Options for Raising Revenue to Avoid Service Cuts

August 31, 2009

The recession has left Pennsylvania with diminished tax revenue, a continuing need to fund education, hospitals and libraries, and a growing demand for unemployment, health care and foreclosure assistance.

State lawmakers have rejected a temporary increase in the personal income tax to prevent cuts to services for children, the elderly, working families and people with disabilities.

State lawmakers have many other options to raise revenue that would maintain needed services, keep Pennsylvania competitive and make the tax system fairer.

The following is a list of revenue options that could bridge the funding gap and protect services.

Close the Delaware Loophole
$200 million in 2009-10 and $620 million in 2010-11

Currently, multi-state corporations can easily avoid taxes in Pennsylvania by shifting profits out of state to places like Delaware. By enacting combined reporting, Pennsylvania can level the playing field for all corporations, making the system fairer and stopping tax avoidance.

Freeze the Capital Stock and Franchise Tax
$374 million in 2009-10 and $550 million in 2010-11

Since 1998, the Capital Stock and Franchise Tax rate has been cut from 11.99 mills to 2.89 mills. The phase-out was suspended during the last recession in 2002.  The rate today is substantially lower than in 2002 and new exemptions mean than more than 70% of companies don't pay this tax. The Commonwealth cannot afford a business tax cut this year.

Enact a Severance Tax on Natural Gas Extraction
$47 million in 2009-10, over $500 million by 2015

Most states with mineral wealth charge a severance tax to ensure that state residents are not on the hook for social and environment costs associated with mining or drilling activities. Pennsylvania is the only state with significant mineral wealth that does not levy any type of severance tax. Enacting a severance tax on the state's growing natural gas extraction at the same rate as in neighboring West Virginia could generate significant revenue, significantly more than what the state would collect by leasing additional state forest land to gas drillers.

Broadening the Sales Tax Base by Eliminating Special Interest Exemptions
$500 million or more

Pennsylvania loses billions of dollars in revenue due to the large number of goods and services that have special exemptions from the state's sales tax.  Eliminating a small number of these exemptions could increase collections significantly and may be able to make the tax less regressive. For example, taxing candy and gum could raise $42 million in 2009-10 and $106 million in 2010-11, while collecting sales tax on accounting services could generate up to $204 million by 2010-11. Adding sales tax to all non-school sporting event tickets could raise $26 million in 2009-10 and $68 million in 2010-11.

Increase the Personal Income Tax (PIT) Rate on Dividends, Net Profits, and Other Non-Wage Income
A 4% tax on Dividends, Net Profits, and other non-wage income effective January 1, 2009 could raise $466 million in 2009-10 and $380 million in 2010-11

Pennsylvania's top PIT rate is the second lowest in the country. By taxing dividends, net profits from a business, and other non-wage income at a rate of 4%, a rate still lower than in neighboring states, Pennsylvania could significantly increase revenue collections without affecting most Pennsylvanians.

Enact a Tax on Cigars and other Tobacco Products
$38 million in 2009-10 and $53 million in 2010-11

Pennsylvania is the only state in the U.S. that does not charge an excise tax on cigars, chewing tobacco, and other tobacco products. This would raise revenue and deter use of the products, saving thousands of lives.

Increase the Cigarette Tax by $0.10 per Pack
$61 million per year

End the Earmark of Cigarette Tax for MCARE
$99 million in 2009-10 and $204 million in 2010-11

Approximately 18.5% of cigarette taxes are currently siphoned off to fund the state's MCARE Fund. This fund was created to reduce malpractice insurance costs for doctors. As the state's malpractice crisis has waned, the fund requires fewer resources. The fund currently has a $740 million reserve, about half of which is sufficient to pay for the doctors' outstanding liability through 2017.

Provide "Tax Amnesty" to Encourage Delinquent Filers to Pay their Taxes
$62 million in 2009-10

Instituting tax amnesty would allow people who are behind in paying state taxes to settle their tax bills without penalty. The state offered amnesty back in 1997, and despite the administrative burden it places on the Department of Revenue, the program brought in needed funds. It is estimated that providing tax amnesty could add $62 million to tax collections in 2009-10. In 2010-11, collections would fall by $32 million as amnesty accelerates the payment of delinquent taxes being collected by the Department of Revenue.

End the Sales Tax Vendor Discount
$54 million in 2009-10 and $75 million in 2010-11

For many years, the state has allowed businesses to keep 1% of their total sales tax collections. This discount was created to help offset the administrative costs of collecting the tax, but that need has been eliminated by the common use of computerized cash registers and accounting software.  Moreover, Pennsylvania does not cap the discount at a certain amount, so big companies like Walmart get most of the benefit.

Close the Amazon Sales Tax Loophole
$27 million more in sales tax revenue each year

While bricks and mortar stores and most online retailers collect sales tax from customers in Pennsylvania, some companies like Amazon.com exploit loopholes in the sales tax law to avoid collecting the tax. This tax avoidance gives Amazon a big break. Target.com  (which is operated by Amazon) collects sales tax. Amazon and other online vendors should play by the same rules as a retailer in a mall.