New Report: A Fair Share Tax Plan for Pennsylvania

John Neurohr |

In the wake of Budget Secretary Randy Albright’s mid-year budget briefing and the news that the Pennsylvania budget for 2016-17 will have a deficit of $600 million, the Pennsylvania Budget and Policy Center today released a new, comprehensive revenue proposal to address the looming deficit for FY 2017-18, which when combined with the deficit for this fiscal year, could approach $3 billion.

The new report, “A Fair Share Tax Proposal for Pennsylvania: How to Raise Revenues While Sparing Most Pennsylvanians,” can be read in full here.

While the current year deficit is a problem for the state, unfortunately it is not the biggest budget problem we face. The Independent Fiscal Office is projecting a 2017-18 deficit of $1.7 billion, which does not include the ongoing costs of higher human service caseloads which might add $300 million or more to the total.

One barrier to raising revenues is the reluctance of legislators on both sides of the aisle to place additional taxes on Pennsylvania’s poor and middle-class. That reluctance is well motivated. Over the last 25 years, incomes for the richest Pennsylvanians have been rising fast, while incomes for all other Pennsylvanians have been stagnant. Despite that, Pennsylvania’s tax system is profoundly unfair, as it taxes those with the lowest incomes at a rate triple those with the highest incomes.

The new report proposes a series of revenue increases that, taken together, would close the structural deficit and provide the funding necessary to meet the needs of the state, while sparing low- and middle-income people from most of the additional tax burden.

The report proposes that the state:

  • Bifurcate the personal income tax into two parts and establish a higher tax rate 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). Raising the tax on income from wealth from the current 3.07% to 4.0% would bring in an estimated $788 million in new revenue. At a rate of 4.5%, the tax would bring in $1.2 billion. Over two-thirds of the new revenue would come from families in the top 5% of income; 82% would come from families with incomes of $101,000 or more.
  • Raise the tax rate on wage and interest income from the current 3.07% to 3.25%, while expanding the tax forgiveness program to reduce taxes on those with the lowest incomes. This would raise revenues by a net of $375 million.
  • Expand the sales tax base to include goods and services that are more likely to be purchased by those with high, rather than low, incomes. Combined with a credit to low-income families for the sales tax they pay, this would net $338 million in new revenue.
  • Eliminate corporate tax loopholes by instituting combined reporting of corporate taxes (closing the “Delaware Loophole”), while lowering the tax rate. This would net $200 million in new revenue.
  • Institute a modest severance tax of 6.5% on natural gas drilling. This would raise $218 million.
  • Raise the minimum wage to at least $10.10 per hour, which would increase income and sales tax revenues while reducing state expenditures for Medical Assistance. The net contribution to deficit reduction would be $225 million.