State Sen. John Blake is reviewing whether to introduce a bill to give Scranton the option of replacing the business privilege and mercantile taxes with a payroll tax, but so far remains skeptical of the concept.
City officials have asked the senator about the possibility of seeking a law to allow the city to impose a payroll tax, said Mr. Blake, D-22, Archbald, and city officials, and he has been studying the matter for the past four or five months.
Under the concept, the current business privilege and mercantile taxes would be eliminated and replaced with a payroll tax, he said.
"This would be a tax shift," said Mr. Blake, stressing that he has not decided whether he supports a payroll tax option for Scranton and has not introduced a bill for it in the Legislature.
"I still have reservations about this," Mr. Blake said. "I'm not satisfied. I haven't gotten a clear view on whether it makes sense."
One big question is whether a switch to a payroll tax would result in "tax neutrality," meaning that revenue from a payroll tax would equal the amount of taxes that would no longer be collected in business privilege and mercantile taxes, he said.
In general, the result of a switch to a payroll tax would be, "If you're a small business you pay less; if you're a larger business you pay more," Mr. Blake said.
That's because the current business privilege and mercantile taxes, which are levied on gross receipts, can be onerous, especially for small businesses which pay the taxes even if they don't turn a profit, he said. In contrast, a payroll tax is levied on an employer's gross payroll, he said.
Pittsburgh has implemented a payroll tax that is levied at the rate of .0055 percent, according to the city's website. Under Pittsburgh's payroll tax, every employer doing business in Pittsburgh for any period of time is required to pay a "payroll expense tax" on the compensation earned by their employees.
The term "payroll expense" for employers in Pittsburgh is defined as, "compensation earned by employees, irrespective of when paid, including salaries, wages, commissions, bonuses and other compensation, by an individual who, during any tax year, performs work or renders service, in whole or in part in the city."
Pittsburgh's payroll tax also applies to the self-employed, with payroll expense defined as the entire amount of distributions made to any self-employed individual from their business for work or services performed in that city. It also applies to partnerships, with payroll expense defined as the entire amount of distributions made to any person having an interest in such partnership for work or services performed in Pittsburgh.
The payroll tax issue was mentioned during Scranton City Council's Jan. 10 meeting, when council President Janet Evans said she had spoken with Mr. Blake about the matter that week.
At that time, Mrs. Evans said a payroll tax "would replace the business privilege and mercantile taxes and provide lower taxes for small business" and higher taxes for large business, such as banks and for-profit portion of tax exempts.
She has long said nonprofit institutions in the city, such as the University of Scranton, do not pay their fair share of city taxes.
Mrs. Evans added that if a bill to allow the option of a payroll tax in Scranton would not be introduced or enacted, the city instead should pursue a change to a third-class city from the city's current classification as the only Class 2A city in the state.
"If Sen. Blake should determine a lack of support for implementation of this tax in Scranton, then in my opinion it appears that Scranton should pursue reclassification to a third class city," Mrs. Evans said. "If legislation that pertains solely to the city of Scranton cannot be adopted by the state Legislature, there is no compelling reason to remain a class 2A city since our population numbers, according to both the 2000 and the 2010 census and certified by the governor of Pennsylvania, no longer qualify Scranton as a Class 2A city."
Furthermore, she added, a change to a third class city "would seem to strengthen Scranton's ability to enact a commuter tax for 2014."
That's because a third-class city does not have to satisfy extra hurdles that were imposed in the 1990s on a Class 2A city to make it harder for Scranton to qualify for a commuter tax.
However, Mr. Blake said the city must be careful in considering a classification change, and that he thinks it would be beneficial for the city to remain as the only Class 2A city in the state.
Contact the writer: jlockwood@timesshamrock.com