By Marc Stier
Pennsylvania politics remains divided. One side, composed of mostly conservatives, believes that the key to prosperity is to cut taxes for the rich, cut spending for everyone else and—although they don’t say it too loudly—keep wages low.
The other side, composed of mostly liberals, believe that a prosperous Pennsylvania needs to close our public investment deficit. They point out that state spending as a share of gross state product has fallen by 12 percent compared to the years 1997-2011. That has left us with:
- K-12 schools that remain among the most unequal in the country, leaving too many of our children to receive an inadequate education;
- state spending on higher education that is half of what it was in 1983-84, leaving us fourth from the bottom among all states in per capita spending and 40th of 50 states in the percentage of adults with more than a high school education;
- roads and bridges that are in a state of disrepair and inadequate public transit systems that may lose their state subsidy in the next year or two;
- a continued decline in spending on environmental protection despite the threat of fracking; and
- thousands of Pennsylvanians who need child care, intellectual disability, and mental health (including opioid abuse treatment), yet face long waiting lists.
With a Democratic governor and a Republican-controlled General Assembly, neither side is getting what they want this year. And thanks to robust revenues, the governor’s austere budget—but not as austere as Republicans want—may be settled without too much stress.
But that means that partisan gridlock is making it impossible for our government to make a real choice between the two visions of Pennsylvania’s future. And for those of us who take the second view, it means we will still have a serious public investment deficit that undermines our long-term prosperity.
At some point we may have to make a choice, but we will no doubt do so under difficult conditions. Revenues won’t continue at high levels indefinitely.
After years of a budget that relies on one-time revenues and borrowing from the future, a modest recession could put the annual budget back in the red. And then we will have to choose between spending and raising taxes.
What will we do then?
The answer is to fix our upside-down tax system.
A fair tax system asks those with higher incomes to pay a higher percentage of their income in taxes. But the uniformity clause of our state constitution prohibits graduated tax rates and turns our tax system upside-down.
The 20 percent of Pennsylvania families with the lowest incomes (making less than $20,000/year) pay 13.8 percent of their income in state and local taxes, while those in the top 1 percent (making on average $1.7 million/year) only pay 6.0% of their income on state and local taxes. The bottom 60 percent of income earners, on average, pay at nearly double the tax rate of what the richest Pennsylvanians pay on average.
Our upside-down tax system is not only horribly unfair, it makes it impossible to raise sufficient revenues to close our public investment deficit now. And it will make it impossible to close a budget deficit when we have a recession.
Income for the top 1 percent of households in the state has been skyrocketing but has remained stagnant for everyone else. If we won’t tax the richest Pennsylvanians, we will never have the funds we need.
The long-term solution is to repeal our uniformity clause, which will take time. But there is a near-term solution, which we call the Fair Share Tax.
Central to this plan is dividing the personal income tax (PIT) into two new taxes. The first would tax wages and interest at 2.8 percent, which is a decrease from the current PIT of 3.07 percent. The second would tax what we call income from wealth—dividends, capital gains, business profits, royalties, and estates—at 6.5 percent.
The Fair Share Tax would bring in $2.2 billion in new revenue. About 50% of the new revenue would come from the top 1 percent, 80 percent would come from the richest fifth, and 16% would come from out-of-state taxpayers. This means that only a tiny 4 percent of the additional revenue would come from the bottom four-fifths of Pennsylvania taxpayers.
Under the plan, 47 percent of taxpayers would see their taxes go down, 35 percent will see no change in their taxes, and only 18 percent will see their taxes go up. And the effective tax rate on the top 1 percent of taxpayers—the combined rate they pay on all of their income—would be only 3.9 percent, far less than that of New York and New Jersey and below all of our neighboring states except Ohio.
The Fair Share Tax is fair to small businesses and seniors as well. Family-owned businesses can choose to receive compensation as profits or wages.
By taking wages instead of profits, they can lower their taxes under the Fair Share plan. And as is the case today, most of seniors’ retirement income—Social Security, pensions, and 401k plans—will remain untaxed. Three-quarters of seniors will see a tax cut or no change in their taxes. The top 20 percent of seniors, who have an average income of $246,100, will pay 92 percent of the increase in taxes among seniors.
The Fair Share Tax would turn our tax system right-side-up while generating the revenues we need to protect the state budget during an economic downturn and meet our public investment crisis. It’s the solution to the long-term problems that our legislators are ignoring this year.
It would give us the means to create individual opportunity and thriving communities throughout the Commonwealth, without burdening working people and the middle class.
Marc Stier is the director of the Pennsylvania Budget and Policy Center, a progressive think-tank in Harrisburg.