Over the past several years, federal funding via the American Rescue Plan (ARP) has temporarily boosted City of Pittsburgh revenues and allowed increased investment in affordable housing, workforce training, healthy and accessible food programs, public safety, and public transportation. ARP funds, however, will expire in 2024, leaving a $30.6 million shortfall in the city budget. This raises an important question: how can Pittsburgh sustain and increase critical investments once ARP funds expire? This brief offers a simple solution: by increasing city tax revenues from individuals with the means and ability to contribute more.
This brief contains new estimates of the revenue the city of Pittsburgh can generate by imposing the city income tax on currently untaxed dividends, interest, and capital gains, and contains estimates of how much of the increased revenues would come from the rich, the middle class, and low-income taxpayers.
While generated for Keystone Research Center by the Institute on Taxation and Economic Policy (ITEP), these estimates have been validated by the PA Department of Revenue.
The problem: the current unfair Pittsburgh tax system. Currently Pittsburgh taxes, like those in other Pennsylvania localities, fall more heavily on working and low-income people than on the rich, which is both unfair and reduces the tax revenue raised with those that have the greatest ability to pay. Pittsburgh’s unfair taxes stem, in part, from the city’s and school district’s earned income taxes that together impose a tax rate of 3%. These earned income taxes are imposed on wages, salaries, self-employment income and net profits but not on other types of income received mostly by the wealthy including dividends, interest, and capital gains – which we call “income from wealth.” By contrast, Pennsylvania’s state income tax is imposed on all kinds (“classes”) of income. Because it does not tax a significant portion of income from wealth, the city’s current income tax takes between 1.5 times and 2 times the share of income from middle- and low- income taxpayers as from the top 1%.
A solution: A fairer income tax that taxes more income from wealth. In a 2022 policy brief, we published the first estimates of the revenue Pittsburgh could generate by taxing some currently untaxed income from wealth. Updated estimates from ITEP find that:
- A 1% tax on income from dividends, capital gains, and interest would generate $22 million, filling more than two thirds of the city’s $30.6 million revenue shortfall.
- If the Pittsburgh School District also imposed its 2% income tax on currently untaxed dividends, interest, and capital gains, and remitted 0.25 percentage points of the revenue raised to the city (as it does with the current school district 2% income tax), the city would gain an additional $5.5 million.
- If the city adopted a 2% tax on income from dividends, capital gains, and interest and raised the tax rate to 2% on net profits, city revenue would increase by $52 million.
- If the city and school district taxed dividends, capital gains, interest, and net profits at a combined rate of 6% – i.e., three percentage points more than the current tax rate on wages and salaries instead of three percentage points less (for all but net profits) – and the school district remitted one eighth of its resulting revenue to the city, city revenues would rise by $65 million (i.e., $52 million plus one eighth of $104 million.).
- The wealthiest Pittsburgh residents would pay most of the increase in taxes. The top fifth of earners would pay about 90% of the increase in tax revenues and the richest 1% would pay over half.
Since the bottom four-fifths of taxpayers pay so little of tax revenue generated by taxing dividends, interest, and capital gains, and increase the tax rate on net profits, if the city taxed those categories of income from wealth at a combined (school district plus city) tax rate of 6%, the city could use some of that revenue to lower the tax rate on wages and salaries. By lowering the tax rate on wages and salaries to a combined (city plus school district) tax rate of 2.7% instead of 3%, the city could achieve lower taxes for most Pittsburghers and enough revenue to plug the hole left by the end of ARP funding.
Critically, as elaborated in a memo in an Appendix to our 2022 report (see footnote 2 above), we believe the city already has the authority to enact a fairer city income tax. It does not require any new state legislation. A fairer income tax can be passed in 2024 that replaces lost ARP funding and helps maintain and expand funding that increases housing affordability, expands pathways to good jobs for low-income city residents consistent with the new “Pittsburgh Good Jobs Principles,” and promotes a more just Pittsburgh through other investments.
READ THE FULL REPORT (DOWNLOAD A COPY HERE):