The Changing Makeup of Philadelphia’s Wage and Earnings Tax

Table 3

Philadelphia Wage Tax Refunds

Fiscal 2019-24

In fiscal 2024, the nonresident wage tax rate was 3.44%. Based on that rate, the average $3,253 refund would cover:

• A nonresident with annual wages of roughly $95,000, if that person received a refund for every workday.
• A nonresident with annual wages of roughly $190,000, if that person received a refund for half of all workdays.

On the other hand, resident wage tax numbers have been relatively strong, largely because of the improved strength of the city’s economy. The unemployment rate for Philadelphia residents averaged 4.2% in 2023 and 4.4% through the first seven months of 2024, the lowest in at least 35 years.⁹ The number of people working in Philadelphia—residents and nonresidents alike—grew from 664,000 in January 2021, the pandemic-related low point, to an estimated 777,000 in July 2024, the highest since the late 1980s.¹⁰

Policy implications

Many suburbanites appear to like working from home, and not just for tax reasons. Doing so allows them to save time and money by not commuting and to deal with family, personal, and household obligations more easily.

Getting them back to the city through tax policy is likely to be difficult. Marginal drops in the nonresident tax rate, which the city has enacted on and off for the last three decades, seem unlikely to move the needle; the income/wage tax gap between the city and its suburbs is too large. In many of those suburbs, there is no earned income tax. In others, residents not subject to the Philadelphia wage tax pay a local tax, generally 1%.¹¹

For years, public officials in Philadelphia have been debating the case, made by some business leaders and fiscal analysts, that the city ought to become less dependent on the wage and earnings tax. The argument is that the tax hurts the city’s ability to retain businesses and residents, has proved to be more volatile than some other revenue sources, and may be a less-than-perfect match with the decreased necessity of in-person work. 

But shifting away from a tax that still brings in hundreds of millions of dollars each year from nonresidents— people who arguably owe their jobs to the city’s economy but require less in direct city services—could put more of the burden on city residents through increases in levies that many nonresidents do not have to pay. A Philadelphia tax reform commission—created by City Council in the spring of 2024, with members named by the council, Mayor Cherelle Parker, Philadelphia’s various chambers of commerce, and others—is to make recommendations on the city’s overall tax structure by the end of 2024.¹²

Beyond tax policy, the Parker administration’s stated goals are to create a city that is safer, cleaner, and greener, with access to economic opportunity for all.¹³ This effort may help encourage nonresident workers to spend more of their work and leisure time in the city. It also could form the basis of a resident retention and attraction strategy.

In addition, Mayor Parker has expressed her desire to have more city businesses require employees to come into their city offices more often. Her administration ordered all municipal employees to return to in-person work five days a week as of July 15, 2024; some had been working hybrid schedules.¹⁴ Because most of those workers are city residents, the policy will have very little impact on wage tax revenue.

Progress on those fronts and other factors could have some impact on the numbers. In any event, city officials say, the share of the tax paid by nonresidents appears to have stabilized for now.

Methodology

How Pew calculated the revenue raised by the nonresident wage tax

The wage tax amounts paid by residents versus nonresidents are not reported by the city on a fiscal year basis; the Revenue Department reports them on a calendar year basis, with the published data going only through the end of 2022.¹⁵ 

Pew extracted the fiscal year numbers from the data included in the Quarterly City Managers Reports (QCMR), which are prepared by the city’s Finance Department and published four times a year. To conduct the analysis for each fiscal year, Pew used what the city calls the “actual” revenue—that is, the revenue received for each fiscal year—as reported in Table R-2 of the QCMR for the year. Pew used the number listed in the table included in the report published on May 15 of the following year, thereby allowing officials time to arrive at a final figure. For fiscal 2023 data, for instance, this would be the QCMR for the period ending March 31, 2024. The figures for fiscal 2024 (estimated) come from the QCMR for the period ending June 20, 2024, the column of Table R-2 labeled “Current Projection.” The numbers for fiscal 2025 (projected) come from the Mayor’s Operating Budget in Brief for Fiscal 2025, as adopted by City Council in March 2024 under Wage, Earnings, and Net Profits Tax Projection—City and PICA.

(Fiscal year data on the makeup of the wage tax can also be extracted from the Revenue Department’s City Monthly Revenue Collections reports, using the year-to-date numbers for June of each year, because the fiscal year ends June 30. The numbers there are identical to the QCMR figures in most cases, and quite similar in others.)

In the QCMRs, the relevant numbers for this analysis are found near the bottom of Table R-2 in a section labeled “Analysis of City/PICA Wage, Earnings, and Net Profits Tax.” On the third line of that section, the city lists the total raised by the wage and earnings tax—the amount paid by both residents and nonresidents—for the preceding fiscal year. On the second line, it lists the amount raised by what’s known as the PICA tax; PICA stands for the Pennsylvania Intergovernmental Cooperation Authority, a state fiscal oversight agency. The PICA tax is a portion of the wage and earnings tax amounting to 1.5% of all taxable wages earned solely by city residents. (The money is channeled through PICA before coming back to Philadelphia once the authority approves the city’s five-year financial and strategic plan.)

Pew used these two numbers—the PICA tax and the total raised by the wage tax—to determine the full portion paid by residents for any given fiscal year, which then allowed us to determine the portion paid by nonresidents.

To get the residential amount, we took the PICA tax total and multiplied it by the ratio of the full city resident tax rate for that year to the PICA rate of 1.5%, which does not change from year to year. Doing so yields the entire residential portion, which we then subtracted from the overall wage tax total to get the nonresidential portion. As an example, here’s how we calculated the results for fiscal 2023:

According to the QCMR for the period ending March 31, 2024, the total raised by the wage and earnings tax in fiscal 2023, for residents and nonresidents combined, was $2,361,048,000, and the amount generated by the PICA tax was $628,206,000. The wage tax rate for residents that year was 3.79%. To calculate the full residential portion for that year, Pew divided 3.79% by the 1.5% PICA rate and multiplied the resulting ratio (2.52666) by the $628,206,000 PICA tax. The result was $1,587,267,000, the full residential portion. We then subtracted that from the combined total of $2,361,048,000 to get the nonresidential portion, which was $773,781,000. The share of the total paid by nonresidents—$773,781,000 divided by $2,361,048,000—was 32.8%, leaving a share of 67.2% paid by residents.

To adjust for inflation from 2019 to 2024, we relied on the consumer price index inflation calculator from the U.S. Bureau of Labor Statistics, using January 2019 to represent fiscal 2019 (July 1, 2018, to June 30, 2019), and January 2024 to represent fiscal 2024 (July 1, 2023, to June 30, 2024). This produced an inflation rate of 22.53% for the five-year period. To convert 2019 dollars to 2024 dollars, we multiplied the 2019 dollars by 1.2253. To get the percentage change, controlled for inflation, we subtracted the 2019 adjusted figures from the 2024 figures, then took the resulting numbers and divided them by the adjusted 2019 figures.

Endnotes

1. City of Philadelphia, “The Mayor’s Operating Budget in Brief for Fiscal Year 2025, as Proposed to the Council—March 2024,” 2024, https://www.phila.gov/media/20240318154139/budget-in-brief-FY2025-proposed.pdf. The data appears on Page 9, Wage, Earnings and Net Profits Tax Projection—City and PICA.
2. Pew made the calculations using the Pennsylvania Intergovernmental Cooperation Authority (PICA) wage tax and total wage tax figures for all years, as reported in the city’s Quarterly City Managers Reports. For an explanation of the calculations, see the methodology section of this brief.
3. Philadelphia Department of Revenue, “Philly’s Business Income, Wage Tax Rates Drop Again,” news release, June 26, 2023, https://www.phila.gov/2023-06-26-phillys-business-income-wage-tax-rates-drop-again.
4. This occurs most often when a Philadelphia resident works for an out-of-state employer. Such employers are not required to withhold the wage tax if they don’t have a physical location within Pennsylvania or aren’t subject to the city’s business income and receipts tax.
5. The origin of the policy is discussed in PICPA Testimony, Before the Pennsylvania Senate Majority Policy Committee (March 2, 2023) (statement of Matthew Melinson, partner, Grant Thornton LLP), https://policy.pasenategop.com/wp-content/uploads/sites/140/2023/02/Matthew-Melinson-Testimony.pdf.
6. Philadelphia Wage Tax Policy Guidance for Non-Resident Employees in the Era of Remote Work, Philadelphia Department of Revenue, 2023, https://www.phila.gov/media/20231024112123/UPDATED-Wage-Tax-policy-guidance-for-non-resident-employees.pdf.
7. Since 1996, the city has enacted a series of marginal cuts in both resident and nonresident rates. See the wage tax and earnings tax section of the table at Philadelphia Department of Revenue, “Summary Schedule of Tax Rates Since 1952, City and School District of Philadelphia (Revised Aug. 4, 2023),” 2023, https://www.phila.gov/media/20231116085343/Historic-Tax-Rates-Updated-Dec-2023.pdf. Even though reductions for residents have been greater than for nonresidents, the share of the tax paid by residents has grown.
8. Southeast Pennsylvania Transportation Authority, “Ridership Recovery Dashboard,” 2024, https://recovery.septa.org.
9. Both jobs and unemployment numbers come from “State and Metro Area Employment, Hours, and Earnings,” U.S. Bureau of Labor Statistics, https://www.bls.gov/sae. Employment numbers are from “State and Metro Area Employment, Hours, and Earnings,” Table SMU42979610000000001; unemployment numbers are from “Local Area Unemployment Statistics,” Table LAUCN421010000000003. Annual and year-to-date averages are the sum of the monthly figures divided by the number of months included.
10. See U.S. Bureau of Labor Statistics, “State and Metro Area Employment, Hours, and Earnings,” Table SMU42979610000000001.
11. To see the rates in communities in Montgomery County, the largest of Philadelphia’s suburban Pennsylvania counties, see “Montco Tax Table,” Montgomery County Association of Township Officials, https://www.mcato.org/sites/g/files/vyhlif4676/f/uploads/mcato_-_local_news_-_taxing_chart_0.pdf. The figures are in the column labeled “residential earned income tax rate.” This kind of calculus does not apply to New Jersey residents who work in Philadelphia, because there are no local wage or income taxes in their state. And New Jersey residents are permitted to claim the wage tax they pay to Philadelphia as a credit against New Jersey’s state income tax.
12. Kharia Garcia, “Philadelphia City Council President Kenyatta Johnson Announces Members of the New Philadelphia Tax Reform Commission,” news release, April 9, 2024, https://phlcouncil.com/philadelphia-city-council-president-kenyatta-johnson-announces-members-of-the-new-philadelphia-tax-reform-commission.
13. For a discussion of policy options for cities dealing with remote work, see Richard Voith et al., “Doom Loop or Boom Loop,” Volcker Alliance, 2024, https://www.volckeralliance.org/resources/doom-loop-or-boom-loop.
14. “Philadelphia City Workers Return to the Office Full-Time After Judge Denies Union’s Request,” Josh Sanders, CBSNews.com, July 15, 2024, https://www.cbsnews.com/philadelphia/news/philadelphia-city-workers-return-to-office-cherelle-parker.
15. “Wage Tax Collections by Residency,” city of Philadelphia, https://www.phila.gov/documents/wage-tax-collections-by-resident-and-non-resident.