Pennsylvania Gov. Tom Wolf (D) and the state’s General Assembly are locked in debate over the state budget. Wolf vetoed the legislature’s budget bill, which would have eliminated guaranteed public pensions for new school and state employees without raising taxes. Wolf’s $33.8 billion spending plan, which represents a 16 percent increase in spending, increases both the state’s income and sales taxes and expands the sales tax base. Wolf says these tax hikes would be used to reduce local property taxes and attempt to close the $1.2 billion deficit. In addition, Wolf’s budget would create a higher tax and fee on Marcellus Shale gas drillers to increase education funding.
Wolf’s plan would expand the sales tax by eliminating 45 exemptions and increasing the state’s sales tax from 6 percent to 6.6 percent. The sales tax hikes are projected to generate an additional $1.554 billion in 2015–16. The governor’s plan would also increase the state’s flat personal income tax by 20 percent, from 3.07 percent to 3.7 percent, with several exemptions for low-income taxpayers, devoting some of the revenues to property tax relief.
The third major tax hike Wolf proposes is a new 5 percent severance tax on natural gas extraction, calculated on the value of gas at the wellhead plus 4.7 cents per thousand cubic feet of gas extracted. The natural gas industry has been one of Pennsylvania’s areas of greatest economic growth, so the severance tax would suppress an important area of the state’s economy.
Finally, Wolf would increase cigarette taxes by $1 per pack, to $2.60 per pack. Cigarette taxes, like most sin taxes, unduly burden people with low to moderate incomes and prop up government spending, all while relying on a narrow and shrinking tax base. This creates greater revenue gaps taxpayers must fill with additional tax increases. The proposal would also expand the tax to smokeless tobacco and e-cigarettes.
One bright spot in the governor’s budget is the closing of corporate tax loopholes and a reduction of the corporate net income tax (CNIT) rate. Under these reforms, corporations would use combined reporting, which closes many tax loopholes. The corporate tax rate would decrease from 9.99 percent to 5.99 percent now and then to 4.99 percent over the next two years.
Matthew J. Brouillette, president and CEO of the Commonwealth Foundation, argues Wolf’s budget has too many tax hikes and too few spending reforms. “The truth is, Gov. Wolf’s plan is grossly out of line with every other state in the union put together,” Brouillette wrote. “All 49 other states combined are decreasing spending by $1.5 billion, yet Wolf is demanding a $4.6 billion increase for Pennsylvania.”
Increasing education funding is a central focus of Wolf’s budget, even though Pennsylvania already spends $13,091 per pupil per year, nearly $3,000 more than the national average, according to U.S. News & World Report. The state’s problem is wasteful, unnecessary spending and the lack of serious school choice options, not a shortage of tax revenue. Only 30 cents of every dollar in new state taxes over the next two years would be distributed to school districts under Wolf’s proposal.
The Commonwealth Foundation estimates Wolf’s proposed tax hikes will represent a net tax increase of about $1,400 per family of four in its first year. Instead of imposing scores of new taxes and suppressing a thriving new industry, Pennsylvania should instead focus on keeping taxes low and holding spending in check.
The following documents provide additional information about tax reform and the Pennsylvania budget battle.
The Illustrated Pennsylvania State Budget
http://www.commonwealthfoundation.org/policyblog/detail/the-illustrated-pennsylvania-state-budget
The Commonwealth Foundation provides a series of charts illustrating some of the key trends and data points in Pennsylvania Gov. Tom Wolf’s proposed budget and in state education spending.
Wolf’s ‘My Way or the Highway’ Approach Blocks Progress
http://www.commonwealthfoundation.org/issues/detail/wolf-plays-politics-of-the-past-with-budget-veto
Matthew Brouillette, president and CEO of the Commonwealth Foundation, discusses Pennsylvania Gov. Tom Wolf’s veto of the General Assembly’s budget and explains how his budget proposals could harm the state.
Pennsylvania Governor Proposes Major Tax Overhaul
http://taxfoundation.org/blog/pennsylvania-governor-proposes-major-tax-overhaul
Jared Walczak of the Tax Foundation examines Pennsylvania Gov. Tom Wolf’s tax plan and argues the benefits created by the reductions in property taxes and corporate taxes would be more than offset by increases in the individual income tax, the sales tax, and the severance tax on the state’s booming natural gas industry.
Research & Commentary: Pennsylvania Severance Tax
https://heartland.org/policy-documents/research-commentary-pennsylvania-severance-tax
This Heartland Institute Research & Commentary examines Pennsylvania Gov. Tom Wolf’s severance tax proposal and its likely effects on the state’s energy industry: “Legislators should recognize avoiding severance taxes creates a competitive advantage and should resist the temptation to impose them. Wolf’s proposal represents a 16 percent increase in the size of the state budget. Instead of increasing taxes on a thriving industry, Pennsylvania should focus on keeping taxes low and holding government spending in check.
Research & Commentary: Pennsylvania Pension Reform
https://heartland.org/policy-documents/research-commentary-pennsylvania-pension-reform
Like many other states, Pennsylvania faces a growing problem with its public pension systems. According to Pennsylvania’s own estimates, the total unfunded pension liability is set to grow by 38 percent, to $65 billion, in 2018. In this Heartland Institute Research & Commentary, Heartland Senior Policy Analyst Matthew Glans argues Pennsylvania must follow the private sector’s model and switch workers from defined-benefit pension systems to defined-contribution plans, such as 401ks, to protect both taxpayers and public workers.
How Big, Bad is Wolf’s Budget?
http://www.commonwealthfoundation.org/policyblog/detail/how-big-bad-is-wolfs-budget
Nathan Benefield of the Commonwealth Foundation analyzes Pennsylvania Gov. Tom Wolf’s budget in detail and identifies the real harm it will cause to the state’s taxpayers and economy.
What Pennsylvania Can Do on Tax Reform This Session
http://taxfoundation.org/blog/what-pennsylvania-can-do-tax-reform-session
Scott Drenkard of the Tax Foundation outlines the organization’s findings regarding Pennsylvania Gov. Tom Wolf’s tax proposal, placing it in a national context, taking note of recent legislative efforts, and recommending policy reforms for consideration.
Five Steps Toward a Balanced Budget
http://www.commonwealthfoundation.org/issues/detail/five-steps-toward-a-balanced-budget
The Commonwealth Foundation argues Pennsylvania lawmakers can and should pass a balanced budget which respects three important principles: “Protect families and business from tax increases. Avoid overspending. The state should not spend more than it collects in revenue. Limit spending growth to the Taxpayer Protection Act index of inflation plus population growth.”
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the effects of income taxes.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Political Attraction of Severance Taxes
http://blog.heartland.org/2014/08/the-political-attraction-of-severance-taxes/
In response to increasing interest in severance taxes in Ohio and Pennsylvania, Heartland Institute Research Fellow Isaac Orr explains what severances taxes are and why states implement them. “More often, the taxes are an estimate of how much money government officials can take from one group, typically job-creators that harvest natural resources, without completely removing their incentives to do business in the state. That makes it possible for politicians to fund their pet projects or popular measures in election years with general-fund monies at the expense of local communities and business owners.”
Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center at George Mason University explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social-welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.
Taxing Sin
http://heartland.org/policy-documents/taxing-sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
