Pennsylvania Gov. Tom Wolf (D) has introduced a set of new tax and spending increases as part of his $33 billion state budget proposal. The 2016 budget repeats many of the mistakes made in other budgets Wolf has proposed recently, all of which were rejected by the Pennsylvania General Assembly. If approved, Wolf’s budget, which includes pension payments, would increase state spending by 10 percent compared to the budget passed by the General Assembly in December, creating the largest spending increase in the state in 25 years.
The largest tax hike in the proposal would increase the personal income tax from 3.07 percent to 3.4 percent. Wolf projects the 11 percent tax hike would raise $1.4 billion in new state revenue.
Taxes on income are considered by many economists to be the most destructive form of taxation, because they stunt economic growth by taking dollars out of the hands of consumers and businesses, stifling production, innovation, and risk-taking – the main factors that drive economic growth.
The Commonwealth Foundation (CF) says Wolf’s income tax proposal, as well as two additional tax hikes on bank shares and insurance premiums, would be applied retroactively to January 1, 2016. This means taxpayers would be required to pay additional taxes on money they already earned. Wolf’s proposed 0.5 percent tax surcharge on insurance premiums for fire, property, and casualty insurance is projected to raise $101 million. The bank shares tax proposal, which would increase the current rate by 11 percent, is projected by the Wolf administration to raise $39.2 million.
The second major tax increase offered in the budget is an expansion of the state’s sales tax, which would be implemented by eliminating exemptions for movie theater tickets, digital downloads, and basic cable television. The proposal would raise taxes by $415 million, much of which would be paid by low- and moderate-income Pennsylvanians.
The third major tax increase would hike cigarette taxes by $1 per pack, up to $2.60 per pack, while also expanding the tax to significantly less harmful products, such as smokeless tobacco and e-cigarettes. Cigarette taxes, similar to most sin taxes, unduly burden people with low and moderate incomes and are an unsustainable source of revenue. Recent data from the U.S. Census Bureau show state revenue from tobacco product sales taxes decreased in 2013 by 0.9 percent, to $17.0 billion. This decrease followed a 0.5 percent reduction in 2012. The National Taxpayers Union Foundation has found initial revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased between 2001 and 2011.
Another major tax increase proposal put forward by Wolf is a new 6.5 percent tax on natural gas production, which Wolf hopes will generate $218 million in tax revenue. The natural gas industry has been one of the sectors of the state’s economy that has experienced significant growth in recent years, so a new tax on natural gas would likely suppress this important economic area, limiting job creation and potential tax revenue.
Other proposed changes include increasing the eligibility limits for tax forgiveness for families from $34,250 to $36,400 and the creation of a new 8 percent tax on promotional casino gambling plays.
Wolf’s budget also mandates significant spending increases. For instance, Pennsylvania already spends $13,091 per pupil per year on education, nearly $3,000 more than the national average, according to U.S. News & World Report, but Wolf’s 2016 budget proposal would increase education spending for public school operations and instruction by $565 million, early childhood spending by $90 million, and higher education spending by 5 percent, to $1.7 billion.
Despite claims made by Wolf, Pennsylvania’s problem is not that there is a shortage of tax revenue. The real issue is wasteful, unnecessary government spending and the lack of serious school choice options. The Commonwealth Foundation says Wolf’s proposal would hinder school choice even further, by proposing arbitrary and punitive cuts for public charter schools, including cyber-charters.
Total state spending in Pennsylvania has increased in 45 of the past 46 years, imposing an additional inflation-adjusted cost of $16,557 per family of four, and CF estimates Wolf’s proposed tax hikes will create an annual net tax increase of about $850 per family of four.
This is the sixth budget proposal made by Wolf suggesting destructive tax and spending increases. Pennsylvania needs a new approach. Instead of imposing scores of new taxes and suppressing a thriving new industry, Pennsylvania should focus on keeping taxes low and holding spending in check.
The following documents provide additional information about tax reform and the Pennsylvania budget battle.
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.”
Governor Wolf’s Sixth Tax Hike Plan
http://www.commonwealthfoundation.org/policyblog/detail/governor-wolfs-sixth-tax-hike-plan
Nathan Benefield of the Commonwealth Foundation summarizes the proposed tax hikes contained in Pennsylvania Gov. Tom Wolf’s (D) 2016 budget. “Including the tax hikes residents will pay in the first half of this year (for the 2015–16 budget), state government will take $1,129 more per family of four over 18 months.” An additional overview is available here.
A Brief History of Wolf’s Tax Hikes
http://www.commonwealthfoundation.org/issues/detail/a-brief-history-of-wolfs-tax-hikes
Nathan Benefield of the Commonwealth Foundation examines Pennsylvania Gov. Tom Wolf’s (D) recent tax proposals. “What Gov. Wolf should have learned by now is that there isn’t any support for broad-based tax increases. Families don’t want to pay more. Businesses don’t want to pay more. Voters don’t support higher taxes.”
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.
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.
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.
