The Effects of Introducing Withholding on Tax Compliance: Evidence from Pennsylvania’s Local Earned Income Tax

This paper examines Act 32, which mandated the introduction of withholding for the local income tax for all employees and the consolidation of a fragmented collection system to one collector per county, effective January 1, 2012, for Pennsylvania local governments. Using a difference-in-differences research design, I find that the act resulted in increased collections of the local income tax by about 9 percent. Results examining the heterogeneous impact of Act 32 show that the effects were larger where fewer residents had been subject to withholding prior to the reform and in counties that experienced a greater consolidation of tax collection.