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Pennsylvania has a flat personal income tax rate of 3.07% — one of the lowest flat rates among the states that have income taxes. But Pennsylvania also has a complex web of local earned income taxes (EIT) that apply on top of state taxes, making the overall burden more significant than the state rate alone suggests.
The State Flat Rate
Pennsylvania's 3.07% flat tax applies to eight classes of income: compensation (wages and salaries), net profits from business, net gains from the sale of property, net income from rents, royalties, patents, and copyrights, dividends, interest, estate or trust income, and gambling and lottery winnings. Each class has specific rules about what counts and what deductions are allowed.
Local Earned Income Taxes
Most Pennsylvania municipalities and school districts impose a local earned income tax (EIT) on wages and net profits from business. Rates vary by location but are commonly 1-3% on top of the state rate. If you live and work in different jurisdictions, you generally pay the higher of the two local rates. This means residents in some areas face a combined state and local rate of 4-6% or more on earned income.
Retirement Income Exemptions
Pennsylvania is one of the most retirement-friendly states in the country when it comes to income taxes. Social Security is completely exempt from Pennsylvania income tax. Pension income from qualified defined benefit plans is exempt. Most distributions from IRAs, 401(k)s, and similar retirement accounts are exempt once you've reached retirement age (generally 59½). This makes Pennsylvania significantly more attractive for retirees than the 3.07% rate alone suggests.
Capital Gains
Pennsylvania taxes capital gains as ordinary income at the 3.07% state rate, with no distinction between short-term and long-term gains. There's no preferential rate for long-term capital gains, unlike the federal system.
Sales Tax
Pennsylvania's sales tax rate is 6%, with Philadelphia adding an additional 2% and Allegheny County (Pittsburgh area) adding 1%. Food for home consumption, most prescription drugs, and clothing are exempt from Pennsylvania sales tax — a broader exemption than many states offer.