The City of Philadelphia has recently taken steps to respond to the economic impact of the COVID-19 pandemic. On May 1, 2020, Philadelphia Mayor Kenney revised his original budget proposals by freezing planned rate reductions and proposing a nonresident wage tax increase. Additionally, on May 4, 2020, the Philadelphia Department of Revenue issued new wage tax guidance clarifying the treatment of non-resident employees.
Fiscal Year 2021 Budget Revised
Philadelphia Mayor Jim Kenney has revised his proposed fiscal year 2021 budget. The recent economic downturn has created a deficit of at least $649 million relative to the initial budget presented in early March. Included in the $649 million shortfall is a projected $535 million reduction in the city’s general fund revenue, which largely comes from local taxes. The revised budget includes spending cuts, reduced reserves and tax increases. The proposed tax increases would result in $49.9 million of additional revenue in FY21.
Business Income & Receipts Tax rate (BIRT) freeze
The BIRT tax rate was scheduled to decrease to 6% by 2023. However, the new budget proposes the rate remain at 6.2% with the reductions planned to resume in FY24. Accordingly, the budget proposes a reduction to 6.15% in FY24 and then to 6.10% in FY25. The revised budget notes that the shift to market-based sourcing will occur as planned in FY23. The proposed BIRT rate freeze is projected to increase revenue by $2.6M.
Resident Philadelphia wage tax rate freeze / non-resident Philadelphia wage tax increase
The wage tax is the city’s largest revenue stream. As with the BIRT, the Philadelphia wage tax rates were planned to decrease. However, the current rate of 3.8712% will remain in place until FY24. According to the revised budget, commuters account for 40% of the city’s wage tax. The non-resident wage tax rate has been adjusted to increase from 3.4481% to 3.5019% over the next three years. The previously announced wage tax rate reductions will resume in FY24. The wage tax proposals are projected to increase revenue by $17.2M.
Other proposed revenue enhancements
In addition to the proposed changes to the BIRT and the wage tax, the mayor has proposed raising the parking tax rate, eliminating the discount for early payment of real estate taxes, increasing license and permit fees and raising commercial trash fees. These proposals are projected to increase revenue by $30.1M. The revised budget is now with the Philadelphia City Council who will hold hearings and approve a budget before the fiscal year begins on July 1, 2020.
Wage Tax Guidance for Non-resident Employees
The Philadelphia Department of Revenue has published guidance pertaining to non-resident employees who are working from home due to COVID-19. The Philadelphia Department of Revenue has announced its wage tax policy remains unchanged at this time. The city utilizes a “requirement of employment” standard, which states a non-resident is not subject to the wage tax when their employer requires the employee to perform their work duties outside of Philadelphia. Therefore, non-resident employees who are required to work from home due to COVID-19 mandatory closures are exempt from the wage tax. Non-resident employees who had wage tax withheld during the city’s mandatory shutdown may file for a refund.
Like most of the nation, the COVID-19 pandemic has wreaked havoc on Philadelphia’s economy. The city and the Commonwealth of Pennsylvania continue to respond to the crisis with new and updated tax guidance on a weekly basis. Philadelphia resident and non-resident taxpayers should expect changes to Philadelphia taxes in 2020. Philadelphia is just one of the major cities expected to make meaningful budgetary changes due to COVID-19. For more information on these proposals and other city and state responses to COVID-19, please reach out to your state and local tax adviser.
Middle-market relief for businesses impacted by the coronavirus has been accelerating with states establishing targeted relief programs on an almost daily basis. Businesses in every industry should consider State tax planning in response to economic distress. For more information on the coronavirus, please see RSM’s Coronavirus Resource Center which includes related and frequently updated developments.