Pennsylvania Senate Considers Hiking Income and Sales Taxes

May 25, 2015

The Republican controlled Pennsylvania House of Representatives, with strong Democratic support, recently passed a bill to increase the state’s personal income and sales and use taxes. If passed by the Republican controlled Senate and signed by Governor Wolf (D.), the bill would increase the statewide sales tax rate from 6 percent to 7 percent, and make Pennsylvania’s overall sales tax burden the second highest in the Northeast region (New York is first). Pennsylvania’s statewide income tax rate would jump more than 20 percent from 3.07 percent to 3.7 percent. Supporters of the tax increase say the money raised is needed to help solve local governmental funding problems.

Under the bill, the additional sales tax revenue will be deposited into a newly created School District Homestead and Farmstead Relief Fund. The additional income tax revenue will be deposited into a newly created School District Millage Rate Reduction Fund. According to the House Republican Caucus, the legislation “would ensure that every new dollar generated through the proposed changes be fully dedicated to school property tax relief.”

However, the bill’s fiscal note points out that a portion of the sales tax increase will be distributed to the state’s Public Transportation Access Fund and Public Transportation Trust Fund. Another portion of the sales tax increase will be distributed to the State Lottery Fund, where it will be used primarily to fund increased payments to eligible renters earning less than $35,000 annually, not to reduce property taxes. Most of the new tax revenues will go to local governments, which will remain free to increase property taxes.

Claims that the tax revenues will be used to reduce property taxes are suspect in light of Pennsylvania’s recent history. In 2004, when the Pennsylvania legislature approved a new gambling law, the primary argument in favor was that the new revenues would be used to reduce property taxes. While some property owners did see reductions, the vast majority of school districts used the increased revenues to offset spending hikes that might not have happened absent increased state funding. Furthermore, the legislature has taken to skimming off the top of the gambling revenues to pay for politically favored projects like a new arena for the Pittsburgh Penguins, public transit projects, and local convention centers. At least one legislator is convinced the newly created dedicated funds will later be used for purposes other than property tax relief: Rep. John Mayer (R) said of them, “Find one dedicated funding source in the history of this Commonwealth that has not been invaded and redirected for other purposes. There is a 100 percent track record that these funding streams do not remain dedicated.”

It will be interesting to see whether Pennsylvania’s Senate Republicans favor the plan passed by the House. The Senate Republican Caucus has previously called a similar proposal from Governor Wolf that would have raised income and sales taxes to fund property tax relief an “economic scorched earth policy” partially because it failed to include safeguards that would have prevented property taxes from rising again. Governor Wolf actually proposed a smaller sales tax hike than the House has, but the Republican Senate Caucus noted that even that smaller hike “could have a devastating effect on businesses in Pennsylvania’s border counties as consumers look to neighboring states for purchases.” The Caucus also noted that Wolf’s income tax hike would take a “substantial, if not fatal” bite out of small businesses.

As they consider whether to support this proposal, legislators should weigh it against other solutions to the state’s local government fiscal issues. The Pennsylvania Senate believes it has identified one fix: pension reform. Another option might be a much less harmful option for revenue raising: asset sales. The Pennsylvania House has identified one large state asset that could be sold off without reducing government services: the state owned alcohol stores. Reforming is almost never easy, but any solution worth doing will be one that actually fixes the problem it is meant to solve.

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