February 18, 2020
by Pauline Abernathy, Chief Strategy Officer, Benefits Data Trust
Thank you, Chair Green and members of the Finance Committee for the opportunity to testify in support of this legislation to provide much-needed Wage Tax relief for low-income working Philadelphians. Sponsored by Councilmember Domb, Chair Green, and 10 other members, this bill would make more than 96,000 Philadelphia households eligible for a bigger Wage Tax refund beginning this year, provide a 61% Wage Tax refund in tax year 2021, and would effectively eliminate the Wage Tax entirely for these taxpayers beginning in 2024.
My name is Pauline Abernathy and I am the Chief Strategy Officer of Benefits Data Trust (BDT), a national nonprofit headquartered here in Philadelphia that helps people live healthier, more independent lives by creating smarter ways to access essential benefits and services, including tax benefits. Since 2005, BDT has screened more than one million households, securing over $7.5 billion in cumulative benefits, including tax benefits. This includes helping more than 110,000 Philadelphians secure more than $330 million in benefits to help pay for food, healthcare, housing, childcare, and other basic needs through BenePhilly, a city-wide initiative to reduce poverty and increase economic security.
Philadelphia not only has the highest poverty rate of any big city in the nation, it also has the highest local income tax in the country.1 Philadelphia’s Wage Tax is particularly pernicious and regressive because it applies to every dollar earned, and the rate is the same whether you earn $2,000 or $200,000. We are literally taxing working Philadelphians in and into poverty.
In contrast, New York City has a refundable local Earned Income Tax Credit – administered by the state – that supplements the federal and state EITCs and helps lift thousands of New Yorkers out of poverty. New Yorkers don’t have to apply separately for the local EITC – they get it automatically when they claim the state EITC.
Every day, BDT and our BenePhilly partners hear from Philadelphians struggling to make ends meet despite working one or more jobs. BenePhilly helped a 47-year old mother raising two daughters in West Philadelphia while earning under $14,400 a year. She paid about $560 in City Wage Taxes. If this bill were in effect, she would have been eligible for a $340 Wage Tax refund in the first full year. That’s money she could use to feed her children or pay an overdue utility bill.
By 2024, a family of four could receive more than $1,300 in Wage Tax relief, making this legislation a valuable tool in the City’s strategy to reduce the number of Philadelphians living in poverty by 100,000 by 2024. In addition, the tax refunds would stimulate the local economy as families are likely to spend much of their refunds locally.
Low-income residents are currently eligible for a 0.5 percent refund on the City Wage Tax, but very few receive it. Last year only about 1,500 tax filers claimed it – less than 2 percent of those receiving the State’s special tax refund (Special Tax Forgiveness). The City and State tax refunds have identical eligibility rules, so why did over 98 percent of Philadelphians who received the state refund not receive the local refund? Because a separate, paper application is currently required for the local Wage Tax refund.
BDT’s core business is to develop smarter ways to access benefits and services. We know from experience that the more complicated it is to apply for a benefit, the fewer people will receive it. If you want everyone eligible to receive a benefit and to minimize administrative costs, the best way to do that is to make the benefit automatic by tying it to another benefit or action. That’s what we recommend be done here. Below are three administrative recommendations to increase the bill’s impact and reduce administrative burden.
1) Work with the State to make the process as automatic as possible.
Taxpayers should not have to fill out a separate application for the local Wage Tax refund since the more than 96,000 Philadelphia households receiving the State’s special tax refund are all eligible for the City refund. The State could simply issue local refunds when a resident claims the State’s special tax refund. The City would then reimburse the State for the total amount of the local tax refunds. This is essentially how New York City’s refundable EITC is administered, and it is by far the simplest solution.
Alternatively, the City could obtain a list from the State of all Philadelphia residents who qualified for the State’s special tax refund and automatically issue refunds to them.
Under either approach, automating the process would both increase the poverty fighting impact of the tax refund and reduce the administrative burden on both taxpayers and the Philadelphia Department of Revenue.
It is worth noting that City Council has expressed interest in automating the tax refund. Section §19-1508 of the Philadelphia Code – the section that addresses “Refunds and Forgiveness for Poverty Income” – called for a report assessing the feasibility of automatically generating refunds to eligible taxpayers.
2) Simplify the local Wage Tax refund application.
Short of the State administering the local Wage Tax refund, the City could greatly simplify the local refund application. First, filers should be able to submit the application online on a mobile device, not just on paper, and they should not have to attach a copy of their State tax form and their W-2s because the City’s Department of Revenue already checks with the State to confirm the taxpayer qualified for the State’s special tax refund before issuing a local tax refund. In addition, currently, the City tax form asks people to report their wages in six-month increments – January to June and July to December.2 This is burdensome.
3) Get the word out about local Wage Tax relief by leveraging tax preparation tools and assistance.
The City can do much more to get the word out about the local Wage Tax refund. First, the City should ensure that national companies like Intuit and H&R Block promote and support the local Wage Tax refund in the same way they do the EITC and the State’s special tax refund. In addition, the City could make the local Wage Tax refund part of the You Earned It campaign. The recommendations above would make it much easier for community partners that offer free tax assistance to help residents claim their Wage Tax refund.
Thank you again for the opportunity to testify in support of this bill. Increasing the value of the current modest local Wage Tax refund and improving how it is administered will help tens of thousands of Philadelphia families.