A Fair Share Tax Plan for Pennsylvania: How to Raise Revenues While Sparing Most Pennsylvanians
The State of Pennsylvania desperately needs new, recurring revenues, both to overcome a serious structural deficit that may lead to devastating budget cuts and to restore and enhance public education, human services and environmental protection.
If Pennsylvania keeps taxing under current law, while spending to maintain even the current level of services, it will face a large and growing structural deficit. For the budget year beginning July 2017, the lowest estimate of that deficit is $1.7 billion. By 2021-22 the structural deficit climbs to $3 billion and keeps growing by more than $175 million per year thereafter.
One barrier to raising revenues is the reluctance of legislators on both sides of the aisle to place additional taxes on Pennsylvania’s poor and middle-class. That reluctance is well motivated. Over the last 25 years, incomes for the richest Pennsylvanians have been rising fast while incomes for all other Pennsylvanians have been stagnant. Despite that, Pennsylvania’s tax system is profoundly unfair, as it taxes those with the lowest incomes at a rate triple those with the highest incomes. Moreover, the structural deficit is not a result of higher spending but, rather, of cuts to taxes, especially corporate taxes, that fall on the very rich.
The uniformity clause of the Pennsylvania Constitution—which prohibits the taxation of any class of income at more than one rate—makes it difficult to create a tax system that places more of the burden of state government on those most able to afford it. But there is much that can be done within the limits of the Constitution to raise revenues fairly. This policy brief proposes a series of tax increases that, taken together, would close the structural deficit and provide revenues necessary to meet the needs of the state, while sparing low- and middle-income people from most of the additional tax burden.
We propose that the state:
- Bifurcate the personal income tax into two parts and raise the tax rate on what we call income from wealth—dividends; net income from a business, profession, or farm; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts. Raising the tax on income from wealth from the current 3.07% to 4.0% would bring in an estimated $788 million in new revenue. At a rate of 4.5%, the tax would bring in $1.2 billion. Over two-thirds of the new revenue would come from families in the top 5% of income; 82% would come from families with incomes of $101,000 or more.
- Raise the tax rate on wage and interest income from the current 3.07% to 3.25%, while expanding the tax forgiveness program to reduce taxes on those with the lowest incomes. This would raise revenues by a net of $375 million.
- Expand the sales tax base to include goods and services that are more likely to be purchased by those with high, rather than low, incomes. Combined with a credit to low-income families for the sales tax they pay, this would net $338 million in new revenue.
- Eliminate corporate tax loopholes by instituting combined reporting of corporate taxes while lowering the tax rate. This would net $200 million in new revenue.
- Institute a modest severance tax of 6.5% on natural gas drilling with an impact fee credit. This would raise $218 million.
- Raise the minimum wage to at least $10.10 per hour, which would increase income and sales tax revenues while reducing state expenditures for Medical Assistance. The net contribution to deficit reduction would be $225 million.
Together, these proposals would generate $2.56 billion which would close the structural deficit and provide some margin for investment in education, human services, and the environment. Moreover, these revenues would not only recur, but increase over time, freeing the state for the vise of structural deficits far into the future.