The Budget Our Democracy Deserves

Marc Stier |

Many of the ideas in this post are components of PBPC’s recently-released “Fair Share Tax Proposal for Pennsylvania.”

The recent political talk about Pennsylvania is focused on the latest in a series of fiscal crises. But lurking in the background is a larger crisis—a crisis of democracy in Pennsylvania.

The deficit approaches $3 billion for this year and next year combined. Yet the solutions that one would think were most obvious in a putative democracy are not the ones the leaders of our General Assembly seem inclined to support.

We are never going to solve our budget crises in Pennsylvania if we don’t fix our upside-down tax system. Pennsylvania is one of what the Institute on Tax and Economic Policy calls the “terrible ten” states when it comes to tax fairness. We tax those with high incomes at a far lower proportion than those with low incomes. State and local taxes take 12% of the income of the bottom 20% of families, 10.3% of the income of the middle 20% of families, but only 4.2% of the income of the top 1% of families.

Over the last twenty years, incomes have been largely stagnant for those at the bottom and middle of the income scale. But the very rich have seen their incomes grow by leaps and bounds. We can’t generate more revenue in Pennsylvania to pay for schools and colleges and roads and bridges and clean air and water we all need when the very rich don’t pay their fair share of taxes.

So, why, in a democracy, do we have a tax system that year after year punishes low- and middle-income families while rewarding those with high incomes?

We could take an important step toward fixing our budget problems if we instituted a severance tax on natural gas drilling. A modest tax would raise over $200 million now. And when gas prices recover, it could generate up to a billion dollars a year. Every other state that has substantial natural gas fracking operations has a severance tax. Polls show that over two-thirds of Pennsylvanians support such a tax.

So why, in democracy, do our legislators again and again fail to vote for such a severance tax?

Another important step we could take in dealing with our fiscal crisis is to reform our corporate income tax. We could raise $200 million in additional revenues while lowering the corporate tax rate by closing the “Delaware loophole.” Because of that provision, 71% percent of corporations, mostly large, rich, multi-national ones, avoid paying taxes to Pennsylvania. Moreover, it is the decline in corporate taxes that largely accounts for our deficits. Those taxes 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 and provided revenues for investments in K-12 and higher education, infrastructure, and clean air and water.

Very few Pennsylvanians hold much corporate stock. And our current tax puts smaller, in-state corporations at a disadvantage against large, multi-state corporations.

Why, in a democracy, would our legislators again and again fail to vote for corporate tax reform.

A full answer to these questions would take a much longer piece. But the main barriers to democracy—and a budget that serves all of us—are clear.

One problem is that some of our legislators are more responsive to big campaign donors than to their constituents. That the natural gas fracking industry is a huge contributor to state legislators has much to do with our failure to tax them.

Another problem is that so many legislative district lines, especially in the House, have been drawn to create overwhelming partisan majorities. In those districts, legislators are far more concerned about losing a primary election to extremists in their own party than losing a general election to the opposing party. In Republican districts, that has encouraged legislators to care more about the views of right-wing ideologues who defend our upside-down tax system than the majority of their constituents who need the high-performing schools, access to college, safe roads and bridges, and protection of clean air and water that the state cannot fund at adequate levels now.

When party leaders elected by a majority of their party, but a minority of the whole House or Senate have absolute control over the legislation that comes to the floor, they can block legislation that a majority of legislators and Pennsylvania voters want. I have no doubt that, even with Republican majorities in the House and Senate, more than 50% of legislators in both houses would vote for corporate tax reform and for a severance tax if they had the chance.

A final barrier to democracy in our state is the uniformity clause of the Pennsylvania Constitution, which prohibits graduated tax rates. Under our Constitution, the General Assembly cannot tax families with high incomes at higher rates than those with low incomes.

There is, however, a way to fix our upside-down tax system despite the uniformity clause. The Pennsylvania Budget and Policy Center has proposed splitting Pennsylvania’s personal income tax in order 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.

Our proposal has been introduced in the General Assembly by Senators Art Haywood, Vincent Hughes, and Jay Costa. A state government that accurately reflected the interests of the vast majority of Pennsylvanians would embrace this proposal. But in our current state of affairs, it is difficult to enact.

Difficult but not impossible. There are barriers to democracy, but if citizens from around the state rally together and demand action to fix our budget crisis without drastic cuts to education and human services, we can overcome them.

Many advocacy groups, human service agencies, educators and labor unions have joined together in the Pennsylvania’s Choice campaign to help fix our broke tax system. You can help make that happen by signing up in support of Pennsylvania’s Choice today.

The ideas in this post are components of PBPC’s recently-released “Fair Share Tax Proposal for Pennsylvania” that are outlined below: