What Is the Fair Share Tax?

Marc Stier |
The main reason that Pennsylvania’s tax system is so upside down — with the top 1% paying only 4.3% of their income in taxes while the middle 20% pays 10% — is that the Pennsylvania Constitution prohibits us from enacting a graduated personal income tax. Sales and property taxes tend to take a higher percentage of the income of taxpayers at the bottom and in the middle than at the top. But graduated income taxes in many states — including all of our neighbors — compensate by taxing those at the top at a higher rate.

We can start to fix our broken tax system by adopting what we call a Fair Share Tax which has been introduced by Senators Costa, Hughes, and Haywood as SB555.  Here are the key elements of it:
  1. The Personal Income Tax which is currently set at 3.07% will be divided into two taxes.
  2. The tax on wages and interest — the kinds of income received by almost everyone — will be reduced to 2.8%,
  3. The tax on what we call income from wealth — business profits, capital gains, dividends, royalties, and estates — will be increased to 6.5%.

The Fair Share Tax plan would raise $2 billion in new revenues in the first year while cutting taxes for about 60% of Pennsylvania families. Twenty-five percent of Pennsylvania families would see no change in their taxes. Only 15% of families would pay more.

Over 50% of the new revenue from the Fair Share Tax would come from the top 1% of taxpayers. They would pay, on average, an additional $20,000 on their average income of $1.7 million. Another 22% of the revenue would come from the next 4% of taxpayers, who would pay on average $2,158 on their incomes, which range from $215,000 to $535,000. The next 15% of taxpayers, with incomes from $104,000 to $215,000 would only pay an extra $343, on average.

A Fair Share Tax would enable us to begin to close our budget and public investment deficits without increasing taxes on working people and the middle class.

Some possible objections and answers to them.

Three objections are often made to the Fair Share Tax, but they can be easily answered:

  • The tax does not place Pennsylvania at a competitive disadvantage to neighboring states. After it is instituted, the effective income tax rate on the top 1% will only be 3.5%, below all of our neighboring states and far below New York and New Jersey, which has an effective tax rate of 6.6% on the top 1%.
  • The tax does not put an unfair burden on retired Pennsylvanians. Pennsylvania is one of the best places to retire from a tax perspective. Social security, pension withdrawals, and 401k withdrawals are not taxed at all. The Fair Share Tax would raise more only from retired Pennsylvanians with substantial financial holdings beyond these protected categories.
  • The tax also does not put an unfair burden on small family-owned businesses or farms. Those businesses and farms can avoid the tax increase by taking the income from their business as wages instead of business profits. Larger businesses cannot do this because they need to show a profit to secure loans. Loans to family-owned businesses typically are secured by the assets of members of the family.