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Page last updated: 07/31/07

How Are Local Taxes Currently Used in Pennsylvania?

Use of the different local taxes available in Pennsylvania varies across local government types and school districts.  Some local taxes are only available to certain local government types.  In addition, state set limits on these tax rates vary across local government types.  Both factors combined mean that the range of local tax choices varies dramatically across local governments and school districts in the Commonwealth. 

School taxes are the largest local tax bill faced by most taxpayers in Pennsylvania, accounting for 57 percent of all local taxes in 1995.

County Governments
Most county governments have only four local taxes available to them (the real property, occupation, per capita, and personal property taxes), but due to tax rate limitations they essentially have little choice other than relying heavily upon the real property tax.   This result is reflected in county governments' average reliance on different taxes in the state (see graphic below).

Municipal Governments (cities, boroughs, townships)
Municipal governments generally have a much wider range of local tax options than do county governments.  Their options include the earned income, amusement, and mercantile taxes.  Tax rate limits vary across the different municipality types.   In general, the earned income tax and real property tax are the two most important local taxes for Pennsylvania municipalities.  Some municipalities are able to rely heavily upon another local tax, such as the mercantile or amusement taxes, because of local circumstances.  The following table gives the average reliance on different local taxes by Pennsylvania municipalities, but note that this varies across different municipality types.  In Townships of the Second Class, for example, the earned income tax generally provides more revenue than does the real property tax.

School Districts
School districts in Pennsylvania also have had a wider range of local tax options than county governments.  In general, their options have been very similar to those offered municipalities, though their tax rate limits for some taxes have been higher.   Unlike municipality, however, the earned income tax plays a much smaller role for them, primarily because that tax hasn't been able to generate enough revenue; they have had the same tax rate limit on the earned income tax (1 percent if they alone levy, 1/2 percent if the local municipality also levies the tax), even though their costs of much greater.  The real property tax consequently has been used to balance budgets, and thus has played a very important role.  In addition, some school districts have also placed similar reliance on the occupation tax, for which there is no tax rate limit (when levied under Act 511). 

A recent state law, Act 50 of 1998, provides school districts with a new local tax option.  School districts adopting the new system receive a higher earned income tax limit in exchange for eliminating nusiance taxes (the occupation, occupational privilege, and per capita taxes), reducing real property taxes through homestead and farmstead exclusions, and local tax referendum whenever future proposed real property tax increases exceed an inflation.   The higher earned income tax rate is a full (and dedicated) 1 1/2 percent, compared to the "old" 1 percent (which needed to be shared equally with municipalities).  

As of now, no Pennsylvania school districts have adopted the new system available under Act 50 of 1998.  It remains to be seen how the new choice will affect local tax reliance.