Pa. just gave low-income workers a tax credit boost. Now it’s Philadelphia’s turn.
In the same way states are building upon federal tax credits, localities should consider building on state tax credits.
Last month, Gov. Josh Shapiro and the General Assembly adopted the state’s first working Pennsylvanians tax credit, ensuring anyone who qualifies for the federal earned income tax credit (EITC) will also automatically receive a state credit equal to 10% of the federal credit when they file taxes next year.
Pennsylvania joins 31 states and the District of Columbia in giving low-income workers an effective, research-backed wage boost; in 2024, the federal and state credits combined lifted an estimated 6.8 million working people from poverty.
While the new state EITC is incredibly welcome and historic, it is relatively modest compared with other refundable state EITCs. Most range from 20% to 50% of the federal credit, with a handful below 10% or over 50%. This major step forward still won’t overcome the hardship facing low-wage workers — hardship compounded by Pennsylvania’s and Philadelphia’s deeply regressive overall tax structure.
The Institute on Taxation and Economic Policy’s “Who Pays?” report found that the lowest-income Pennsylvanians pay 15.1% of their income in state and local taxes — more than double the share paid by the wealthiest 1%, making the new state EITC essential for offsetting the lopsided tax code.
In the same way states are building upon federal tax credits, localities should consider building on state tax credits.
In Philadelphia, low earners pay an even higher share of their income in state and local taxes, in part due to the highly regressive, flat wage tax.
» READ MORE: Philadelphia’s working poor should not pay a regressive city wage tax | Opinion
The city’s wage tax refund ordinance, a well-intentioned credit aiming to address regressivity by retroactively reducing the city’s income tax to 1.5%, reaches very few people. This year, 2,700 applications were approved, even though 50,000 were eligible, a dismal 4.5% take-up rate (which is actually double last year’s rate).
One major reason for this abysmal take-up is linkage to the state’s special income tax forgiveness program, requiring people to first be approved by the Pennsylvania Revenue Department for individuals earning no more than $8,750, or $24,750 for a family of three.
Councilmembers Kendra Brooks and Nicolas O’Rourke introduced legislation as part of the People’s Tax Plan that would raise income eligibility to that of the PACENET prescription assistance program and expand the wage tax refund to include the entire 3.75% wage tax, but the proposals have not moved forward.
Pennsylvania’s new state EITC opens the door for a far more generous and administratively simple wage tax refund that reaches more residents. Tying the wage tax refund directly to the new state EITC and coordinating with the state can streamline this process.
Montgomery County, Md., pioneered one practical and high take-up approach: It partners with the state to automatically deliver the refundable portion of its county credit to all residents receiving a refund from the state. The credit is directly deposited or mailed with no additional application required.
Similarly, Philadelphia can improve eligibility for the wage tax refund by disconnecting it from the state’s income tax forgiveness program and instead linking it to the state’s working Pennsylvanians tax credit. Local policymakers should also automate applications, wage and residence documentation, and payouts.
Pennsylvania’s new state EITC opens the door for a far more generous and administratively simple Wage Tax Refund.
Our city’s poverty rate is nearly double the state average. Local refundable credits, such as earned income tax credits and child tax credits, are anti-poverty tools proven to quickly lift incomes and stabilize households facing increasingly high costs. With the federal government retreating from long-standing health and economic security programs, the responsibility now falls even more heavily on states and cities to step up.
A strengthened, refundable, and automatic local EITC is exactly the kind of targeted investment that can help Philadelphia reverse decades of persistent poverty.
Kamolika Das is the local tax policy director at the Institute on Taxation and Economic Policy, a nonprofit, nonpartisan tax policy organization that conducts analyses of tax and economic proposals. She lives in Queen Village with her husband and daughter.