 What is Act 32 and How Will it Make a Difference in Your Paycheck?
By Jack Etzel
In 2008, Pennsylvania passed a law creating major changes
in the way that the local earned income tax is paid from this year
forward. It is known as Act 32. The newly overhauled earned income tax
system went into effect as of January 2012. So just how will this
affect your paychecks from now on? The answers come easily
to Bradford Woods resident and attorney Michael G. McCabe. McCabe
represents numerous Pennsylvania taxing jurisdictions in tax-related
legal matters. He is a shareholder with the Pittsburgh law firm of
Goehring, Rutter and Boehm, which also has offices in Franklin Park
and Philadelphia. In addition, McCabe serves as special counsel to the
Allegheny County treasurer and has been closely involved with Act 32
since its inception.
North Hills Monthly Magazine (NHMM): Beginning with this
new year, we have a new system for collecting the local earned income
tax. What was wrong with the old one?
Michael G. McCabe: Prior to Act 32, Pennsylvania’s local
earned income tax collection was inefficient, inconsistent and did not
mandate employer withholding for most taxpayers. Act 32 consolidates
collections from what were 550 tax collectors representing 2,900
taxing jurisdictions down to just 69 tax collection districts, each
having one tax collector. It is estimated that as much as $237 million
went uncollected each year as a result of the inefficiencies in the
collection process. We forecast that with fewer collectors,
standardized forms and mandatory employer withholding, a higher
percentage of taxes will be recovered in a more efficient manner under
Act 32.
NHMM: People reading this are probably assuming that they
are going to pay more taxes. Can you assure them that the amount of
tax they are paying is not
going to increase? McCabe: Act 32 does not raise earned
income tax rates. It simply changes the manner in which local earned
income taxes are reported and collected. Any taxpayer who’s been
paying taxes at the proper rate each year will not experience any
increase in tax unless the taxpayer experiences an increase in earned
income.
NHMM: Let’s make sure that we get this straight. The
state will take in more tax dollars but there will not be a tax
increase. Is that really possible?
McCabe: Jack, you mention that ‘the state’ will take in
more tax revenue. We should probably change that reference to ‘local
municipalities and school districts’ since we are dealing with local
earned income tax rather than state personal income tax. I don’t want
to confuse anyone. Regarding your question about not having a tax
increase while bringing in more revenue, the answer is yes, that is
entirely possible.
NHMM: How? McCabe: The efficiencies created
by Act 32, in particular, mandatory employer withholding, should
result in the collection of taxes that were not collected under the
old system. Let me give you an example or two. Prior to Act 32, an
apartment dweller, or a short-term transient employee who moved to
Pennsylvania from another state, may not have filed their local
quarterly tax returns or a final return. By the time that the local
municipality and school district discovered that these taxes had not
been paid, that person could have moved into another municipality or
even to another state. With Act 32 in place, mandatory employer
withholding will make sure that these residents of Pennsylvania also
comply with their local earned income obligations. As a matter of
fact, many noncompliant wage earners will be discovered as a result of
Act 32. Many of them will be required to pay any past due amounts for
those years that they failed to pay the taxes due, or because they
failed to even file a tax return.
NHMM: There’s hardly ever a piece of legislation passed
on which everyone agrees. At this early stage, can you judge who is
likely to be happy about all of this and who is not going to be
pleased?
McCabe: You’re right about not being able to please
everyone. On the other hand, we believe that in time, everyone will
become more comfortable with the new process, but perhaps it will take
time until it becomes second nature. First of all, taxpayers should be
happy because under Act 32, salaried employees no longer have to file
quarterly tax returns. They will only have to file a final return,
much like they do now with their Pennsylvania state personal income
taxes. If you are self-employed, you will not notice the difference.
The process won’t change for self-employed persons who will continue
to be required to file both quarterly returns and a final return.
In time, taxing bodies will be pleased with the new Act
32 procedures, but initially they may experience temporary cash flow
issues. For employers with multiple offices in multiple locations, Act
32 will be a welcome change because of its uniformity. The uniformity
of collection procedures and forms will benefit these employers the
most. In the beginning, employers with single locations will likely be
the least happy because of some additional responsibilities, but keep
in mind that these employers are already withholding state and federal
taxes, so Act 32 should not create too much additional work.
To learn more about your own municipality regarding this subject, do a
Google search by entering the name of your municipality (i.e.,
Franklin Park, Fox Chapel, McCandless, Hampton, Pine, etc.) followed
by the words,
Act 32 EIT. |
