Who Pays For An Increase in the PIT to 4% on Income From Wealth
Legislators are currently working to find the revenues necessary to fund the appropriations bill that passed the House and Senate this week. They are finding it difficult to agree on a proposal that raises genuine, recurring revenues in a way that does not make our already inequitable tax system more unfair.
One constitutional way to raise recurring revenues while making our tax system fairer would be to tax income from wealth (dividends, business profits, capital gains and a few other categories) at a higher rate than income from wages and interests. This briefing paper examines the impact on individual taxpayers (tax incidence) and the geographic distribution of revenue generated from a May proposal by lawmakers to raise $788 million with a higher personal income tax (PIT) on the income earned from wealth. Our findings in brief:
· On average, the typical middle-income family (with income between $41,000 and $65,000 per year) would see its state income taxes increase in 2016-17 by $31 dollars.
· Families in the second-lowest-income fifth, with incomes between $22,000 and $41,000, would see their income tax bills rise by $12 dollars on average next year.
· The bottom 20% of families (those with incomes less than $22,000 a year) would see their income tax bills rise by $4 on average.
· Even for families with incomes near the top (in the 80th to 95th percentile earning between $101,000 and $201,000 per year), a 4% tax on the income from wealth would increase the average tax bill by only $119 next year.
· A 4% tax on the income earned from wealth would have the largest impact on the top 1% of earners, with incomes of $463,000 or more. This group’s average tax bill would rise $5,305.
· All together 82% of new tax revenue generated by a 4% tax on the income earned from wealth would come from families with annual incomes of $101,000 or greater.
· Because a higher tax on income from wealth primarily impacts high-income families, 53% of the revenue raised from this tax will come from six relatively high-income, and largely suburban Pennsylvania counties (Montgomery, Chester, Delaware, Bucks, Allegheny, and Lancaster).
· In 42 of Pennsylvania’s 67 counties, the average increase in revenue (taxes) per taxpayer would be $104 or less—i.e., $2 per week or less. All but six of these 42 counties are rural counties.
· Seven rural counties with significant shale drilling (Bradford, Butler, Greene, Sullivan, Susquehanna, Washington, and Wyoming) would see taxes rise per family by more than the statewide average $140 per family. In these counties, royalty income from gas drilling is high. Only a small share of the population in these counties, however, receives royalties or other income from wealth. Most of the population in these rural counties would pay small increases in taxes – similar to taxpayers in other rural counties – because most of its income comes from wages/salaries and interest payments.
To sum up, if Pennsylvania’s lawmakers want to raise revenue but largely spare middle- and low-income families, rural counties, and urban neighborhoods from higher taxes, it can increase taxes on income from wealth to 4%. Most specifically, rural areas with lower incomes, and with lower shares of income from wealth, have the most to gain from making Pennsylvania’s income system less regressive, including by raising income tax revenue through raising tax rates on income from wealth rather than compensation (wages and salaries) and interest.