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Legislative Update

Week Ending April 25, 2008

• Action Alert—EIT Collection Reforms Need Your Support
• Record Turnout on Primary Tuesday
• “Independent Contract” Classification Disputed
  
• Property Tax Relief Certain This Year
• Mad About Money With Lancaster County High Schoolers
• Court Restricts Taxation of Income of Out of State Companies
• Register Now for PICPA’s 2008 Local Government Conference
  

Action Alert—EIT Collection Reforms Need Your Support

Your immediate action is needed to secure passage of PICPA-supported legislation reforming Pennsylvania’s archaic and inefficient system of collecting local earned income taxes.  Senate Bill 1063 would establish much needed administrative standardization and reforms in relation to EIT collection. The bill is on the Senate Calendar and appears headed for an early May vote. PICPA urges members to contact their state senator today to urge support for the bill.  

Pennsylvania is unrivaled in the number of jurisdictions levying local taxes—almost 2,900. About 560 local tax collectors are used to collect and distribute over $1.9 billion in annual revenue. Lack of standardized practices, coordination, reporting and accountability among and between jurisdictions and collectors plague the process.

Senate Bill 1063 establishes uniform withholding, remittance and distribution requirements. Employers would be required to withhold all local income taxes imposed on the compensation of their employees, and remit those taxes to only one collector, even if the employer operates in multiple jurisdictions.

Most importantly, SB 1063 would require the Department of Community and Economic Development (DCED) to develop uniform forms, notices, reports, returns, schedules and codes for school districts, municipalities and tax collectors. It also requires DCED to issue one set of rules and regulations.

Enhancements are also made to auditing tax collector records. SB 1063 requires collectors to keep a record of all public monies received and distributed, and submit monthly reports to each taxing jurisdiction and the tax collector that must be reconciled with other records in an annual audit.

Legislative reforms as proposed in SB 1063 are not without their political challenges. As PICPA members are all too aware, Pennsylvania’s labyrinth of local tax collectors is a source of much frustration. Senate Bill 1063 proposes to consolidate collection at the countywide level, reducing the number of collectors from 560 to 66. (Philadelphia, which is governed by the Sterling Act, is not included in this legislation.) Consolidation is necessary to combat the severe fragmentation and lack of standardization that plagues the system.

The Senate is scheduled to reconvene on Monday, April 28.

Record Turnout on Primary Tuesday

The April 22 Pennsylvania primary election shattered the record for primary turnout of 1.53 million set in 1980.  According to the state Bureau of Elections, 2,283,864 people voted for U.S. Sen. Hillary Clinton (D-NY) or U.S. Sen. Barack Obama (D-IL)—more than 750,000 more people voted Tuesday than ever voted in a state primary election before.

In the Democratic race for state treasurer, Rob McCord bested a crowded field and will face Republican Tom Ellis in the fall. McCord spent $3.4 million in advertising. McCord won 771,808 votes, or 43 percent. The runner-up was John Cordisco of Bucks County. He won 464,049 votes, or 26 percent, while state Rep. Jennifer Mann (D-Lehigh) had 424,131 votes, or 24 percent.

Only two incumbents lost their re-election bids—both from Philadelphia, Reps. Harold James and Tom Blackwell. A third, Rep. Frank Andrew Shimkus (D-Lackawanna), lost the Democratic nomination, but somehow won the Republican nomination write-in.

No surprises in state Senate races. Larry Farnese defeated Electrical Union president John Dougherty for the inside track to replace retiring Sen. Vince Fumo (D-Philadelphia).  

“Independent Contract” Classification Disputed

On April 23, House Labor Relations Committee members heard testimony from a variety of interest groups weighing in on new legislation that would help clarify the classification of “independent contractor” for tax and insurance purposes, and introduce new, stricter penalties on those employers who intentionally or unintentionally misclassify their workers as such.

House Bill 2400 would establish the free-standing Employee Misclassification Prevention Act. Among its provisions is a 3rd degree misdemeanor charge, a fine of up to $2,500 and/or imprisonment for up to 180 day for those employers who unknowingly misclassify legitimate employees as “independent contractors.” For those employers who knowingly misclassify workers with the intention of avoiding the aforementioned tax and premium monies, the charge is a 3rd degree felony and up to $15,000 and/or imprisonment for up to 3 ½ years. The fines and sentence times increase with subsequent charges.

In addition, employers could face possible stop-work order, debarment, administrative penalties and civil action for damages, attorney fees and costs to the wronged worker(s).

During the committee hearing, representatives from the AFL-CIO expressed their support of HB 2400, while members of the National Federation of Independent Businesses, Pennsylvania Chamber of Business and Industry, Pennsylvania Builders Association and Direct Selling Association voiced concerns regarding the potentially overly-broad definition of “independent contractor” contained within the legislation as it currently reads. Both sides agreed that a concerted effort must be placed on employers and workers alike regarding classification standards and parameters.

PICPA is working with committee staff and other stakeholders to ensure that the legislation is amended to make the definition of “independent contractor” contained within House Bill 2400 adhere to current federal law, so as to avoid unintentional noncompliance with state statute.

The House Labor Relations Committee intends to bring the bill up for consideration and vote when it reconvenes on May 6.

Property Tax Relief Certain This Year

The state will provide nearly $800 million in statewide property tax relief this year, Budget Secretary Michael Masch announced recently. The total includes more than $660 million from the state’s Property Tax Relief Fund.  

The relief will reduce annual statewide school district property taxes by 10 percent, averaging $169 per household across the state, Masch said.  Nearly $613 million in broad-based property tax relief will be provided from the state’s Property Tax Relief Fund.  In addition, more than $173 million will be used to provide targeted property tax relief for Pennsylvania’s senior citizens.
  
Philadelphia’s share of funding for broad-based tax relief – $87 million – will be used to reduce the city’s wage tax instead of its property tax.  Philadelphia’s resident wage tax is projected to decrease from 4.169 percent to 3.93 percent in 2009.  The non-resident wage tax rate is projected to decrease from 3.685 percent to 3.50 percent in 2009.

Masch certified that the fund balance available for property tax relief is now $600 million, with an additional $102 million for the Property Tax Relief Reserve account.  Gaming revenue from April through September is projected to provide an additional $232 million for the Property Tax Relief Fund by October 15. Masch said $171 million will remain in the Property Tax Relief Fund to ensure that the amount of state-provided local tax relief is sustainable in future years.

Homeowners will see the property tax reduction itemized on their tax bill, which school districts will issue this summer.  The amount of property tax relief will vary by school district.

Mad About Money With Lancaster County High Schoolers

Against the backdrop of a recent national survey showing high school seniors know even less about money than they did two years ago, Secretary of Banking Steve Kaplan and PICPA joined students of Conestoga Valley High School recently for a performance of “Mad About Money,” a free financial education theatre show touring schools across Pennsylvania. 

Mad About Money uses sketch comedy and improvisation to teach valuable financial lessons.  Actors play a variety of characters in four skits about how to prioritize spending; the differences between cash and credit; the benefits of investing; and the importance of developing a savings habit.  Students also receive workbooks, take-home activities and Internet exercises. 

Mad About Money is visiting 20 high schools this month on a tour sponsored by PICPA.

Court Restricts Taxation of Income of Out of State Companies

A recent unanimous U. S. Supreme Court decision limited the ability of states to tax the income that companies with out-of-state headquarters earn from their investments in businesses in their home state. The ruling vacated a decision of the Appellate Court of Illinois.

The Illinois court had upheld the state's right to tax the $1 billion in capital gains earned by the Ohio-based MeadWestvaco Corporation, on the $1.5 billion sale in 1994 of an Illinois-based subsidiary.  MeadWestvaco argued that Illinois did not have the right to reach across state lines to tax the passive income from what amounted to an arm's-length investment.

The Court in the past has developed rules to permit states to tax the portion of an out-of-state company's revenue that reflects its home-state operations, while at the same time shielding multistate companies from duplicate taxation.

Register Now for PICPA’s 2008 Local Government Conference

PICPA’s 2008 Local Government Conference is scheduled for July 14-15, 2008 at the Hershey Lodge & Convention Center in Hershey, Pa. Invest two days and learn about required audits a nd initiatives for local governments from the Auditor General, discover what GASB issued this year, examine AICPA and federal activities in response to the federal government’s study on the quality of single audits, understand effective approaches to uncover evidence of a financial crime, and more! You can also personalize this conference by selecting your concurrent sessions! Register by May 20 and save!