OP-ED: The rich can take the hit – to fix the budget, they should pay their fair share

Marc Stier |

This piece originally appeared on Pennlive, December 23, 2016.

You remember how Lucille Ball would work her way into some kind of predicament and then look around and wonder how she got there? That’s how our state legislators seem to look at the budget deficit we are stuck with right now. They are looking around wondering how the current Pennsylvania budget deficit, which approaches $3 billion for this year and next year together, happened.

But it didn’t just happen. It was the product of a series of long-term and short-term decisions made by legislators, sometimes with the help of our governors.

Let’s start, however, with what did not cause the budget deficit, because too many of our legislators, like Lucy, want to blame someone else for the mess they have made.

Growth in state spending is not the cause of budget deficits.

From 1994 to 2011, under both Democratic and Republican Governors, the state spent 4.7% of the its GDP. During the Corbett years, that fell to 4.3% as spending on education and human services were sharply cut. And while the state has been able to restore some of those cuts under Governor Wolf, overall spending remains at the same level as in the Corbett years.

To reiterate, we do not have a problem of government spending too much, as so many legislators would like you to believe. Can we find efficiencies? Sure. And we should. Are there ways to be smarter about how dollars are allocated across the state? Absolutely. And Governor Wolf has been more than willing to engage in that conversation with legislators. But the size of government is not driving our deficit problem.

Nor are pensions for state workers and teachers the problem. An effort to finally address the pension problem has led to rising costs in the last few years. But the future deficits projected by the Independent Fiscal Office will occur even though state pension costs are leveling off. And no one has put forward a Constitutional plan to actually reduce already-contracted pension costs in the short term.

So why do we face deficits year after year?

The root of the problem is that we have cut corporate taxes. They once accounted for over 30% of general fund revenues. Today they are at 17%. If corporate taxes brought in the 22.5% of revenues they did in 2002-03, overall revenues would be higher by $2.3 billion for this year’s budget. That would have eliminated our budget deficit.

The more recent problem is that year after year, the General Assembly balances the general fund budget by overestimating revenues and adopting one-time fixes which only make the hole deeper.

The only solution to the budget crisis—besides another round of billion-dollar-plus cuts in both education and human services, which Pennsylvanians rejected in 2014—is to fix our upside-down tax system. So long as Pennsylvania is one of what the Institute on Tax and Economic Policy calls the “terrible ten” states that taxes those with low incomes at higher rates than those with high incomes, we will never be able to raise the revenues we need to balance our budgets.

No one wants to raise taxes on working people and the middle class, especially when their incomes have barely budged in the last twenty years. But our “Fair Share Tax Plan” shows how Pennsylvania can raise revenues from those whose incomes have gone up a great deal.

Central to the plan is the splitting of Pennsylvania’s personal income tax to tax different classes of income at different rates. We would keep the tax on wages and interest close to its current rate (while increasing tax forgiveness for those with low incomes). But we would raise the tax rate on dividends, capital gains, business profits, royalties, and estates—which we call “income from wealth”—to 4.5%. Over two-thirds of the revenue raised by this tax would fall on the top 5%, while 82% would be paid by families with incomes above $95,000.

Combined with some other measures—expanding the sales tax base to services that are mostly purchased by those with higher incomes while offering a sales tax credit for those with lower incomes; a modest severance tax on natural gas drilling ; corporate tax reform that would lower rates while taxing the 71% of mostly-out-of-state corporations that now pay nothing; and raising the minimum wage, which would increase revenues while reduce expenditures—our proposal would generate $2.5 billion, going far to overcome the two year deficit. And because income for families in the top 1% are growing rapidly (while that of other families stagnate) and natural gas prices will rise again, our proposal would generate growing revenues long into the future.

Lucy could always get out of her messes once she realized that she brought them on herself and had the power to fix them. We need our legislators to come to the same realization and fix our budget mess.