PA Should Raise Needed Revenues in Fair Ways: Short- and Long-term Approaches to Fixing Pennsylvania’s Unfair Tax System

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Executive Summary

This briefing paper analyzes several options for raising revenue for the Pennsylvania state budget which would fall much less on middle- and low-income families than the existing Pennsylvania state and local tax system.

We first analyze the income tax increase (from 3.07% to 3.4%) and expansion of income tax forgiveness and sales tax base broadening proposed by Governor Wolf in his 2016-17 budget. This reveals that the governor’s revenue increases would be substantially less regressive than the current Pennsylvania state and local tax system.

Our second set of analyses compare the governor’s 2016-17 income tax proposal with two other ways of modifying the state’s single flat income tax that would raise the same amount of revenue. Both of these options would fall even less on middle and low-income taxpayers than the governor’s proposal and one of them – elimination of taxes on the first $30,000 of income – would reduce the average taxes paid by the bottom 80% of taxpayers by nearly $500 per taxpayer.

Based on this analysis, PBPC recommends that lawmakers use a two-step process to achieve fairer taxation and raise the revenue Pennsylvania needs.

The first step, which could be taken without a change to the constitution, would include a smaller increase in the tax rate on middle-class income than proposed by Governor Wolf, but a larger increase in the tax rate on income from wealth. The second step would begin this legislative session the process of eliminating the constitutional uniformity clause, which removes any uncertainty regarding the constitutionality of an exemption on the first part of income from state income taxes.

The analysis in this paper underscores that Pennsylvania can raise the critical revenues needed to address the state’s structural deficit and invest in education and vital services without raising taxes substantially on the middle class – and could, in fact, raise more revenue while cutting middle-class taxes.

NOTE: For reasons of simplicity, and to focus on taxes paid directly by individuals, this brief does not address the issue of the severance tax. Any comprehensive approach to raising revenue in a fair way, however, should include a severance tax so that Pennsylvania does not remain the only state with significant natural gas extraction that does not have such a tax.