PBPC Research Prompts Senators to Introduce Tax Fairness Legislation

Marc Stier |

Something new and unusual happened in Harrisburg today. Senators Art Haywood, Vincent Hughes and Jay Costa put forward an idea that actually could help resolve the pressing fiscal cliff we face this year, and at the same time could make our tax system more progressive.

Despite partisan differences, three goals are more or less shared by everyone in Harrisburg. While their top priority may differ, for the most part, legislators all say they want:

1. to close the $1.8 billion structural deficit;

2. to spend more on education;

3. and to put no additional tax burden on low- and middle-income taxpayers.

Yet no one has presented a plan to accomplish this feat. In an election year, legislators will say that they are not willing to raise the income tax or sales tax – which could generate the necessary funds to close the deficit and fund education – because doing so would harm working people and the middle class. Under the uniformity clause of the PA Constitution, it is illegitimate to tax the same class of income at different rates, so we can’t just raise taxes on those with high incomes. And the tax proposals that legislators might accept – new tobacco taxes or a severance tax on natural gas drilling – by themselves do not get close to generating the revenues necessary close the deficit.

But now we have a real alternative. Senator Haywood’s legislation, which is based on a proposal PBPC put forward three weeks ago, calls for certain classes of income we call 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 – to be taxed at a 4% rate. Income from regular wages and interest will still be taxed at the current 3.07% rate.

This proposal raises $758 million a year. And as the chart below shows, it barely raises taxes for the bottom 60% of households, those making $65,000 or less, who would pay between $2 and $28 dollars a year. It raises taxes by only $55 a year for the fourth quintile of households, making between $65,000 and $101,000. Even the next 15% of households, with an income of $101,000 to 201,000 only pay $118 a year. It is only when one gets to the top 5% of households that the tax really kicks in.  The top 1% – income of $463,000 or more – pays $5,304 on average. And they can afford it.

(click the graph to enlarge)

In other words, it turns out that you can raise taxes just on those with high incomes in Pennsylvania despite the uniformity clause, as nothing in the Constitution prohibits different classes of income from being taxed at different rates.

And while $758 million doesn’t close the structural deficit, it gets us much closer to doing so, and makes it conceivable that a number of other small taxes that don’t hit low- and middle-income Pennsylvanians could get us the rest of the way there.

Sometimes a little creativity is needed to find the way out of a sticky political situation. Senator Haywood’s proposal has shown us a path toward resolving the current budget crisis; just in the nick of time.