House Earned Income Tax Credit Bill Turns into Tax Cut Frenzy

The combined cost of "Christmas Tree" full of tax cuts rises to an estimated $3.8 billion.

On Wednesday, January 16, the Pennsylvania House of Representatives took up legislation sponsored by Representative Dwight Evans to establish a refundable state earned income credit (EIC). Set at 15% of the federal EIC in the first year and 30% in year two and beyond, the bill would provide targeted tax relief to working families with annual incomes up to $35,000. The House Appropriations Committee estimates the legislation would cost $25 million in year one and $250 million in year two.

During more than six hours of discussion, the House adopted amendment after amendment, offered by Democrats and Republicans alike, to cut or eliminate income taxes, business taxes, inheritance and gross receipts taxes, and to offer a host of special interest tax credits.

In the end, the cost of the legislation had skyrocketed from $250 million to $2.4 billion in Fiscal Year 2008-09 and a total of $3.8 billion when fully phased in.

On Thursday, January 17, 2008, the House suspended the rules that require a 24-hour waiting period before voting on amended legislation, and adopted the bill unanimously.

The proposed tax cuts include:

• $990 million to reduce the state Personal Income Tax rate from 3.07% to 2.80%.
• $843 million to repeal the state Inheritance Tax.
  $804 million to reduce the Corporate Net Income Tax rate from 9.99% to 6.99%.
• $215 million to eliminate the Gross Receipts Tax on cell phones.
• $673 million to allow businesses write off an unlimited amount of previous year's losses against current year taxable income.
  In total, HB 377 would cut 8.5% of state general fund revenue in 2008-09 and 12.7% of revenue by 2011.

If adopted by the Pennsylvania Senate, the bill will force deep cuts in education, health care, public safety, and human service programs. Legislators adopted the tax cut amendments with little discussion of the impact on state revenues for the upcoming budget year and with no consideration of the effect on state services.

Passage of this bill comes at a time of growing concern about the nation's economy and fears of a recession resulting from rising energy prices, the decline in residential housing prices, and the collapse of the sub-prime loan market. In a slowing economy, economists agree that cuts in taxes --unless targeted to very low-income families -- and cuts in government spending weaken the economy and make recession more likely. The tax cuts that passed the House would also give Pennsylvania a deep structural deficit, with revenues falling far short of the levels to meet the state's need for education, services, infrastructure, and economic growth.

The weakening economy has already affected many state budgets and Pennsylvania will not be far behind. To date, 14 states are predicting deficits of $29 billion in fiscal year 2009-10 and 12 more expect deficits in 2010. Even without deep tax cuts, Rendell Administration officials predict a difficult budget year, as tax collections are expected to slow and could fall below budgeted amounts in the current fiscal year, which could trigger program cuts.

Advocates for the state earned income tax credit expressed disappointment with the action of the House of Representatives action on HB 377 and have withdrawn their support for the bill in its current form.

A statement from the Pennsylvanians for Economic Opportunity, a coalition of organizations working to expand the EIC, deemed the current bill "cynical, unaffordable, and irresponsible."

(For a list of the amendments and cost estimates click here.)

(To read the statement from the Pennsylvanians for Economic Opportunity click here.)

A state earned income credit (without the costly amendments added to the bill) could be powerful part of Pennsylvania's response to a slowing economy. It would provide a meaningful rebate to families earning under $35,000--in general between $300 and $1,000, depending on income--that would be spent in Pennsylvania businesses in Pennsylvania communities. At a cost of $250 million in 2010, it is much more affordable than an across the board cut in the state personal income tax. Funding for the EIC could come from the federal Treasury as part of a state fiscal relief package.