Editor’s Note: This is the second of a series of occasional blogs by a Philadelphia resident highlighting policy problems holding back the City of Brotherly Love.
If a tree falls in a forest and no one hears it, does it make a sound?
You’re probably familiar with this thought experiment, but Philadelphia is adding its own twist to the famous question: If a tax is on the books and no one knows it, does it matter?
For many Philadelphians the answer is no.
Philadelphia Revenue Commissioner Frank Breslin explained the issue to the Inquirer recently, saying of the city’s School District Income Tax (SIT), “[M]any residents who should be paying school income tax are not even aware that it exists.”
That’s right. The city knows that people are oblivious to—and aren’t paying—a tax designed to fund local schools. And given the Revenue Department’s limited resources, they likely won’t have to. The department focuses enforcement only on people with over $3,000 of income subject to the tax.
I’m not saying Philadelphians are undertaxed—we aren’t. I’m saying the tax system is self-defeating and unenforceable.
Let’s examine what types of income are subject to SIT, and how that affects payment and collection. As the table below shows, in virtually every case, taxpayers or preparers must calculate income in a way unique to Philadelphia. That’s a problem. The amounts cannot be determined directly from your 1040 or PA-40 forms. Your tax preparer doesn’t mind—you’re paying for the extra work!
The article goes on to say that only about 40,000 residents end up paying the tax. Yes, out of some 670,000 taxpayers in Philadelphia (IRS, 2015), we are to believe that only 6 percent have income subject to the SIT. Is this credible? According to the IRS, nearly 1 in 5 returns nationally had taxable dividends and still more had taxable interest and capital gains. Because no other jurisdiction calculates dividends and capital gains the way the SIT does, we can only estimate how the SIT compares to IRS or state data. This data implies that the city is missing out on a considerable amount of tax revenue.
Why? The system is flawed.
It is axiomatic that good taxes are both easy to pay and easy to collect. In other words, taxpayers should know if they owe the tax and easily understand how much to pay. Similarly, the tax collector must be able to quickly determine who owes the tax and how much they owe. The SIT fails on both counts.
The solution, as previously noted, is to simplify the tax code and streamline the payment process. Not only would this increase tax compliance, but it would save in auditing and collection expense, possibly allowing for tax reductions in other areas.
The City Council seems unwilling to take on this challenge, that is, unless pressure is brought to bear from Harrisburg.
Andrew Terhune has an MBA from Columbia University with a concentration in finance. He has studied Philadelphia's arcane taxation system for over two decades