Significant Tax Increase for Pennsylvania

February 05, 2007

Pennsylvania Governor Ed Rendell today announced plans for a significant tax increase because of what he calls "an extraordinarily difficult budget year," according to the Pittsburgh Post-Gazette.

Gov. Ed Rendell is expected to propose increasing the 6 percent state sales tax to 7 percent when he unveils his 2007-08 budget. Over the course of a year, the move would raise about $1.4 billion in additional funds for the state.

Mr. Rendell wants to use about half of the additional sales tax revenue, or $700 million, to reduce property taxes.

Sen. Sean Logan, D-Monroeville, said there is only one way he might support a sales tax increase -- if all the additional revenue is used to lower property taxes.

A $1.4 billion tax increase would amount to a 5% tax increase for Pennsylvanians. Total tax revenue in Pennsylvania was $26.2 billion in 2005 according to the Census Bureau.

It is not surprising, however, that lawmakers want to use revenue from the sales tax increase to reduce property taxes-as I warned last week was sure to happen somewhere in 2007.

Governor Rendell will likely use the sales-tax-increase-for-property-tax-decrease swap as a way to sell his large tax increases, especially since he will raise additional taxes. Again, from the Pittsburgh Post-Gazette:

A higher sales tax won't be Mr. Rendell's only revenue-raising idea. To expand health care coverage to the uninsured, he has already called for a higher cigarette tax and a first-time tax on cigars and smokeless tobacco.

And that's not all. A recent transportation funding report called for the state to spend an additional $1.7 billion a year to improve state roads, bridges and mass transit. Mr. Rendell is expected to propose a series of revenue-raising options to deal with that problem -- but not a further hike in the sales tax.

Governor Rendell blames part of the budget problems on the phase-out of the state's Capital Stock tax-an antiquated tax most states do without. The phase-out will cost the state $200 million this year, so it is hard to see why the Governor needs to raise taxes 10 times that amount to cover the loss.

Pennsylvania already has the second highest corporate income tax rate in the country, and a 1 percent sales tax hike would make it tied for the highest state level sales tax rate.

Pennsylvania ranks 22nd in the Tax Foundation's 2007 State Business Tax Climate Index and would fall considerably if these tax increases passed. Not to mention that the state's tax burden, currently ranked 24th, will increase significantly.

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