New Pa. tax credit for some workers to be ready for 2026 filing season

State lawmakers have created a new Working Pennsylvanians Tax Credit. It’ll be tied to the federal Earned Income Tax Credit and could mean extra dollars for roughly 1 million people.

Pennlive.com

A new tax credit for lower- income workers in Pennsylvania will be ready for tax time this spring, Gov. Josh Shapiro ‘s administration said, calling it the most significant tax change for the state’s working class in over half a century.

The new program — called the Working Pennsylvanians Tax Credit — was one part of the sweeping state budget deal that Shapiro signed last week, ending a months-long impasse. The tax credit received bipartisan praise and was influential in shoring up support for the various concessions and compromises made in the deal.

The new credit is a state-level version of the federal Earned Income Tax Credit (EITC), allowing Pennsylvania workers to claim a credit on their state income tax bill equivalent to 10% of their federal EITC.

The credit is also refundable, meaning that tax filers will get money back if the credit takes their tax liability into the negative. The federal EITC scales with income and family size, and the largest credit of just over $8,000 is available for households with three or more children. That family will now get $800 off their state income taxes as well.

Based on current income estimates, about 940,000 Pennsylvanians will benefit from the earned-income credit, Shapiro said Monday, with a total value of $193 million.

Not only is the new tax credit a significant move politically and for workers’ wallets, it’s also a major step forward in figuring out how to deal with the legal constraints of Pennsylvania’s income tax system.

“The last 54 years, state government has not advanced a new initiative in its tax system to address poverty and assist all working families — until this year,” Revenue Secretary Pat Browne remarked at a press conference.

Under changes to the state constitution made in the late 19th century, Pennsylvania taxes are required to be “uniform” across all subgroups of taxpayers, with limited exceptions for poverty and disability.

Courts have interpreted this uniformity clause to mean that taxes must be flat-rate, without any variation in the percentage charged. This is why Pennsylvania’s personal income tax is 3.07% across the board, and does not increase or decrease depending on total income in the way that federal taxes do.

Over five decades ago, as Browne referenced, the state put in place a tax forgiveness system tied to a family’s income relative to the poverty line, allowable under the uniformity clause. Fewer and fewer Pennsylvanians qualify for this each year, and some lawmakers have sought to expand the poverty forgiveness as a workaround to the uniformity clause. Former Gov. Tom Wolf proposed raising the base income tax rate but drastically broadening the forgiveness carve-out in order to mimic a progressive tax rate while not running afoul of the uniformity clause. The plan never made it through the legislature.

In more recent years, Democrats who control the state House of Representatives have fielded the idea of a state earned-income credit as a simpler, cleaner way of achieving the same effect. The credit’s inclusion in this year’s budget deal is a major milestone for Browne and others who deal with the finer points of tax policy.

“It really is a landmark improvement to our Pennsylvania income tax system. And that really is not a stretch,” Browne said, because of the limitations imposed by the uniformity clause.

Crucially, the new earned-income credit will also dovetail with the longstanding poverty-level- based tax break. For the example of a single parent with three dependents, the federal EITC begins to phase out after $23,350 in earned income, but a single earner making $25,000 per year would still get a federal credit of around $7,700, putting their state credit at $770.

This parent would normally have a state tax liability of $768, but this is already fully forgiven under the state’s poverty exemption. Starting with this tax year, that parent will now get $770 cash back from the state due to the earned-income credit.

An earned-income credit was not part of Shapiro’s original budget pitch, with the governor crediting House Democratic leadership for pushing to have it be part of the final deal.

In early May — almost two months before the nominal budget deadline — the House passed a standalone bill to create the credit, signaling that it was of high importance for the chamber.

“We passed it way ahead of the budget because we wanted it to be part of budget negotiations,” said House Speaker Joanna McClinton, D-Philadelphia. “From the moment that I was brought into the room, I talked about the urgency that we come up with a win” for working Pennsylvanians, McClinton said of budget negotiations.

The credit proposal sailed through the House in May on a 185-to-18 vote, seeing much broader support than it had two years prior, when the same bill was opposed by the majority of Republicans.

“We worked hard to get people on board,” said the bill’s author, Rep. Christina Sappey, D-Chester County. The increase in support, Sappey added, is a likely indicator that voters’ cost-ofliving concerns are making it through to lawmakers.

“It’s like, ‘are you really going to vote against working Pennsylvanians?’” Sappey posed, given that every legislator has constituents who will be helped.

Most states have a refundable earned-income tax credit, meaning “we’re almost late to this party,” Mc- Clinton said, but “we finally got there.”

The Department of Revenue is currently working on implementing the new credit, Shapiro and Browne said Monday, and it should be simple for filers to claim when they begin submitting their 2025 tax returns early next year.