The Changing Makeup of Philadelphia’s Wage and Earnings Tax

How the numbers stack up and why it matters

Issue Brief October 24, 2024 Read time:

Projects: Philadelphia Research and Policy

Starting in early 2020, the COVID-19 pandemic was accompanied by a huge increase in remote and hybrid work in Philadelphia and throughout the country. City officials soon began to wonder about the long-term impact on their largest revenue source, the tax on wages and earnings, particularly the portion paid by nonresidents whose jobs were based in the city.

Nonresident wage tax revenue has long been a key part of city finances, not just because of the hundreds of millions of dollars raised each year—an estimated $848 million in fiscal year 2024—but because nonresidents generally use fewer public services than city residents do.

Now, more than four years later, it’s clear that the impact has been significant. The makeup of this levy has changed, with proportionally more of the tax coming from Philadelphians and proportionally less from nonresidents. Controlled for inflation, the amount raised by the nonresident tax has dropped substantially.

Remote and hybrid work has reduced the number of suburbanites commuting into the city and has allowed some of them to avoid the tax. Meanwhile, the improved strength of the city’s economy has bolstered the resident share of the levy by producing large numbers of taxable jobs, many of them filled by Philadelphians.

Through it all, the tax has continued to produce about half of all locally generated revenue for city government—an estimated $2.51 billion in fiscal 2024 and a projected $2.63 billion in fiscal 2025, which began July 1.¹

Here are some of the other numbers behind the trends:

The estimated wage and earnings tax paid by nonresidents in fiscal 2024 was about $53 million higher than in fiscal 2019, the last full year before the pandemic. Adjusted for inflation, however, the 2024 figure was 13% lower than in 2019. Over the same time span, the amount paid by residents grew by roughly $378 million, up 5.7% adjusted for inflation.²
The share of the wage and earnings tax revenue from nonresidents, just over 38% in fiscal 2019, was on track to be roughly 33.8% in fiscal 2024, according to the latest city estimates, with the resident share rising from 62% to 66.2%. This change was already underway pre-COVID; the nonresident share was more than 40% in 2015 and fell during the next several years.
Data from the city’s Revenue Department shows that the number of wage tax filings made by nonresidents was 11% lower in calendar year 2022, the last year for which numbers were available, than in calendar year 2019: 348,087, compared with 393,015.
Wage tax refunds—for which only nonresidents with jobs based in the city are eligible and which cover days when their employers required them to work outside the city, at home, for instance, or on a business trip—rose dramatically in the wake of the pandemic, increasing from less than $30 million in fiscal 2019 to more than $81 million in fiscal 2022 before falling back to nearly $47 million in fiscal 2024, still well above the pre-pandemic level.

This analysis uses the latest available data to document some of the trends that have changed the makeup of the wage tax in important ways.

The numbers raise two central questions: To what degree are the changes described in this analysis likely to be long-lasting? And what, if anything, can be done in response?

How the Philadelphia wage and earnings tax system works

To understand how the makeup of the city wage and earnings tax has changed, one first needs to understand the rules that govern it.

The wage tax, which is typically withheld from workers’ paychecks, applies to all Philadelphians, regardless of where they work, and to all nonresidents who work in the city. The current rates are 3.75% for residents and 3.44% for nonresidents.³ The earnings tax, imposed at the same rates, applies to workers whose employers do not withhold money and forward it to the city.⁴

With the rise in remote and hybrid work since the pandemic-related shutdown in March 2020, a central question has been exactly what it means when nonresidents with city-based jobs are not working in the city and thus are exempt from the tax. And it’s not just about physical whereabouts.

Under city policies that have been in effect for decades,⁵ nonresidents with jobs linked to workplaces in Philadelphia must pay the tax except on days when their employer requires them to work outside the city, whether they are taking a business trip or staying at home.⁶

In the early stages of the pandemic, when offices were closed, nonresidents had to work remotely, making them exempt from the tax. But when businesses fully reopened for in-person work, nonresident workers again became covered by the tax, even if their employers required them to come in only a few days a week. Choosing to work from home does not exempt nonresidents from the tax.

These distinctions do not apply to Philadelphians, because living in the city makes their wages taxable regardless of where they work.

The changing makeup of the wage and earnings tax

The fluctuations in the revenue raised by the wage and earnings tax in recent years reflect the interplay between these rules, the pandemic, and the persistence of remote and hybrid work—as well as marginal reductions in the tax rates enacted by the city.⁷ The result has been a change in the overall makeup of the tax, with less of it coming from nonresidents.

As shown in Table 1, the dollar amount of the wage and earnings tax paid by nonresidents dropped from more than $795 million in fiscal 2019 to roughly $698 million in fiscal 2021, when many offices were closed. In the next few years, as offices reopened, the nonresident total rose sharply in fiscal 2022, dropped slightly in fiscal 2023, and increased in fiscal 2024.

Table 1

Philadelphia Wage and Earnings Tax Revenue

Resident and nonresident totals for fiscal 2019-24

Fiscal year	Total wage tax	Paid by residents	Paid by nonresidents
2019	$2.08 billion	$1.28 billion	$0.80 billion
2020	$2.12 billion	$1.33 billion	$0.78 billion
2021	$1.93 billion	$1.23 billion	$0.70 billion
2022	$2.21 billion	$1.41 billion	$0.79 billion
2023	$2.36 billion	$1.59 billion	$0.77 billion
2024 (projected)	$2.51 billion	$1.66 billion	$0.85 billion
Change, 2019-24
Amount paid	20.7%	29.5%	6.7%
Amount paid, adjusted for inflation	-1.5%	5.7%	-13.0%

Source: Pew calculations based on data in Quarterly City Managers Reports from the city of Philadelphia’s Department of Finance

Note: A 22.53% inflation rate was used in the calculations. That figure comes from the U.S. Bureau of Labor Statistics and its consumer price index inflation calculator, found at https://data.bls.gov/cgi-bin/cpicalc.pl. The inflation rate was calculated from January 2019—representing the midpoint of fiscal 2019—to January 2024, representing the midpoint of fiscal 2024. Percentage change was calculated based on more precise dollar amounts and may appear slightly different when rounded figures are compared. For more information on the calculations, see methodology at the end of this brief.

The taxes paid by nonresidents did not surpass the pre-pandemic level of fiscal 2019 until fiscal 2024. Over that period, the nonresident portion of the tax grew by 6.7%, and the resident portion rose by 29.5%. Adjusted for inflation, however, the nonresident portion fell by 13%, and the resident portion grew by 5.7%.

Over the same period, as shown in Figure 1, the percentage of the wage tax coming from nonresidents dropped from 38.3% in fiscal 2019 to an estimated 33.8% in fiscal 2024. The projections in the city’s latest five-year financial and strategic plan indicate that the nonresident share is also expected to be 33.8% in fiscal 2025.

Figure 1 also shows that the decline in the nonresident share—and the accompanying rise in the share of the tax paid by residents—had been underway before the pandemic. The 38.3% nonresident share recorded in fiscal 2019, the last full pre-pandemic year, was more than 2 percentage points lower than it was four years earlier, in fiscal 2015.

There also were year-to-year changes in the number of people, both residents and nonresidents, paying the tax, as shown in Table 2. Filings by nonresidents fell from 393,015 in 2019 to 327,135 in 2021, a decline of almost 17%, before rebounding somewhat to 348,087 in 2022, still more than 11% below the pre-pandemic level. These figures come from calendar-year data provided by the city’s Revenue Department.

Table 2

Wage Tax Filings by Residents and Nonresidents

Calendar years 2019-22

	2019	2020	2021	2022
Residents	711,375	684,358	672,154	695,805
Nonresidents	393,015	361,241	327,135	348,087

Source: Unpublished Philadelphia Revenue Department data

Note: Individual taxpayers have multiple filings if they have more than one job from which wage taxes are withheld. Thus, the number of taxpayers in the years shown was slightly lower than the number of filings. This data covers only the wage tax, which is withheld by employers, and not the earnings tax, which is not.

The factors underlying the changes

There are two major factors behind the changing composition of the wage tax. One is the relative weakness of the nonresident portion of the tax; the other, the relative strength of the resident portion.

Let’s start with the nonresident piece. The idea that fewer people are commuting to work in the city is supported by numerous data points, including ridership data for SEPTA’s Regional Rail system, which primarily serves suburban communities; the number of monthly trips on the system stood at 65% of pre-pandemic levels as of July 2024.⁸ Beyond the decline in commuting, analysts and city officials suggest that several other factors help explain the wage tax numbers, although it is hard to quantify the impact of each of them.

One is that employers may have reclassified some city-based jobs held by nonresidents as fully remote or reassigned those jobs to suburban offices; either action would exempt jobholders from the wage tax. Another is that some nonresidents have found jobs outside the city, with their former positions eliminated or filled by city residents. In addition, some employers in Philadelphia, seeking to keep their nonresident workers happy, may be requiring them to work from home several days a week, thereby exempting them from the wage tax for those days.

Kathleen McColgan, the city’s revenue commissioner, noted that most city-based employers withhold the wage tax for all workdays for all employees—thereby requiring nonresident workers to apply to the Revenue Department for refunds. Each refund application must be accompanied by a formal letter from the employer stating that the employee was required to work outside the city on the days in question. Revenue Department officials review every application, McColgan said, and those without the necessary documentation are rejected.

Pre-pandemic, in fiscal 2019, the department issued 12,042 refunds totaling $29,473,266, for an average of $2,448 per refund. Those numbers peaked in fiscal 2022, with 27,407 refunds totaling $81,526,915, then fell slightly in fiscal 2023 and dropped dramatically in fiscal 2024, with 14,374 refunds totaling $46,755,932—or an average of $3,253 per worker. (See Table 3.)

Table 3

Philadelphia Wage Tax Refunds

Fiscal 2019-24

	Number of refunds	Total refunded	Average refund amount
Fiscal 2019	12,042	$29,473,266	$2,448
Fiscal 2020	10,217	$20,369,651	$1,994
Fiscal 2021	26,415	$66,354,772	$2,512
Fiscal 2022	27,407	$81,526,915	$2,975
Fiscal 2023	23,316	$76,841,536	$3,296
Fiscal 2024	14,374	$46,755,932	$3,253

Source: Philadelphia Department of Revenue

Note: The numbers for fiscal 2019 and 2020 are not strictly comparable to those for fiscal 2021-24. The earlier years include relatively small amounts refunded to employers who made payments in error. With the employer refunds excluded, the refund figures for 2019 and 2020 would be slightly lower. This data covers only the wage tax, which is withheld by employers. It does not cover the earnings tax, which is not withheld.

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

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.
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.
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.
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.
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.
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.
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.
Southeast Pennsylvania Transportation Authority, “Ridership Recovery Dashboard,” 2024, https://recovery.septa.org.
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.
See U.S. Bureau of Labor Statistics, “State and Metro Area Employment, Hours, and Earnings,” Table SMU42979610000000001.
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.
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.
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.
“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.
“Wage Tax Collections by Residency,” city of Philadelphia, https://www.phila.gov/documents/wage-tax-collections-by-resident-and-non-resident.