By Mafc Stier and Diana Polson
Pennsylvania has long suffered from a tax system that is both highly regressive, taking a larger share of income from low-income and moderate-income families than high-income families, and that does not raise sufficient revenue to meet the needs of Pennsylvanians. In the recent past, inadequate revenues have led to a structural budget deficit and will continue to do so in the near future. In turn, this has led to what we call a public investment deficit: a lack of funding for critical needs that undermines both opportunity and economic growth. Just one example of the public investment deficit in Pennsylvania is the recent decision by Commonwealth Court President Judge Jubelirer saying the state fails to meet its constitutional obligation to provide a “thorough and efficient” education to all K-12 school children.
This paper puts forward the Fair Share Tax proposal, a major step toward fixing Pennsylvania’s broken state and local tax system. It divides the state’s Personal Income Tax into two new taxes: 1) a tax on wages and interest and 2) a tax on income from wealth which includes 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.
The Fair Share Tax would raise the revenues we need to provide the public goods that are critical to creating thriving communities: education at all levels, infrastructure repair and improvement, protection for our air and water, and human services. It would set the tax rate on income from wealth higher than the current Personal Income Tax rate and set the tax on wages and interest lower than that rate.
In this paper, we present our standard Fair Share Tax plan. In the first appendix, we include another option that would raise even more money for Pennsylvania.
- Standard Fair Share Tax plan: Tax income from wealth at 6.5% and tax wages and interest at 2.8%.
- This would raise $2.68 billion in new revenue each year, the vast majority of which would come from Pennsylvania’s top 5% of income earners. Approximately fifteen percent would come from out-of-state taxpayers.
- Under the Fair Share Tax, 57% of taxpayers would see their taxes go down, 26% would see no change in their taxes, and only 17% would see their taxes go up.
- Considering only Pennsylvania taxpayers who see their taxes increase (i.e., excluding non-residents who pay taxes to Pennsylvania), 52% of the new revenues would come from the top 1% of families, 75% would come from the top 5% of families, and 87% would come from the top 20% of families. That means only 13% of revenue raised under the Fair Share Tax would come from the bottom 80% of income earners.
- There is little variation in the impact of tax from one county to another or one legislative district to another. The shares of taxpayers in a county that sees a decrease or no change in their tax ranges from 71% to 90%, with all but four counties under 80%.
- Option 2: Raise the tax rate on income from wealth to 12% and decrease the tax rate on income from wages and interest to 1.9%.
- This option would increase Pennsylvania’s revenue each year by $6.22 billion.
- Eighty-five percent of taxpayers would see their taxes decrease (59%) or stay the same (26%). Only 15% of taxpayers would pay more under this option.
- Fifty-two percent of the money raised by Option 2 comes from taxpayers in the top 1% and would earn, on average, $1.6 million per year. Three-quarters of the money raised would come from the top 5% of income earners.
These two options show the flexibility of the Fair Share Tax. While we present two options, legislators can choose to enact an almost infinite variation of combinations of two tax rates, one on the wages and interest, the other on income from wealth. And combining those tax rates in different ways can raise a range of new revenue. The two options we examine bring in an additional $2.9 billion or $6.22 billion annually, dramatically increasing state revenues. Other options could bring in lower or higher levels of income and contribute to making the overall state and local tax system in Pennsylvania more or less regressive.
New funding would allow the state to meet its constitutional responsibility, as recently determined by Commonwealth Court President Judge Jubelirer, to provide a “thorough and efficient” education to all school children. It would provide the pre-K education that every child needs to get their lives off to a good start. It would allow us to provide critical health care and other human services to vulnerable Pennsylvanians that were revealed by the pandemic to be inadequate. It would allow us to fix our crumbling infrastructure. And it would allow us to protect our water and air and do our part to limit climate change.
Meeting these important goals will be impossible if Pennsylvania does not figure out how to raise new revenues to meet these needs as well as close the structural budget deficit that will soon make it difficult to do what the people of Pennsylvania already expect our state government to do.