Pennsylvania increases tax credit for low-income workers; Philadelphia prepares to implement similar measures.

Governor Josh Shapiro, alongside the Pennsylvania General Assembly, recently enacted the state’s inaugural Working Pennsylvanians Tax Credit (WPTC), a significant policy aimed at supporting low-income workers across the state. This new tax initiative will ensure that any individual qualifying for the federal Earned Income Tax Credit (EITC) will automatically receive a state credit equivalent to 10% of their federal credit when filing taxes in the upcoming year.

With this legislation, Pennsylvania aligns itself with 31 other states and the District of Columbia that have implemented refundable tax credits to provide essential financial support to low-income employees. The combination of federal and state EITC benefits lifted an estimated 6.8 million working individuals out of poverty in 2024, demonstrating the positive impact of such tax incentives on reducing economic hardship.

While the introduction of the state-level EITC is a noteworthy development, it is somewhat limited in comparison to similar credits in other states, which generally range from 20% to 50% of the federal credit. This modest increase, while progressive, may fail to fully alleviate the financial strains faced by low-wage workers, particularly in light of Pennsylvania’s regressive tax structure, which disproportionately impacts low-income families.

According to the Institute on Taxation and Economic Policy’s “Who Pays?” report, the lowest-income residents of Pennsylvania contribute approximately 15.1% of their income in state and local taxes, which is more than double the tax burden experienced by the wealthiest 1%. This disparity accentuates the necessity for robust tax credits like the new state EITC, intended to neutralize some of the adverse effects of the current tax system.

In urban areas such as Philadelphia, low-income individuals face an even steeper tax burden, exacerbated by a flat wage tax that further diminishes their disposable income. The city’s wage tax refund program, designed to provide some relief, has demonstrated significant shortcomings, with only about 4.5% of eligible individuals applying and receiving benefits this year.

There is a pressing need for local authorities to enhance eligibility and streamline the application process for tax refunds. Legislation proposed by councilmembers Kendra Brooks and Nicolas O’Rourke aims to increase income thresholds and extend the wage tax refund, but these proposals are presently stalled.

The new state EITC could facilitate a more effective wage tax refund approach if local policies were adapted to connect the refund directly with the state credit. By automating applications and payouts, cities could increase participation rates, thereby reaching more eligible families.

With the poverty rate in Philadelphia significantly above the state average, the need for targeted economic interventions is more critical than ever. Local tax credits such as EITCs and child tax credits have proven beneficial in combatting poverty and providing financial stability. As federal support retracts, state and local governments must escalate their efforts to support vulnerable populations effectively.

The Working Pennsylvanians Tax Credit heralds a new opportunity for Pennsylvania to address poverty through a more generous and efficient tax refund system. With appropriate adjustments and innovations, Philadelphia can adopt strategies that have seen success in other jurisdictions to better support its working families and reduce economic disparities.

Media News Source