Philadelphia’s reduction to its resident wage tax rate—approved on June 22, 2023 and set to take effect on July 1, 2023—will have little impact on the overall local tax burdens of city resident households, according to The Pew Charitable Trusts, which updated its calculations from an earlier analysis.
Pew’s March report, “The Local Tax Burden on Philadelphia Households,” found that the overall local tax burden was lowest, in percentage terms, on Philadelphia’s low-income homeowners who receive the city’s $80,000 homestead exemption and highest on low-income renters of market-rate apartments. The publication also found that the overall tax burden was higher on renters than on homeowners. Pew’s model was based on 10 hypothetical representative households with varying levels of income, property values, and consumer purchases.
For almost three decades, Philadelphia has made small annual reductions in the wage tax rate from its 1995 peak of 4.96%. This year, trimming Philadelphia’s wage tax rate, and the corresponding rate for the school income tax, from 3.79% to 3.75% will reduce the tax burdens by less than one-tenth of one percentage point, according to Pew’s model. Those reductions amount to $75 a year for the highest-income homeowner, $20 for the middle-income owner, and $1 for the lowest-income owner. For renters, those figures are slightly lower because renters tend to have lower taxable incomes. Here are the amounts of change due to the rate reduction for each household in Pew’s analysis:
Figure 1
| Homeowners | Reduction in effective tax rate (percentage points) | Reduction in taxes owed per year |
|---|---|---|
| Highest-income owner | 0.04 points | $75 |
| Second-highest-income owner | 0.03 points | $37 |
| Middle-income owner | 0.03 points | $20 |
| Second-lowest-income owner | 0.02 points | $8 |
| Low-income owner | 0.01 points | $1 |
| Renters (market rate) | Reduction in effective tax rate (percentage points) | Reduction in taxes owed per year |
|---|---|---|
| Highest-income owner | 0.04 points | $49 |
| Second-highest-income owner | 0.03 points | $24 |
| Middle-income owner | 0.03 points | $13 |
| Second-lowest-income owner | 0.02 points | $5 |
| Low-income owner | 0.01 points | $1 |
Pew’s model includes four of Philadelphia’s main taxes: the wage tax, the property tax, the city’s share of the sales tax, and the school tax on unearned income. It also includes broadly applicable tax exemptions, most notably the $80,000 homestead exemption, which is widely used by homeowners but is not available to renters or their landlords. The model assumes that renters shoulder the property tax as part of their rent, which is typically passed on from landlords who are ineligible for the homestead exemption. Nonresident taxes were not analyzed. Business taxes are being analyzed in a separate analysis currently underway.
Thomas Ginsberg works on The Pew Charitable Trusts’ Philadelphia research and policy initiative.