Guest Blog: The Hidden Cost of Tax Complexity

Editor’s Note: This is the first of a series of occasional blogs by a Philadelphia resident highlighting policy problems holding back the City of Brotherly Love.

As a Philadelphia resident and taxpayer since 1985, I have seen firsthand how city leaders’ first resort to solve perceived problems is either higher taxes or burdensome non-tax economic constraints. The sweetened beverage tax is but the latest in a litany of examples. Sadly, their cumulative effect pushes businesses and families to relocate, sometimes in Pennsylvania, but also in neighboring New Jersey, Delaware, and elsewhere.

Admittedly, many of the city’s problems are self-imposed, beginning and ending in City Hall and at the feet of the City Council. But because Philadelphia is Pennsylvania’s most populous city—five times the population of Pittsburgh—the rest of the state must take note. What happens in Philly does not stay in Philly.

Thankfully, many of the city’s issues can—and often must—be addressed in Harrisburg.

Is this the nation’s most complicated tax system?

Google “what makes a good tax” and what you find in virtually every list is “simplicity,” both for the taxpayer and the tax collector. Time and money spent preparing and collecting taxes is time and money wasted. Federal tax reform, on the move in Washington D.C., recognizes this problem and takes steps to streamline the tax code.

The fact is, the best taxes are easy to pay and easy to collect—like the sales tax, which is collected at the time and place of sale. Simple.

What is the opposite of simple? Requiring up to four different tax returns for Philadelphians’ incomes:

  1. Earnings Reconciliation: If any of your wage or salary earnings are from businesses that don’t collect the city’s wage tax (e.g. businesses not in PA), you must file a tax form with the city reconciling taxes paid or withheld with the amount you owe. Don’t forget the quarterly estimated payments you have to make during the year either.
  2. Net Profits Tax (NPT): This is paid on the net income of any business you own within or outside the city.
  3. Business Income & Receipts Tax (BIRT): Taxing business income once isn’t enough in Philadelphia, so you may also have to file the BIRT which taxes both gross receipts and profits. (Starting in 2016 the first $100k is exempt).
  4. School District Income Tax (SIT): This is a catch-all tax on income not already taxed by the other taxes. Since the city’s definition of income is different from the definition used by either PA or the IRS, you or your accountant get to calculate income all over again.

This complexity has hidden costs. First, taxpayers must spend extra time, effort, and expense to file the right forms at the right times. Second, the city collects less than it is owed because some residents don’t pay them, either out of ignorance or in the not unrealistic expectation that the city will never catch them. Finally, the city must bear the expense of having its own revenue department and staff to collect these taxes.

There is an obvious solution to simplify both collection and payment and to lower costs: a unified city-state income tax form. Look no further than New York and Maryland for examples. No extra forms or filings are necessary in these states. You apply the local tax rate to the state income you’ve already calculated for your state return and you’re done.

One tax return, one payment, and big savings in time and effort. Simple, yes, but it won’t happen unless the legislature in Harrisburg acts.

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.