Pennsylvania has rarely been accused of cutting-edge government, but our patchwork glut of Earned Income Tax collectors is over-the-top ridiculous. Would you believe that we have more taxing jurisdictions than all other states combined! Our 560 collectors handle nearly $2 billion in yearly revenue. And that is for EIT only - not real estate taxes.
Despite that army, the Pennsylvania Economy League estimates that, annually, about $237 million of EIT goes uncollected, robbing towns and school districts of vital income. There are no uniform requirements for collecting, distributing, and accounting, and no meaningful penalties for violations. An extreme makeover was badly needed. So the state finally enacted new legislation. And while it may be a boon to municipalities that have neglected the job, it actually penalizes those towns that have been doing it right. Like Richland and Haycock.
Starting in 2011, 66 of our 68 counties will each have a single collector, but the work will not be done by the county government. We are adding a new layer of bureaucracy, the "tax district committees", made up of representatives from the county's municipalities and school districts. Each committee will decide on their methods, governed by state-standardized collection, coordination, and reporting procedures. But Trumbauersville Council President Ed Child is worried that the weighted voting procedure, involving population and tax revenue, is stacked against small towns like T'ville: "Time will tell if the bureaucracy level will work."
The law was enacted to address the lack of uniform regulations, but, like our national bailout, it is not a cure-all. In fact, taking collections out of the hands of local offices, which (should) have intimate knowledge of their residents' addresses, creates a whole new set of problems. Haycock Supervisor Henry DePue explained "Many residents are not aware of what township they live in. Their mail goes to Quakertown, they think they live in Quakertown. Our tax collector knows. And he knows when a house is sold, and new residents move in. Our rental units are tracked. I don't think the county will do this as efficiently as our collector. If a family lives in a border area, like West Thatcher Road, will the county send the taxes to Haycock, or Richland? Plus, the high cost for the administration of a county program would cut into the revenue that we would normally receive."
DePue's concerns are well justified. The law does not provide any way to verify how accurately the tax revenues are divided. Since several towns share the 18951 zip code, Qtown could over-receive, while Richland, Haycock, Milford, and Trumbauersville under-receive. On the county level, the result is a zero. But those towns could each be hurt. Multiply that mistake by 50, or 100, and the loss can be dramatic. The benefit of local collectors is that they have much more intimate knowledge of municipal boundaries, and taxpayer names. And they have the ability to track what they are owed, compared to what they have received.
Richland Supervisor Rick Orloff, a CPA who deals with municipal finance, believes that EIT should be collected on a school district basis, which has been successful in Palisades and Central Bucks. "A county system just has too much chance for error, and those errors will be very difficult to track. Typically, the EIT rate is one percent, split between the municipality and the school district. But you have many variants. Richland is 1.6. Haycock and Trumbauersville 1.5. The difference needs to be accounted for. With 500 school districts, and 2,500 towns, there are potentially infinite permutations."
Richland has been so efficient, that EIT provides almost half of the township's operating revenue. Residents will lose out under the new law. Orloff explained "After a $75,000 consult, and a new system, we improved collection by roughly $270,000 annually, and also improved it for Richlandtown Borough by 11 percent. We have reports that show what we collected vs. what we should collect. With a 98-99 percent collection rate, we have nowhere to go but down. Richland now gets its money instantaneously, with no hold back, and immediately invests it to earn interest. Contract collectors can hold back distributions for months. They are also notorious for doing a poor job on the harder-to-get amounts, like discovering non-filers, and placing claims against other collectors to bring the money back to the home municipality. With the new law, if distributions are off by 10 percent, our cash flow will be off by about $160,000."
He added a note of warning for all of Bucks: "This could take years to iron out. Meanwhile, I can see some towns getting 40 percent more, and others getting a corresponding amount less. Communities on the short end of the stick may have to pay interest on swing loans to meet current operations, or enact extra taxes to cover collection shortfalls. Those with the windfalls may spend money they may not be able to keep. All towns will have to develop greater financial acumen to discern if they are getting their just EIT receipts."
DePue agreed: "I feel Haycock will definitely lose money. I think it would be impossible for the county committee to collect the EIT, and turn over our portion, in a timely manner, as our collector does. Haycock relies on these funds at the end of April. Instead of the county collection system, it should be at the school district level."
Child added "For those municipalities that already do this well, like Richland, it could be a step backward. Until this all came about, neither I, nor the rest of council, had really given it much thought. We would get payments from our EIT collector, which is the same one that Milford Township uses, but not a detailed report. We don't know what the expected taxes should be versus what we are actually getting. We are certainly culpable for the lack of oversight, but I don't think Trumbauersville is unique in that respect.
Any town which loses income under the new law may petition to opt out in 2014. The efficient ones, like Richland and Haycock, undoubtedly will, but, in the meantime, EIT may be just more one state-imposed financial headache.