TAX NEWS - June 2010

Delaware Tax: Delaware cities: Other places in region impose higher wage tax

Wilmington isn't the only government that uses the wage tax as one of the main ways to balance its budget.

Although cities such as Baltimore manage to get by without it, many other towns and school districts impose the levies, commonly known as earned-income taxes.

Some nearby cities also have much higher rates than Wilmington's 1.25 percent, officials said. The wage tax is levied on all earned income for anyone who lives or works in the city and is usually the government's largest source of revenue.

In Philadelphia, for example, the wage tax is 3.9 percent for city residents and 3.5 percent for nonresidents who work in the city.

Wallace H. Nunn, a retired managing director for Smith Barney in Philadelphia, paid the wage tax for decades and said it hurt the city.

"It's always been a short-sighted tax," said Nunn, of Newtown Square, Pa. "It started decades ago as what was supposed to be a temporary measure to infuse money into the city's budget. But it led to a downward spiral. The amount of the tax grew and grew, which I believe was one of the main reasons that Philadelphia's population of businesses and residents got smaller and smaller."

A similar dynamic has taken place in Wilmington, Mayor James M. Baker said. The property tax used to be the government's largest source of cash, but now it's the wage tax.

City economic development officials recently told the City Council that 80 percent of Wilmington's downtown work force during the week is made up of nonresidents.

The theory behind the tax is that nonresidents should pay for the government services they use during the day, Baker said.

Delaware Chamber of Commerce President Rich Heffron said most people accept that.

"Commuters who work there every day use the roads, police, and water and sewer services," he said. "The argument isn't that the tax is too high. It's that they are now trying to collect it from places where they've never collected it from before."

Wilmington resident Cassandra Marshall, an environmental engineer, said she doesn't think she's getting a sufficient bang for her wage-tax buck.

"Leaving aside for a moment that the audit they conducted of me a few years ago was the most unprofessional thing I've lived through in my life," she said. "I just think the size of the city's work force is way too big for a city this small. We're spending way too much and the services are way too few and far between. And the ones that are provided are inefficient."

In 2009, the most recent year for which final data are available, the city collected about $45 million, according to Communications Director John Rago. About $35.5 million came from nonresidents and $9.5 million from city residents.

Media, Pa., a Philadelphia suburb in Delaware County, has a 1 percent tax for residents. Nonresidents pay half that amount. Because Media is the county seat and has more than 1,000 practicing lawyers in the borough each day, assessing the wage tax on them allows the local government to keep property taxes relatively low.

Wilmington will collect about $55 million in wage taxes this year, according to the city's budget for fiscal 2011. Because of a poor economy, the city's wage-tax base has decreased by millions in the past few years. But collections have remained relatively high over that period because of the city's efforts to find people who hadn't been paying the tax for years, Finance Director James M. Jones said.

Jones noted that Wilmington's wage-tax rate has remained at 1.25 percent for years, while cities such as Philadelphia have raised their rates. Changing it in Delaware requires state legislative approval.

There is language in Wilmington's wage-tax law that exempts city residents from the levy if they pay more than the city's 1.25 percent tax elsewhere.

That offset benefits taxpayers such as Wilmington resident Louis DaSaro, an engineering professor at Drexel University in Philadelphia. DaSaro has to pay 100 percent of Philadelphia's wage tax, but because it's higher than Wilmington's rate, he pays no wage tax in his hometown.

"I actually think Wilmington has a pretty nice program in that regard," DaSaro said. "I think the tax environment in Wilmington is much better than the situation in Philadelphia, where it's really bad."