By James J. Newhard, CPA, CGMA
It took more than two years to craft and refine Pennsylvania House Bill 245 (HB 245). This was an extremely important piece of legislation as it protected taxpayers from being double-taxed, provided definitive and consistent interpretations to taxing jurisdictions, provided taxpayers a safe harbor for estimated earned income tax (EIT), formalized parameters of when a temporary jobsite location constitutes a taxable jurisdiction for employee EIT withholding, eliminated the mandatory filing of a return when a taxpayer has no taxable income, and established an authority (the DCED) with oversight responsibility that could resolve conflicts without going to litigious war. The bill garnered “yes” support of 75 percent in the Senate and 78 percent of the House in overwhelming bipartisan support. Days after the Senate and House left for recess, Gov. Tom Wolf unceremoniously vetoed the bill on Nov. 4, 2016. How could this happen? More importantly, why?
Since the implementation of 2008’s Act 32 to manage Pennsylvania’s local earned income taxes world, the collection of EIT has grown tremendously – principally through collection efficiencies, greater responsibilities placed upon employers to withhold, and the streamlining of the processing through uniform consistencies. Over nearly six years (four counties adopted Act 32 effective Jan. 1, 2011, while all others commenced Jan. 1, 2012), the tax revenues have contributed tremendously to municipalities and school districts throughout the state. Act 511, the local tax enabling act (LTEA) was passed in 1965, and while it has grown and expanded since then, Act 32 contributed to phenomenal surges in collected tax revenues through placing the onus for appropriate tax withholding on Pennsylvania employers, establishing consistent and uniform statewide forms (along with clarity of tax jurisdictions and rates through the www.newpa.com website), and creating efficiencies and cost-savings through consolidated (countywide) collections – with these savings being in the millions in collection commissions! Act 32, however, did not raise a single tax rate; did not change any tax crediting; and did not create multi-levels of earned income taxes within the EIT rate structures.
Since the passage of Act 32, members of PICPA’s Act 32 task force of the state tax committee have worked to monitor and clarify the local tax process to ensure that local earned income taxes meet the PICPA guiding principles of good tax policy, particularly in the areas of equity and fairness, certainty, simplicity, and transparency and visibility. We have worked with many groups, including the local EIT tax collectors and the business community. Our focus has been on the heart and spirit of the earned income tax law, with no vested interest other than what was intended to best serve the taxpayers and the services provided to them by taxing jurisdictions.
As Pennsylvania faced a growing shortfall in revenues with less state and federal funding to meet the financial “needs” of municipalities and school districts, more aggressive interpretations of the language of the laws opened the door to more aggressive earned income taxation application. The goal (by some) is to maximize tax revenue for the jurisdiction rather than honor the true spirit of the tax system. Fundamental fairness to the taxpayer is often an afterthought.
So, the task force went to work on clarifying matters with a technical corrections-type provision to make the language clearer and more understandable with regard to the real intent and application of the local tax requirements. House Bill 245 clarified the simplicity of the tax (including portions of the rate added on for specific targeted purposes, such as open space, distressed financial conditions, and substitution for local occupation taxes), the determinations of who must file, the availability of tax credits, estimated tax safe harbor, and the establishment of actual oversight by DCED.
It now seems, in post veto analysis, that while very few constituents pushed aside the spirit of the system, those who did were the loudest voices communicating with the governor. Accordingly, in the assessment of this humble member of the PICPA Act 32 task force, the governor was swayed by the complete misinterpretation and misinformation of those seeking to maximize gains from tax assessments rather than honoring the spirit and intent of the local tax system.
While Pennsylvania governors sit for either four or eight years, the CPAs of the PICPA are here for the long haul. We will put constant and consistent focus on Pennsylvania local earned income taxes, and that will never cease. Accordingly, as the legislative session reopen in 2017, we will again put forth every effort to advocate for the fair spirit of Pennsylvania local taxation, and seek to establish the clarity, consistency, and efficacy that every taxpayer deserves.
James J. Newhard, CPA, CGMA, is the owner of James J. Newhard CPA, providing services to small business entrepreneurs and individuals. A PICPA Greater Philadelphia Chapter past-president and recipient of both the Volunteer Service Award and the Champion Service Award, Newhard serves on several PICPA committees at the state and chapter levels (including the Act 32 Task Force). He is also a member of the AICPA (including tax section and PCPS).
You may also want to read the letter to the editor that PICPA President Lisa Myers sent out days after the veto was announced. It was printed in the Delaware County Daily Times, and also ran in the Limerick Patch, Roxborough Patch, Citizens' Voice, Times-Leader, Tribune-Review, and the Reading Eagle.