On Oct. 26, 2020, the Pennsylvania Commonwealth Court held that the city of Scranton, Pennsylvania, a home rule municipality, is not subject to the aggregate limitation on the amount of taxes a municipality may levy and collect under Pennsylvania’s Local Tax Enabling Act (LTEA).1 The court determined that when Scranton elected home rule status, the city retained the ability to impose various local taxes authorized by the LTEA,2 most notably an earned income tax and a gross receipts tax known as a business privilege tax (BPT), but was no longer restricted by the law’s limitations.
Chapter 3 of the LTEA (Act 511) provides an express grant of taxing power from the Pennsylvania legislature to political subdivisions, enabling those subdivisions to impose various local taxes on municipal residents and nonresidents.3 As a result, Pennsylvania municipalities have implemented various local taxes over the years. For example, approximately 3,000 Pennsylvania localities levy a local earned income tax on resident and nonresident wage income.4 Another 300 or so municipalities impose a local BPT based on gross receipts for the privilege of doing business in their jurisdiction.5 Act 511 also contains a provision limiting the aggregate amount of local taxes certain municipalities may impose.6 Specifically, the provision places a limitation on local taxes such that total taxes levied may not exceed the total value of all real estate in the municipality multiplied by 12 mills, or .012.
In Pennsylvania, home rule municipalities are incorporated under a unique charter and are authorized to act independently except where specifically limited by state law.7 In electing home rule status, the authority to act in municipal affairs is transferred from state law to the local charter adopted and amended by the municipality’s voters. The Pennsylvania Home Rule and Optional Plans Law (Home Rule Law) grants home rule municipalities additional taxing powers, including the power to levy taxes at rates as determined by the governing body.8 Scranton, formerly a Second Class A city under Pennsylvania law, adopted a home rule charter on May 21, 1974.
A group of Scranton residents filed a complaint in the state trial court alleging that Scranton collected $34.5 million in taxes for the 2015 fiscal year, significantly exceeding the $27.3 million limit imposed under Act 511, based on the value of real estate located in Scranton. The taxpayers alleged that Scranton also exceeded the cap for the 2016 and 2017 fiscal years. In their complaint, the taxpayers asked the court to order Scranton to reduce its tax rates to comply with Act 511 and to create a fund and repay any excess tax collected in these years. Persuaded by the taxpayers’ argument that Act 511’s aggregate tax limitation applied to Scranton, the trial court ordered Scranton to reduce its tax rates to comply with the aggregate limit, and further ordered the city to escrow the approximately $50 million in excess taxes collected during the 2015-2018 fiscal years, which would eventually be repaid to all of Scranton’s taxpayers. Scranton appealed the court’s order to the Commonwealth Court.
Commonwealth Court decision
On appeal, Scranton argued that: (i) it was not subject Act 511’s aggregate limit on local taxes because it is a home rule municipality; (ii) Pennsylvania’s Home Rule Law precludes Act 511 limits on the tax rates set by a home rule municipality; and (iii) alternatively, that it was exempt from Act 511’s aggregate tax limit as a distressed city authorized to impose additional taxes under Act 47.9
Reversing the trial court, the Commonwealth Court ruled that Scranton may impose any type of tax authorized by the LTEA while not being subject to the aggregate tax limitation contained in Act 511. In analyzing the interaction of the LTEA with the Home Rule Law, the Court reasoned that the Pennsylvania Constitution and the state legislature endowed home rule municipalities with “the broadest possible power.” Based on its interpretation of the Home Rule Law, the Court found that home rule municipalities are limited by statute as to the subjects of taxation, but they are not limited by the rates of taxation. The court also noted that any uncertainty whether Act 511’s aggregate tax limitation is a limit on tax rates must be resolved in favor of the home rule municipality.
The Court acknowledged that once a municipality adopts a home rule charter, it is no longer a municipality of its former class. However, the court reasoned, that does not mean that “a municipality electing home rule status thereby loses its former statutory powers.” Relying on the reasoning of the Pennsylvania Supreme Court in Pennsylvania Restaurant and Lodging Association v. Pittsburgh, the Court observed that municipalities electing home rule status enjoy as much or more authority than municipalities declining to do so, and that while home rule municipalities are not restricted by their former municipal codes, they may still exercise powers bestowed by the former code.10 Accordingly, the Court determined that once Scranton elected home rule status, it retained all taxing powers conferred upon it by the LTEA, but was no longer subject to the LTEA’s limitations. For these reasons, the court concluded that the Act 511 aggregate tax limitation does not apply to Scranton.
Finally, the Court rejected Scranton’s alternative argument that application of the Act 511 aggregate limit to force repayment of taxes would endanger the city’s recovery from its distressed status under Act 47. The Court determined that Scranton may seek additional tax authority under Act 47, regardless of Act 511’s applicability. Finding that the aggregate limitation was irrelevant to Scranton’s distressed status, the Court found that Scranton’s Act 47 argument lacked merit.
In a state unique for its unusually large number of local taxing jurisdictions relative to other states, the Commonwealth Court’s decision affirms that home rule municipalities retain broad taxing authority afforded to them under the LTEA, while at the same time being free from the law’s tax collection limitations. Broadly construing the applicability of Pennsylvania’s Home Rule Law, the Court confirmed that home rule municipalities are not subject to the general restrictions put in place by state law, absent express statutory limitations saying otherwise. Interestingly, before the Court reached its decision in this case, Pennsylvania separately enacted legislation amending Act 511 to clarify that the aggregate limitation does not apply to taxes imposed by home rule municipalities or Act 47 municipalities.11 This legislation was intended as a prospective response to the trial court’s ruling in favor of the taxpayers, not as a method to otherwise affect the ultimate outcome of the case applicable to earlier fiscal years.
Signifying a win for Scranton and similarly situated home rule municipalities in Pennsylvania, the Court’s ruling clarifies the ability of home rule municipalities to levy local taxes at higher rates if they so desire, especially those facing significant budget deficits that preceded or resulted from the pandemic. With this decision, it is possible that other municipalities may be more inclined to elect home rule status, noting that such action requires voter approval.12 Existing home rule municipalities may also increase tax rates in an effort to raise additional revenue. Faced with such decisions, however, local leaders risk driving out residents and businesses opposed to such tax increases (such as the ones that brought the Scranton litigation). In any event, the court ruling should remind businesses operating in Pennsylvania, along with those living and working in the state, to be aware of the specific taxing structures and powers of local taxing jurisdictions throughout the state, depending on their local government classification.13
1 Gary St. Fleur et al. v. City of Scranton et al., No. 112 C.D. 2020, Pennsylvania Commonwealth Court, Oct. 26, 2020 (opinion not reported).
2 Act 511 of 1965, P.L. 1957, 53 PA. STAT. § 6924.101 et seq.
3 53 PA. STAT. §§ 6924.301–6924.330.
4 Taxation Manual, Pennsylvania Department of Community & Economic Development, Feb. 2019.
6 53 PA. STAT. § 6924.320(a).
7 Home Rule for Pennsylvania Local Governments, Community Environmental Legal Defense Fund, Oct. 19, 2010.
8 Act 62 of 1972, 53 PA. CONS. STAT. §§ 2901–2984.
9 Act 47 of 1987, 53 PA. STAT. § 11701.102(a).
10 Pa. Rest. & Lodging Ass’n v. City of Pittsburgh, 211 A.3d 810 (Pa. 2019).
11 Act 76 of 2020, adding 53 PA. STAT. § 6924.320(d).
12 Residents must approve the formation of a government study commission to explore and recommend home rule status. Once recommended, the home rule charter must also be approved by voter referendum. Home Rule in Pennsylvania, Pennsylvania Department of Community & Economic Development, Mar. 2020.
13 It should be noted that Pennsylvania local taxing jurisdictions are limited in their ability to enact new receipts-based taxes under the Local Tax Reform Act of 1988. 72 PA. STAT. §§ 4740.101-4750.3112. A notable exception is the city of Philadelphia, a home rule city with special taxing powers that other Pennsylvania municipalities do not have, including the ability to levy additional taxes. As the only First Class city in Pennsylvania (a city with a population of over one million residents), Philadelphia is given broad taxing authority under the Sterling Act. 53 PA. STAT. §§ 15971-73.
Matthew D. Melinson
Matthew Melinson is a partner in Grant Thornton's Philadelphia office and the national leader of the SALT practice's indirect tax services. Melinson is responsible for all aspects of multistate tax consulting and planning and compliance related to income tax, franchise tax, sales and use tax, credits and incentives, real estate tax, and personal property tax.
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Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
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