Our proposal would be more equitable while also helping to close the deficit
December 26, 2016 12:00 AM
By Marc Stier
Pennsylvania faces another budget crisis. The combined deficit for this year and next is roughly $3 billion. It’s time all Pennsylvanians — and especially the members of our General Assembly — recognize that recurrent budget crises won’t stop until we fix our upside-down tax system.
Federal tax rates are higher for those with higher incomes than those with lower incomes. However, combined state and local taxes, because they rely on property taxes, sales taxes and income taxes that do not have steeply graduated rates, often tax those with low incomes at roughly the same percentage as those with high incomes.
Pennsylvania is worse than most states on this score. It is one of what the Institute on Tax and Economic Policy calls the “terrible 10” when it comes to tax fairness.
Pennsylvania taxes those with high incomes at a far lower rate than those with low incomes. State and local taxes take 12 percent of the income of families in the bottom 20 percent of the income scale, 10.3 percent of the income of the middle 20 percent of families, but only 4.2 percent of the income of the top 1 percent of families.
A tax system that treated rich and poor Pennsylvanians alike would bring in far more money, close the deficit and give us the resources we need to invest in education, human services, strong communities and clean air and water.
The uniformity clause of our state constitution prohibits any class of income from being taxed at more than one rate. So, rates that rise with income are prohibited. There are ways around the uniformity clause, but the General Assembly has never been willing to embrace them.
Instead, Pennsylvania has made matters worse by reducing taxes on corporations. Those taxes once accounted for more than 30 percent of general-fund revenue. Today they account for 17 percent. If corporate taxes brought in even the 22.5 percent of revenue they did in 2002-2003, overall revenues would increase by $2.3 billion. There would be no budget deficit in Pennsylvania, and legislators could debate which programs to invest in, not which programs to cut.
Rather than fixing our broken tax system, our legislators have continually put off the day of reckoning. This year, they closed a $1.3 billion deficit with tobacco taxes, revenue overestimates and short-term fixes: borrowing money (from other funds, which needs to be repaid), shifting expenditures forward a year, selling licenses to new outlets for gaming and liquor, and instituting a tax amnesty that benefits mostly the wealthy and creates incentives not to pay taxes.
What’s more, while avoiding the real problem, legislators complain about spending — which as a percentage of the state GDP remains as low as it was in the Tom Corbett years. Or they try to change the subject to pensions, while never putting forward a pension proposal that actually would reduce the deficit, because such a plan does not exist.
No one wants to close deficits by increasing the tax obligations of working people and members of the middle class, whose incomes have stagnated for the past 20 years while the incomes of families high on the income scale have skyrocketed.
There is a better way forward: the “Fair Share Tax Plan” released by the Pennsylvania Budget and Policy Center last week.
Central to our plan is splitting Pennsylvania’s personal income tax to tax different classes of income at different rates, which the uniformity clause allows. 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 percent. More than two-thirds of the revenue raised by this tax would fall on the top 5 percent, while 82 percent would be paid by families with incomes above $95,000.
Combined with some other measures, our proposal would generate $2.5 billion, going far to overcome the two-year deficit. Those other measures include extending the sales tax 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 percent of the mostly-out-of-state corporations that now pay nothing, and raising the minimum wage, which would increase revenues while reducing expenditures. And because income for families in the top 1 percent are growing rapidly and natural gas prices will rise again, our proposal would generate growing revenues long into the future.
Turning our tax system right-side-up not only would be fairer to all Pennsylvanians, it is the only path to raising the revenues needed to fix our budget problems and invest in communities across the state in the long term.
Marc Stier is director of the Pennsylvania Budget and Policy Center.
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