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Staff report outlines implications of proposed earned income tax exemption for low-income residents
Summary
City staff presented an initial report on a possible earned income tax (EIT) exemption up to the state ceiling of $12,000, estimating administrative costs, refund mechanics, and potential revenue shifts that could result in an overall city outlay exceeding the tax revenue foregone.
City staff presented a preliminary report to the Finance Committee on July 1 analyzing a potential earned income tax (EIT) exemption for lower-income Lancaster residents.
The report, requested by Councilor Hirsch, reviewed how the city’s EIT functions under the new home rule charter: residents currently pay a 1.1% city EIT plus a 0.5% school district levy (1.6% total). Staff advised the state sets a maximum exemption ceiling at $12,000 and recommended analysis focused on that ceiling.
Staff said the exemption must operate on a refund basis: residents would pay the full tax during the year and, after filing, eligible residents would receive refunds processed by the Lancaster County Tax Collection Bureau (LCTCB). Staff estimated the city would forgo approximately $258,000 if filing increased with the incentive of refunds; of that amount, the LCTCB analysis suggests about $117,000 of the gross would be paid to other municipalities as nonresident EIT because many residents live in the city but work elsewhere. After refunds and an estimated processing fee of roughly $10 per filing (about $47,000), staff estimated the city’s total outlay would be about $304,000 with an estimated $141,000 flowing back to qualifying residents. The average refund in the staff example would be about $42 per resident under the assumptions used.
Councilors asked clarifying questions about the calculation, the LCTCB’s role and whether an application process or use of funds targeted to city programs (for example, the Critical Repair Fund or Lancaster Water Assistance Program) might deliver more direct benefits to low-income in-city residents. Multiple councilors said the risk that other municipalities would collect nonresident tax portions was a key concern that reduced enthusiasm for a citywide EIT exemption as designed. Staff said further study is possible if council provides direction and that final budget estimates could be incorporated in the fall budget process.
No committee action was taken; staff requested direction from council about next steps and more detailed modeling.
