Pennsylvania Gov. Tom Wolf’s (D) $4.7 billion 2015–2016 budget represents a 16 percent increase in spending. The budget proposal would make several major changes to the tax code, including $2.5 billion in net tax increases and a shift away from property taxes and corporate taxes toward individual income taxes, sales taxes, tobacco taxes, and a new energy tax on the state’s booming natural gas industry. Some components address longstanding tax problems, but the plan represents a vast expansion of state spending and an increased burden on taxpayers.
Wolf proposes to cut the state’s corporate income tax, which at 9.99 percent is the second-highest state corporate income tax in the nation, to 5.99 percent for 2016 and 2017, then to 4.99 percent thereafter. In addition to the rate reduction, Wolf proposes a phase-out of Pennsylvania’s Capital Stock and Franchise Tax by 2016, a reduction in the cap on net operating losses, which corporations are able to write off, from $5 million or 30 percent of income to $3 million or 12.5 percent of income, and the addition of combined reporting across state lines.
Wolf’s plan would expand the sales tax by eliminating 45 exemptions and increasing the state sales tax rate from 6 percent to 6.6 percent. The base for the sales tax would be broadened to include candy, print media, non-prescription drugs, cable television, legal and accounting services, home health care, transportation services, spectator events, and more. Business inputs would be excluded from these taxes. The proposal 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.
Recent studies have shown states with lower income taxes perform better economically and achieve greater job and population growth than those with higher income taxes.
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 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 on low to moderate incomes and prop up government spending while relying on a narrow and shrinking tax base, thus creating greater revenue gaps taxpayers must fill with additional tax increases.
The primary stated goal of Wolf’s tax proposal is to improve education funding, but Pennsylvania has already shown higher spending does not improve student achievement. Pennsylvania spends $22,350 per family of four on education, up from $8,500 in 1970, an inflation-adjusted increase of 162 percent, according to the Commonwealth Foundation. The problem with education is not a lack of money; Pennsylvania already spends $3,000 more per pupil than the national average. The problem is wasteful, unnecessary spending and the lack of serious school choice options. Only 30 cents of every dollar in new state taxes over the next two years would be redistributed to school districts.
The Commonwealth Foundation estimates the tax hikes will represent a net tax increase of about $1,400 per family of four in the first year. Instead of imposing scores of new taxes on taxpayers and taxing a thriving industry, Pennsylvania should focus on keeping taxes low and holding spending in check.
The following articles examine tax reform from multiple perspectives.
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.
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 taxpayers.
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, making 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 lawmakers can pass a balanced budget that 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.”
Research & Commentary: Franchise Taxes
http://heartland.org/policy-documents/research-commentary-franchise-taxes
Heartland Institute Senior Policy Analyst Matthew Glans explains how different states are approaching reform of their franchise taxes. Lowering or eliminating franchise taxes improves a state’s competitiveness by eliminating a double tax on business, Glans notes.
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.
