Philadelphia has already paid back more than $81 million in wage taxes to suburban residents who worked from home last year instead of commuting to the city — and officials are still processing refund applications.
As of mid-August, Philadelphia had sent checks to about 32,000 people, according to city spokesperson Kevin Lessard. And finance officials estimate they’ll refund a total of $105 million to nonresident commuters for 2020 by the time they’re done.
Those refunds are being issued as many suburbanites continue to work from home. Many companies are delaying plans to bring workers back to city offices amid a surge in coronavirus cases and the return of a citywide mask mandate. The budget approved in June projects that the city will pay $75 million in refunds for 2021.
How are wage tax refunds affecting the city’s bottom line?
The $105 million that Philadelphia expects to repay nonresidents represents just 6.2% of the $1.59 billion in wage tax revenue the city collected in the last fiscal year.
But this year’s refunds still account for much more money than in years past, due to the pandemic. The city has approved about 32,000 applications for 2020 thus far, Lessard said, compared with 5,000 by the same date last year.
And refunds alone don’t account for all wage tax losses due to remote work. Many companies simply stopped withholding the tax from employees’ paychecks if they had to work remotely from the suburbs, so the city lost that money upfront.
The city is also projecting that some workers will never return to city offices, which will have a lasting impact on wage tax revenue. Finance Director Rob Dubow told City Council earlier this year that he expects 15% of commuters won’t ever return, which he warned could cost about $100 million a year.
Before the pandemic, the city collected about 40% of its annual wage tax revenue from nonresident commuters. But of those who worked remotely and were eligible to apply for refunds, not all chose to do so.
The amount the city pays back depends on how many people choose to apply for refunds. The city had previously predicted it would have to pay $125 million back to commuters for 2020 taxes. Officials reduced that estimate based on the number of people who have applied.
What is the future of the wage tax?
The nonresident wage tax was a hotly debated topic during city budget negotiations earlier this year.
Mayor Jim Kenney proposed an accelerated reduction in the nonresident wage tax rate, in an effort to entice commuters back to the city. Several lawmakers criticized that plan, saying the city should pour resources into fighting poverty and violence rather than tax breaks for affluent suburbanites. Councilmember Allan Domb, meanwhile, fought for even steeper reductions to wage and business taxes than those proposed by Kenney, saying it would help attract jobs to grow the city’s economy.
Kenney and Council ultimately agreed on a budget with a slimmed-down version of Kenney’s proposal that included modest cuts to the wage tax for both residents and nonresident commuters.
But the wage tax — along with the city’s business tax structure — are likely to remain a subject of debate.
Shortly after the latest budget approval, Kenney and Council President Darrell L. Clarke announced the creation of a Tax Reform Working Group. They tasked the group with proposing tax changes that would best ensure an equitable recovery from the pandemic for city businesses and residents, and said its recommendations could influence the next budget.
Is it too late to apply for a 2020 wage tax refund?
Under city law, wage tax refunds can be requested as late as three years from the date of payment or the due date, whichever is later.
That means there’s still time to apply for people who worked from home in 2020.
“We receive refund requests every day,” Lessard said. “The process won’t be complete as long as we continue to receive new 2020 wage tax refund requests.”
And many existing applications are still being reviewed as taxpayers await their refunds. As of last week, Lessard said about 1,000 requests were in process.