Time to Fix Our Upside-Down Tax System

Originally published at the York Dispatch on December 23, 2016.

Pennsylvania has been struggling with persistent budget deficits since the start of the Great Recession in 2008. And we at the Pennsylvania Budget and Policy Center have been recommending a “balanced approach” to resolving the deficit from the beginning, one that combines restraint in spending with new revenues.

But since 2010, under Gov. Tom Corbett and Gov. Tom Wolf, the General Assembly has adopted an unbalanced approach. Spending has gone down but revenues have gone down faster. From 1994 to 2011, under both Democratic and Republican governors, the state spent 4.7 percent of the state’s GDP. During the Corbett years, that fell to 4.3 percent as spending on education and human services were sharply cut. And while, thanks to Wolf, the state has been able to restore some of those cuts, spending in the last two years remains at the same level as in the Corbett years.

Revenues have gone down partly because the state has been reducing corporate taxes for many years. They once accounted for over 30 percent of general fund revenues. Today they are at 17 percent. If corporate taxes brought in the 22.5 percent of revenues they did in 2002-03, overall revenues would be higher by $2.3 billion.

And, in more recent years, the General Assembly has plugged holes in the budget with short-term fixes. This year they closed a $1.3 billion deficit with a combination of tobacco taxes — which decline over time — over-estimates of revenues, and other one-time revenue sources. They borrowed money from other funds (which needs to be repaid). They shifted expenditures forward a year. They sold licenses to new outlets for gaming and liquor. And they instituted a tax amnesty that mostly benefits the wealthy and creates incentives to not pay taxes.

There is no doubt that the state can be more efficient. The current administration has found millions of dollars in savings and, by working with the public-sector unions, can find millions more. But the deficit now approaches five percent of yearly spending. There is little fat to be cut. Drastic reductions in state spending would require the kinds of deep cuts in education and human service spending instituted by Corbett and rejected by the voters in 2014. York is one among many cities in the state still suffering from those cuts.

So now, to balance our path to solving the state’s fiscal crisis, it is time 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 the “Fair Share Tax Plan” released by the Pennsylvania Budget and Policy Center shows us how to raise revenues from those whose incomes have gone up a great deal during that period.

Because our Constitution contains a uniformity clause that makes it impossible to tax those with higher incomes at higher rates, this is difficult to do. But it is not impossible. Central to the plan is 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 percent. Over 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 — 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, including an impact fee refund; corporate tax reform that would lower rates while taxing the 71 percent 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 percent 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.

The best, most balanced way forward for the Pennsylvania Budget is to fix our tax system and make everyone pay their fair share.

Marc Stier is the Director of the Pennsylvania Budget and Policy Center.

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