Who Pays for a Hike in PA’s Sales Tax? An Analysis of the Impact of Raising the Sales Tax to 7.25%

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Ellen Lyon, 717-919-9924
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Who Pays for a Hike in PA’s Sales Tax?
An Analysis of the Impact of Raising the Sales Tax to 7.25%
Low- & Middle-Income Families Fare Better Under a Personal Income Tax Increase


Read the brief online here

Download a table on the average tax increase by income group

HARRISBURG, Pa. – Nov. 18, 2015 – Under a budget framework currently being negotiated by Gov. Wolf and legislative leaders, Pennsylvania’s sales tax would be increased to pay for property tax cuts. A new analysis, released today by the Pennsylvania Budget and Policy Center, found that the bottom 80 percent of Pennsylvania families – those earning less than $102,000 annually – would provide 63 percent of the revenue produced by raising the sales tax from 6 percent to 7.25 percent, as proposed.

The tax incidence of the proposed sales tax rate increase contrasts sharply with what would have occurred under Gov. Wolf's plan to raise the personal income tax rate to 3.57 percent while expanding the state’s income tax forgiveness program, a proposal rejected in October by all House Republicans and nine western Pennsylvania House Democrats. A personal income tax rate increase would raise the majority of its revenue from families earning $102,000 or more annually.
 
Who Pays for an Increase in the Sales Tax: Analysis of the Tax Incidence of an Increase in the Sales Tax from 6% to 7.25%, finds that:

  • The bottom 60% of families, those earning less than $65,000 per year, would account for 39% of the increase in sales tax revenue generated by all Pennsylvania taxpayers. In contrast, these families would account for just 19% of the increase in revenue from the personal income tax rate to 3.57 percent that Gov. Wolf proposed in October.  
  • The highest-income 20 percent of families, those earning $102,000 or more annually, would account for 37% of the increase in sales tax revenue generated by all Pennsylvania taxpayers. In contrast, these families would account for 61% of the revenue raised from an increase in the personal income tax rate.
  • The bottom 60% of taxpayers would pay nearly $100 more, on average, under the sales tax increase ($165) than under the income tax increase ($72). 
  • The bottom 20% of taxpayers would actually see their taxes fall, on average, by $4 under the income tax increase because more families would pay no income tax due to expanded income-tax forgiveness. 
  • The top 20% of taxpayers, on the other hand, would, on average, pay substantially less in new taxes under a sales tax rate increase than under a higher personal income tax rate. 
  • By far, the biggest beneficiaries of relying on the sales tax to fund property tax relief would be the top 1% of taxpayers, who would pay less than a quarter as much under a sales tax rate increase ($1,205) versus a higher personal income tax rate ($5,306).

“These numbers illustrate the importance to the vast majority of low- and middle-income Pennsylvania families of the ongoing negotiations about how this revenue will be redistributed through property tax cuts,” PBPC Research Director Mark Price, the author of the brief, noted. “There is a real danger that too much revenue collected from working families will be redistributed to affluent homeowners and business owners. Most Pennsylvanians support raising taxes to reinvest in education, but that support does not extend to raising taxes on working families to provide property tax cuts to high-income households.”

This briefing paper recommends that if the sales tax remains the vehicle for providing property tax cuts, it is imperative that the final plan not amplify the unfair nature of the sales tax increase by distributing tax cuts mostly to the affluent.  To this end, it is critical that the final budget agreement:

  • include, alongside property tax cuts, a rebate for renters;
  • target property tax cuts to  low- and middle-income homesteads;
  • expand personal income tax forgiveness to more low-income households, as Gov. Wolf proposed in October (and March); and
  • include an increase in the minimum wage to $10.10 per hour to boost the wages of low- income taxpayers who will bear the greatest burden of higher sales taxes.

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