If you’ve ever thought the Beatles’ song “Taxman” needed a line about the Philadephia wage tax, you’re probably not alone. There’s a fundamental feeling of the unfairness of the tax man’s reach when you live in Montgomery County, but pay taxes to Philadelphia just because your office chair is in the city.

Not many Pennsylvanians have heard of the commonwealth’s Sterling Act, but that is soon going to change thanks to legislation proposed by state Senator Frank Farry of Bucks County.

The Sterling Act was passed by the state legislature in 1932 and granted Philadelphia and Pittsburgh the power to levy a tax on the wages of people who worked in the city — whether they lived in the city or not. In 1947, that power was extended to every municipality in the commonwealth. 

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Normally, if you work in one municipality and live in another, any local income tax you pay where you work gets forwarded to the tax authorities where you live. For instance, if you live in Abington and work in Horsham, the local tax you pay in Horsham gets remitted to Abington. But if you work in Philadelphia, that’s not the case.

If you live in Abington and work in Philadelphia, you pay the 3.44 percent non-resident tax rate to the city. That payment works as a credit against Abington’s one percent tax rate, so you don’t have to pay both. But instead of forwarding that one percent to your home township, Philly keeps the whole 3.44 percent. So, by working in the city, you not only pay a higher tax rate, but you also inadvertently make your township worse off than it would be if you worked anywhere else in the state. 

When this system started during the Great Depression, it was seen as an emergency measure to keep the city budget afloat in a time of drastically decreased business activity and widespread unemployment. And for the suburban townships and boroughs, it made no difference — none of them imposed a wage tax or earned income tax, so they were not taking in revenue on that basis either way. 

Since then, the suburbs have started imposing taxes of their own, and offering greater services to match. This was inevitable as many areas once devoted to farmland became densely developed communities that needed more roads, more schools, more police, more everything. But so long as some of their residents worked in Philadelphia, they never received the full amount of tax money from the population they served. The shortfall amounts to millions for many townships.

Because residents who live in surrounding municipalities but work in Philadelphia pay all of their local income tax to the city … the tax burden is greater for non-Philadelphia workers of those municipalities.

It took another economic downturn to really drive the point home: the Covid lockdowns and the financial chaos that followed from them. The absurdity of Philly’s special exemption stood out all the more as non-resident city workers began working from their suburban homes, only to find their paychecks still diminished by the city wage tax. Not only did they not live in Philly, but many had not set foot there all year. Yet City Hall still took their 3.44 percent.

After being forced to in court, the city began to allow a process to get the tax refunded for remote workers, but it required such a time-intensive process for each individual that many were unable or unwilling to make the effort — which is exactly what the city wanted.

Farry’s legislation would still allow the city to have a higher tax than the rest of the municipalities are allowed, and would still let them keep most of it for those workers who actually work there. But it would level the playing field by requiring the other townships to get their tax back, as they do from other jurisdictions. In our example above, an Abington resident working in Philly would still pay the wage tax of 3.44 percent, but the city would keep only 2.44 of that, forwarding the remaining one percent to Abington. 

“Because residents who live in surrounding municipalities but work in Philadelphia pay all of their local income tax to the city rather than a portion to their home municipality, the tax burden is greater for non-Philadelphia workers of those municipalities,” Farry told Broad + Liberty. “My bill is to make Philadelphia’s City Wage Tax more equitable for non-residents and keep our tax dollars local to help our community.”  

Democrats recently took control of the state House by one vote, and that will make a tougher fight for Farry’s legislation than in the Republican-controlled Senate. But given that the 102-member Democratic House caucus includes many members who represent the very townships and boroughs losing out under the present system, it is worth asking: will suburban Dems vote with Philadelphia or with their own home towns?

Kyle Sammin is Broad + Liberty’s editor at large.