Philadelphia Does Not Need to Provide a Credit for Income Taxes Paid to Another State

The City of Philadelphia is not required to give residents a credit against the city’s wage tax for income taxes paid to another state, held the Pennsylvania Supreme Court in a 3-2 split in Zilka v. Tax Review Board, Nos. 20 & 21 EAP 2022, 2023 WL 8102749 (Pa. Nov. 22, 2023). 

The Zilka decision, one of the first by a state supreme court to interpret Comptroller of Treasury of Maryland v. Wynne, 575 U.S. 542, 549 (2015), concluded that enactment and administration of local taxes should be analyzed to determine whether state and local taxes must be aggregated to see if a tax unconstitutionally burdens interstate commerce. Emphasizing that the Philadelphia wage tax was enacted, and is administered, by the city government, the court found the Philadelphia wage tax to be a bona fide local tax, rather than a duplicative state tax in disguise. Consequently, the Philadelphia wage tax does not need to be aggregated with Pennsylvania personal income tax in applying Wynne and the state-to-local tax crediting mechanism for income taxes paid. Businesses and individuals are encouraged to consider broad multistate applications of this decision and our insights noted in this alert. 

In Detail

From 2013 through 2016, Diane Zilka, the taxpayer, resided in Philadelphia but worked exclusively in Wilmington, Delaware. As a result, the taxpayer’s wages were subject to four state and local income taxes during that time: the Philadelphia wage tax (3.922%), the Pennsylvania personal income tax (3.07%), the Wilmington earned income tax (1.25%), and the Delaware income tax (5%). The tax rates listed are those for the period in question in the case. 

Pennsylvania granted the taxpayer a credit for her Delaware income tax liability to completely offset her Pennsylvania personal income tax liability. Although Philadelphia similarly granted the taxpayer a credit for her Wilmington earned income tax liability against her Philadelphia wage tax liability, the taxpayer claimed that Philadelphia had to grant her an additional credit for the remaining Delaware income tax liability, approximately 1.93%, that she was unable to use as a credit against her Pennsylvania personal income tax liability due to the higher Delaware income tax rate. As a matter of policy, the Philadelphia Department of Revenue refused to grant the additional credit.

The taxpayer argued that the Philadelphia wage tax violates the fair apportionment and discrimination prongs of Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). As the reason why additional credit should be provided, based on Wynne, the taxpayer argued that state and local taxes should be considered in the aggregate, as one state taxing scheme, for Complete Auto analysis purposes. 

However, the Zilka court disagreed with this reading of Wynne, writing that Maryland’s “county” tax had been found to be “little more than a state tax masquerading as a local tax, given that the state imposed the tax via state legislation and the state’s comptroller collected the tax.” The Zilka court interpreted Wynne to mean that a local tax, like Maryland’s “county” tax, may be indistinguishable from the state tax, but only if the “local” tax is “actually a duplicative state tax in disguise.” The court found that the Philadelphia wage tax, unlike the Maryland “county” tax, was a legitimately 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.”

Because the Philadelphia wage tax is a legitimately local tax and offers a credit to residents for local taxes paid to other local jurisdictions, it passes the internal consistency test and is not discriminatory. Further, “any excess taxes paid by [the taxpayer] were simply the result of Delaware’s higher income tax rate of 5%, rather than any inherent discrimination contained in the Philadelphia Tax or the City’s practice of offsetting its tax with credits [for taxes] paid only to local taxing jurisdictions.” 

In a concurring opinion, Justice David N. Wecht agreed with the majority that the tax scheme at issue passes the internal consistency test but, echoing Justice Scalia’s dissent in Wynne, criticized the U.S. Supreme Court’s dormant Commerce Clause jurisprudence as resting “on an unstable foundation seemingly unmoored from any discernible legal principle.” Justice Wecht suggested that this case may be worthy of U.S. Supreme Court review to “consider whether the internal consistency test should be applied as a state-level inquiry,” as the taxpayer argued.

In a dissenting opinion joined by Justice Sallie Updyke Mundy, Justice Kevin M. Dougherty wrote that for purposes of a dormant Commerce Clause analysis, the Philadelphia wage tax should be considered as part of Pennsylvania’s income tax scheme, noting that the ultimate authority for all local taxes comes from the state. 


The Zilka decision views local taxes as a dichotomy: either they are state taxes in disguise, such as the Maryland “county” tax from Wynne, or they are bona fide local taxes, such as the Philadelphia wage tax. To determine which group a tax belongs to, one must look to the circumstances underlying the creation of the tax and the way it is collected and administered. Given the importance of the internal consistency test to the Complete Auto analysis, the determination of whether a local tax should be viewed as such or as a state tax is critical.

Notwithstanding the potential for U.S. Supreme Court review, Zilka will have its most immediate impact on Pennsylvania residents, and in particular Philadelphia residents, who earn income in states that have not entered into a reciprocity agreement with Pennsylvania and that impose a higher individual income tax rate than Pennsylvania (for example, New York). 

It is unclear, however, how the Zilka analysis might apply to local earned income taxes enacted under Pennsylvania’s Local Tax Enabling Act, which places restrictions on various aspects of such taxes. Furthermore, Zilka could potentially influence and give guidance to other states’ taxing agencies. Localities with similar taxing schemes that previously may have provided a credit for other state income taxes paid may revisit and revise their laws and policies.

In the age of remote and hybrid work arrangements, and taxpayers increasingly subject to taxes in multiple states and local jurisdictions, the Zilka decision is of particular significance. Employers and individuals need to monitor the impact of this case and verify whether it may affect withholding requirements and crediting against taxes paid to other jurisdictions.