The state Senate has unanimously passed legislation that would stop Pennsylvania from applying its personal income tax to dividends from mutual funds invested in U.S. government securities.

When it reconvenes in September, the House is expected to pass the measure, which would result in a $5 million annual loss to state coffers, according to a spokeswoman for Eileen McNulty, the state's revenue secretary.

The Investment Company Institute, a trade group representing the mutual fund industry, has lobbied for the change, arguing that state taxation of federal dividends is unconstitutional.

"This brings Pennsylvania one step closer to righting a financial wrong," said David J. Mangefrida Jr., assistant tax counsel for the institute. "It's the only state that imposes an income tax on earnings from U.S. bond mutual funds, which are free from tax in the other 49 states."

McNulty's spokeswoman said the secretary supports the Legislature's measure, but sees no need to end the tax immediately through an administrative order, as the institute has urged. She said the bill, which is expected to pass. would make the tax repeal retroactive to Jan. 1, 1993, so a delay until September would not affect taxpayers' savings from the repeal.

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