Testimony by Cheri H. Freeh, CPA, on behalf of the Pennsylvania Institute of Certified Public Accountants to the House Finance Committee

Tuesday, December 2, 2003

Good morning Chairman Flick, Chairman Levdansky and members of the Committee. Thank you for the opportunity to appear before you today to discuss Pennsylvania’s local tax collection system. My name is Cheri Freeh, and I’m a CPA and partner with Hutchinson, Gorman and Freeh, PC, located in Quakertown, Pennsylvania. I am a member of the Pennsylvania Institute of Certified Public Accountants (PICPA) Committee on State Taxation and I am chair of its Local Taxation Task Force. For several years, I have coordinated the PICPA’s efforts on behalf of our 19,000 members and their clients to improve the local tax system in Pennsylvania.

I am joined today by Bill Lazor, a CPA and partner with Kronick Kalada Berdy & Co., PC, located in Kingston, Pennsylvania. Bill is currently the president of the PICPA and he appeared before you during your November 13th hearing to offer testimony.

My experience with local taxation stems from the fact that my firm and I deal with the local tax system from both sides on a daily basis. We often find that dealing with the local tax collection system can be more time consuming and confusing than dealing with the state or federal tax systems. My firm services approximately 1,000 clients and prepares close to 900 personal tax returns. We also audit four municipalities and 19 school districts as well as most of their earned income tax offices.

I am here to share my insight into the local tax collection system, specifically as it relates to the earned income tax collection process that is governed by the Local Tax Enabling Act, or Act 511. The proposals that would give taxpayers the opportunity to increase either the local earned income tax or elect to impose a local personal income tax for the purpose of decreasing residential property taxes are of particular interest to PICPA members and their clients.

The PICPA is not here in support or opposition of these or any other legislative proposals. Our objective is to offer information to ensure that the public policy created through this process is done in an informed manner that fosters an ongoing partnership in these matters.

My remarks will focus on three priorities of the PICPA in improving Pennsylvania’s local tax collection system:

• Simplifying and centralizing the collection process
• Establishing a uniform oversight and appeals process
• Easing compliance for taxpayers

Simplifying and Centralizing the Collection Process
Earned income tax collection in Pennsylvania involves the collection and distribution of more than $1.5 billion annually in taxes. An estimated 500 local tax collectors collect the earned income tax for approximately 2,900 municipalities and school districts that impose the tax. The current tax collection system allows for joint collection between municipalities and school districts. As you are all well aware, both municipalities and school districts may impose an earned income tax under the Local Tax Enabling Act. This tax is levied on wages, salaries, commissions, net profits or other compensation. In most cases, the rate of the tax is limited to 1 percent. Where both a municipality and a school district levy the earned income tax, the 1 percent limit must be shared on a 50-50 basis, unless otherwise agreed to by the taxing bodies.

Legislation currently under consideration by the General Assembly would introduce a local personal income tax (PIT) option for school districts, but not municipalities. If school districts are permitted to elect a personal income tax and the municipalities are not given this option, not only would the joint tax collection process be difficult, it could become necessary for taxpayers to file two separate local tax returns.

In addition, given that there are over 500 school districts in the Commonwealth, some of the proposals under consideration have the potential to double the number of tax collectors because joint collection between school districts and municipalities would become difficult. According to an August 2002 study sponsored by the Governor’s Center for Local Government Services under the Department of Community and Economic Development, Pennsylvania already has more local jurisdictions levying income taxes then all other states combined, with 95 percent of the 2,566 municipalities in the Commonwealth levying an earned income tax. Because Act 511 allows each taxing jurisdiction to appoint a separate tax collector and gives both municipalities and school districts a large amount of latitude to choose who and how the earned income tax will be collected, an already complex system would become even more cumbersome.

Presently there are a wide variety of collection options used by taxing authorities throughout the Commonwealth. These range from single person offices with no computers to large contracted collectors with multiple offices and employees. Each taxing district has adopted its own tax ordinance and each office its own rules and regulations. Every one of which may be slightly different based on their own interpretations of Act 511. The result is fragmentation, confusion and conflict.

We believe that combining the different tax collection options in place with additional local tax options -- such as a local personal income tax and additional collectors – would deepen the complexity of the current local tax collection process. One of the top legislative priorities of the PICPA over the past decade has been to work toward simplifying and streamlining the local taxation process. To that end, the PICPA would encourage you to consider that the costs of adding a PIT option could outweigh any benefits.

Establishing a Uniform Oversight and Appeals Process
More unfortunate than the ambiguity within the local tax collection process is the lack of oversight of those who ignore the law, misappropriate funds, and engage in disputes with taxpayers. According to the August 2002 survey of earned income tax collectors sponsored by the DCED Governor’s Center for Local Government Services, disregard for the law and ineffective enforcement were identified as two of the main problem areas with local tax collection.

It is unfortunate that some tax collectors ignore the law, while others create their own rules and do not cooperate with other collectors and taxing jurisdictions. Local taxing jurisdictions are also responsible for many of the problems with local tax collection. Many are not using written contracts, asking the right questions, requesting important information, using independent auditors or providing proper oversight.

The problems with earned income tax collection go beyond tax collectors ignoring the law, which is more prevalent and widespread than should be the case. The reporting, operating and audit provisions of Act 511 are vague and ambiguous. Moreover, Act 511 does not include any procedural or standardized reporting requirements. Such requirements are critical for the smooth operation of a complex and interdependent system of tax collection that involves the collection and distribution of large amounts of public monies.

Contributing to some tax collectors’ indifference to the law is the lack of an enforcement mechanism in Act 511, an absence of a grievance process for disputes and no oversight by a higher authority. Most disputes occur between tax collectors regarding the distribution of nonresident taxes. However, there are also a significant number of disputes between taxing jurisdictions and their own tax collectors regarding tax reporting and remittance. Essentially, the only way to resolve tax collection disputes is to file a suit with the county court of common pleas, which is costly and time consuming.

The current system, where each taxing jurisdiction can appoint separate tax collectors, depends upon cooperation between collectors to run smoothly. The absence of an accessible appeals process and an enforcement mechanism creates a playing field that is not level, and creates a situation in which players with more resources can dominate those with less resources.

Act 511 establishes penalties for taxpayers and employers who fail to disclose tax information or remit taxes. However, there are no penalties for current or former tax collectors that fail to comply with Act 511 in their collection practices or fail to disclose records or disburse tax monies that belong to another taxing jurisdiction. In addition, there is no administrative-level process for resolving disputes between and among tax collectors and taxing jurisdictions. Although many of these disputes are local in nature, most cross municipal lines, some cross county lines and a few have involved disputes between parties in different parts of the state.

Easing Compliance for Taxpayers
Many business people consider Pennsylvania’s local tax system frustrating and confusing because it entails contending with a multitude of local government boundaries, rules, regulations and taxes. Although local tax collection may not be perceived as a major impediment to economic development, it is an issue that I know, from personal experience, contributes to the perception that Pennsylvania can be a difficult state in which to do business.

When compared with other local tax issues, earned income tax withholding seems to create the most problems for employers doing business in Pennsylvania. The multitude of earned income tax rates permitted under different laws complicates employer-withholding requirements and erodes employer compliance and cooperation.

Withholding at source is the most efficient and effective tax collection method. It is also important because it is usually easier for most taxpayers to pay tax bills in increments throughout the year rather than to pay a large lump sum once a year. Withholding can reduce paperwork for both the taxpayer and tax collector. In addition, from the taxing jurisdiction’s perspective, withholding helps with compliance and permits the taxing jurisdiction to increase revenues by investing the tax monies collected throughout the year. This is one of the advantages of the income tax over the property tax and the assessed occupation tax. However, withholding can become burdensome for employers, especially when it requires dealing with many different entities and rules.

Unlike most states where taxpayers and employers only have to deal with one tax collector, in Pennsylvania taxpayers have to deal with at least two different tax collectors – one at the state and one at the local level -- and in some cases two or more different local tax collectors. Generally employers need to file one quarterly employer tax return to report and remit local taxes withheld from their employees. Adding a local personal income tax into this mix will make the task of complying with the local tax laws even more onerous. Employers could be faced with filing multiple employer withholding tax returns on a quarterly basis.

In conclusion, I would like to thank you for a recent action you took to simplify and streamline the local tax collection process with the passage of House Bill 1700, now Act 166 of 2002. This new law established uniform definitions of earned income tax and net profits contained within the Local Tax Enabling Act. This was an excellent first step in streamlining local tax filing in addressing the different interpretations of what is taxable and what is not. It is my hope that when the General Assembly contemplates future changes to the local tax laws there will be changes that build upon the progress that was made with Act 166.

The PICPA and the 19,000 members we represent are prepared to assist you in this important endeavor.

Thank you and I would be happy to answer any of your questions.