The effect of COVID-19 on work-from-home dynamics could heavily affect Philadelphia, which depends on a commuter wage tax for some of its general fund revenue.
The city relies on the wage taxes as a whole for 43% of its general fund revenue, which includes both the resident and non-resident portions based on current fiscal 2021 projections. The non-resident portion alone accounts for about 13% of general fund revenue, city officials say.
According to FY21 projections, roughly $1.98 billion comes from the wage tax as a whole, both resident and non-resident, including a resident-only portion passed through the oversight Pennsylvania Intergovernmental Cooperation Authority. The non-resident portion alone totals roughly $600 million.
Philadelphia residents, regardless of where they work, must pay a wage-tax rate of 3.8712%. Non-residents who work in the city pay 3.5019%. Non-residents are exempt from the portion of their wages or salaries for work performed outside the city.
And with many of commuters living across the Delaware River in New Jersey, a case that may reach the U.S. Supreme Court is resonating: New Hampshire v. Massachusetts.
New Hampshire has filed a
New Jersey, Connecticut, Hawaii and Iowa have filed briefs supporting New Hampshire’s argument.
"The decrease in revenues will continue all this year and in 2022,” Villanova School of Business professor David Fiorenza said of Philadelphia. “Businesses are finding it easier and less expense for their employees to work from their homes, some which are outside the city of Philadelphia limits.
“The SEPTA [Southeastern Pennsylvania Transportation Authority] train stations are at 20% to 25% capacity, based on the cars in the parking lot. Less people are traveling into the city and the suburban communities who have wage taxes or earned-income taxes are reaping the benefits of Philadelphia's loss.”
Philadelphia, according to Fiorenza, should scrutinize its budget. “Unfortunately, that might include early retirements, hiring freezes in areas that are not public safety, and renegotiating all contracts for savings,” he said.
City officials intend to release the fiscal 2022 budget in April. A quarterly
The city projects a fund balance of merely $29 million, by the end of the fiscal year. “This is a very difficult budget year, no doubt about it,” Mayor James Kenney said Monday during a media briefing about the city’s long-term
Regardless of whether the Supreme Court hears New Hampshire v. Massachusetts, “this issue isn’t going to go away,” said Michael Cullers, a Squire Patton Boggs partner whose practice centers on tax-exempt bonds and state and local taxation. Remote work arrangements, he said, will continue after the pandemic at a greater level than beforehand.
The Supreme Court might pass on the case, which New Hampshire based on original jurisdiction, under which states petition for redress of interstate disputes without going through the normal appellate process.
Rating agencies are scrutinizing the case for revenue implications across several states.
According to Moody’s Investors Service, the court has involved itself in these cases sparingly.
“Even if the court agrees to hear the complaint, the timeline for a hearing is unknown, it might not result in a ruling, or could result in a very narrow ruling that, for example, addresses only unique aspects of the Massachusetts regulation, such as its temporary nature, that would not be applicable to other state tax regimes,” Moody’s said.
The Massachusetts regulation in question effectively establishes a “convenience of the employer,” or COE rule for personal income taxation.
“Cross-border income tax rules are complex and vary considerably, and the rise in remote work during the pandemic has brought COE rules, in particular, under more scrutiny,” Fitch Ratings said. Fitch expects states would act quickly to offset any revenue losses, including through tax reciprocity agreements such as the Pennsylvania-New Jersey reciprocal tax agreement.
Complexities abound, said St. John’s University law professor Anthony Sabino.
“It is far too facile to say Jane Doe’s salary can be taxed by Massachusetts because her employer works there,” Sabino said. “After all, Jane’s hard work and intellectual output is created in New Hampshire — she is only sending it over the Internet to Massachusetts. Not to mention what about when her work product goes to another state or states or even overseas?
“Can Massachusetts legitimately tax that work when it is shipped elsewhere, even if Massachusetts is the ostensible home of the employer?”
