Must a state tax and a local tax be considered together when determining whether either of them pass constitutional muster? In a recent decision, the Pennsylvania Supreme Court said “no” and determined that the City of Philadelphia was only required to provide income tax credits to Philadelphia residents for similar income taxes that they paid to other localities, but was not required to provide income tax credits to Philadelphia residents for income taxes paid to other states. Zilka v. Tax Review Board City of Philadelphia, Nos. 20 EAP 2022 & 21 EAP 2022 (Nov. 22, 2023).

Facts: The case involved a Philadelphia resident, Diane Zilka, who worked exclusively in Wilmington, Delaware. Zilka was subject to four income taxes: (1) Delaware state income tax; (2) Wilmington local income tax; (3) Pennsylvania state income tax; and (4) Philadelphia local income tax. When Zilka filed her Pennsylvania state income tax return, she claimed a credit for the income tax that she had paid to Delaware, though Zilka was not able to utilize as a credit the entire amount of income tax that she paid to Delaware, as Delaware had a higher tax rate. When Zilka filed her Philadelphia local income tax return, she claimed a credit for the income tax that she paid to Wilmington, though Zilka owed additional Philadelphia income tax even after utilizing the entire amount of the credit for income tax paid to Wilmington, as Philadelphia had a higher tax rate. Zilka argued that Philadelphia was constitutionally required to provide her with an additional credit to the extent of the amount of the remaining Delaware state income tax credit that Zilka was not able to utilize on her Pennsylvania state income tax return.

Decision: While Zilka asserted that a taxpayer’s state and local tax burdens must be aggregated in determining whether either tax violates the dormant Commerce Clause of the U.S. Constitution, the Court disagreed, finding that state and local taxes need only be aggregated when a court determines that a purported local tax is actually “a state tax masquerading as a local tax,” and is not “truly a local tax.” The Court then concluded that the Philadelphia local income tax was “truly a local tax” because it “was enacted by Philadelphia’s City Council and is collected by the City’s Department of Revenue solely for the benefit of the City and its citizenry.” 

Considering the burden of the Philadelphia local income tax on a standalone basis, the Court had little trouble finding that the tax was both internally and externally consistent. The tax was internally consistent because if every local jurisdiction imposed the same taxing scheme, residents and nonresidents working in each locality would pay the same amount of local income tax (i.e., with nonresidents working in different localities receiving a credit from their locality of residence). The tax was externally consistent because Philadelphia had not taxed more than its fair share by providing Zilka with a 100 percent credit for the taxes she paid to Wilmington. Finally, the Court observed that the additional tax burden for Zilka was the result of Delaware having a higher tax rate than Pennsylvania and “‘tax schemes that create disparate incentives to engage in interstate commerce (and sometimes result in double taxation) only as a result of the interaction of two different but nondiscriminatory and internally consistent schemes’ are not unconstitutional.”