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%

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Summary

Gov. Wolf and legislative leaders are currently negotiating over the terms of a plan to cut property taxes which would be financed by an increase in the state sales tax rate from 6% to 7.25%. This brief analyzes the size of the sales tax rate increase by income. It also compares that impact to how much different income groups would pay with an increase in the state personal income tax rate from 3.07% to 3.57%, as proposed by Gov. Wolf in October and rejected by the Republican legislative majority and nine Western Pennsylvania Democrats.   We find:

  • The bottom 60% of families, those earning less than $65,000 per year, would pay 39% of the increase in the sales tax.  In contrast, these families would pay just 19% of Gov. Wolf’s proposed increase in the personal income tax via a rate hike to 3.57%.   
  • The top 20% of families, or those earning $102,000 or more per year, would pay 37% of the sales tax increase. In contrast, families with annual incomes over $102,000 would pay 61% of the tax increase resulting from a higher personal income tax rate.
  • The average taxpayer in the bottom 80% of taxpayers would pay higher taxes under the proposed sales tax rate increase than under an increase in the personal income tax rate to 3.57%. 
  • The average taxpayer in the top 20% of taxpayers, on the other hand, would pay substantially less in new taxes with a higher sales tax rate than a higher personal income tax rate.
  • By far, the biggest beneficiaries of relying on the sales tax to fund cuts in property taxes are the top 1% of taxpayers, who would see an average tax increase of $1,200 under the sales tax plan, less than a quarter of the average increase of $5,300 under the governor’s proposed higher income tax rate.

From a tax fairness perspective, these findings show, even an increase in the state’s flat personal income tax is far superior to a sales tax rate increase.  If the General Assembly and Gov. Wolf must finance property tax cuts we urge them to do it with a higher personal income tax rate rather than with a higher sales tax rate. (They could also finance property tax relief with a severance tax which, according to the conservative Tax Foundation, would be paid mostly by people from out of state.)

If a sales tax rate increase remains the vehicle for reducing property taxes, it is imperative that the property tax relief in the final budget not further amplify the regressive nature of the tax increase by distributing a high share of property tax cuts to affluent property taxpayers. To this end, the final plan to cut property taxes should:

  • include a rebate for renters;
  • target property tax cuts to low- and middle-income homesteads; and
  • increase the minimum wage to $10.10 per hour to boost the wages of low-income taxpayers who already bear the greatest relative burden of sales taxes.

In addition, lawmakers should take up Gov. Wolf’s proposal (made first in March and again in October) to expand personal income tax forgiveness to more low-income households.