This paper puts forward the Fair Share Tax plan, a major step toward fixing Pennsylvania’s broken tax system and raising the revenues we need to invest in the public goods that are critical to creating thriving communities and individual opportunity in our state: education, infrastructure, protection for our air and water, and human services. The calculations included in this plan are an update to similar proposal put forward by the PA Budget and Policy Center in 2017. The proposal that would raise $2.2 billion annually, while cutting taxes or leaving them level for 82% of Pennsylvanians.
- The Fair Share Tax divides our Personal Income Tax into two new taxes: 1) a tax on wages and interest and 2) a tax on income from wealth (dividends; net income from a business, profession, or farm; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts.)
- The Fair Share Tax increases the tax on income from wealth from 3.07% to 6.5% and decreases the tax on wages and interest from 3.07% to 2.8%.
- Under the Fair Share Tax, 47% of taxpayers will see their taxes go down, 35% will see no change in their taxes, and only 18% will see their taxes go up.
- The Fair Share Tax brings in $2.2 billion in new revenue, 80% of which comes from the richest fifth of Pennsylvania taxpayers and 16% of which comes from out-of-state taxpayers. This means that only a tiny 4% of the additional revenue comes from the bottom four-fifths of Pennsylvania taxpayers.
- Considering only Pennsylvania taxpayers who see their taxes increase (I.e., excluding non-residents who pay taxes to Pennsylvania), 51% of the new revenues comes from the top 1% of families, 75% comes from the top 5% of families, and 88% comes from the top 20% of families.
- There is little variation in the impact of tax from one county to another or one legislative district to another. The shares of taxpayers in a county that sees a decrease or no change in their taxes range from 73% to 91%, with all but four counties at under 80% or over. Under the Fair Share Tax, 81% of taxpayers in urban areas and 86% of rural taxpayers will see their taxes go down or remain the same.
- Even after implementation of the Fair Share Tax, the effective rate on the top 1% of Pennsylvania taxpayers will be only 3.9%, less than that of any neighboring state other than Ohio.
How it works:
The basic idea behind the Fair Share Tax is to bifurcate the current personal income tax. Currently, eight classes of income, which are defined under federal law, are subject to the Pennsylvania Personal Income Tax: gross compensation (mostly wages, salaries, and tips); interest; dividends; net income from a business, profession, or farm; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts. We propose created two new taxes to replace the Personal Income Tax. The first would be a tax on the classes of income, wages, and salaries, and it would be set below the current Personal Income Tax rate. The second would be a tax on the other seven classes which would be set higher than the current Personal Income Tax rate. We call those other seven categories “income from wealth“ because they mostly include income that is earned from the ownership of some kind of wealth (including, among other things, intangible and real property) as opposed to income from work.
Most people under the age of retirement have income from compensation, that is, wages, salaries, tips, and interest. But what we call “income from wealth” is mostly earned by those with higher incomes. Thus, by taxing income from wealth at a higher rate we can generate more tax revenue from those whose overall incomes are high and have been growing fast.
Given how upside-down our taxes are, we need to start raising more revenue from those whose incomes are going up and give those whose incomes are static or declining a break. That’s why our Fair Share Tax proposal calls for increasing the tax on income from wealth from the current 3.07% to 6.5% while reducing the tax on wages and interest from 3.07% to 2.8%, where it was when Tom Ridge was governor.