minimum penalties for tax collectors' violations of statutory law, should be included to avoid de minimus penalties for noncompliance by tax collectors. Currently, Section 509(k) of the draft amendment makes reference to a maximum financial penalty of $2,500.00 for noncompliance. In the past, the minor judiciary has construed this type of language to allow the placement of a minimal financial penalty, even one as low at $1.00. Establishing minimum penalties will make a more effective deterrent for noncompliance and recognize taxpayers' rights. PSBA suggests the legislation set a minimum penalty of no less than $500.

NONRESIDENT TAXATION
Under both the current provisions of the Local Tax Enabling Act and the proposed changes in the draft amendment, municipalities are authorized to tax nonresidents, while school districts are prohibited from taxing nonresident, if their resident municipality or school district does not levy an EIT. Municipalities benefit, at the expense of school districts, by retaining the full amount of the EIT for nonresidents. In addition, municipalities were granted an increase in the emergency and municipal service (EMS) tax in 2004. School districts that did not previously levy an occupational privilege tax (OPT) were limited to $5.00 under Act 222 of 2004, while municipalities now collect up to $47.00. Therefore, we propose that school districts should be entitled to share in the EIT taxes paid by nonresidents not subject to the EIT at their place of residence (with the exception of Philadelphia , which is under the Sterling Act).

MULTI-COUNTY SCHOOL DISTRICTS
Also, PSBA also remains concerned about the requirements for school districts whose boundaries cross multiple counties. PSBA suggests that the 87 multi-county school districts be authorized to choose the tax collection committee they will serve on, thereby determining which of their counties will have the responsibility for collection or be granted a seat on each county in which their district overlaps. Voting should then be weighted based on the EIT revenue collected in that county.

CONCLUSION
I appreciate the opportunity to share these insights to the issue of EIT collection consolidation. PSBA believes that a countywide collection system could be valuable to school districts if the system takes into account PSBA's concerns. The association continues to stand ready to work with the committee and DCED on amendatory language. I will be pleased to take any of your questions at this time.

PSBA notes that there is precedent of proportioning based on millage rate. Act 8 of 1992 (72 Pa.C.S. § 5452.10(a)) provides that when an appeal is taken by a municipality or school district of an assessment dealing with commercial, industrial or multiple residential property, the cost of the independent appraisal shall be proportioned based on the millage rate of each entity to the total millage of such entities.