PA State Tax report

Press release from The Pennsylvania Budget and Policy Center.

School board members, Morrisville Borough Council members, Senator McIlhenney and Representative Galloway: What are you doing about this? Why is there such a regressive tax system in place?

New Report Finds Pennsylvania Tax and Spending Levels Moderate and Stable Over Time

Last update: 12:01 a.m. EST Nov. 16, 2008

HARRISBURG, Pa., Nov 13, 2008 /PRNewswire via COMTEX/ -- Pennsylvania also has one of the most regressive tax systems in the U.S., with the poor paying 12.3 cents in taxes out of every $1 of income, while the rich pay only 4.3 cents.

Pennsylvania ranks favorably when compared to the nation and to competitor states in overall tax and spending levels, according to a new report from the Pennsylvania Budget and Policy Center (PBPC).

Pennsylvania state taxes, when measured as a share of state personal income, ranked 32nd among the 50 states in 2005, while state spending ranked 30th. Pennsylvania taxes were 6.3 percent of state personal income, a half-percentage point less than the average of competing states.(1)

But Pennsylvania's tax system is highly regressive, taking a significantly larger share of the incomes of the bottom 20 percent of earners than of the incomes of more affluent Pennsylvanians.

PBPC's new report, The Common Good: What Pennsylvania's Budget and Tax Policies Mean to You, provides a roadmap to state and local tax policy in Pennsylvania, with a focus on whether taxes and spending are fair and appropriate to the state's needs. It can be viewed online at http://www.pennbpc.org/pdf/PBPC_Tax_Primer_08.pdf.
The report finds that, over the past three decades, Pennsylvania state government taxes have held steady as a share of income, while state expenditures have stayed below the national average for 27 of the last 30 years.

The findings on state taxes and spending fly in the face of myths that Pennsylvania state spending is out of control and needs to be reduced, noted Sharon Ward, director of the PBPC, a non-partisan tax policy research organization.

"State budget discussions in Harrisburg begin with an assumption that state taxes and spending are high and that state spending is a luxury," said Ward. "This report makes clear that Pennsylvania spending and taxes are both competitive and necessary for the state's economy to grow."

Two-thirds of state General Fund spending goes to just three items: education, health care, and public safety. The report argues that investments in public goods, including public and higher education, workforce development, and transportation, make a vital contribution to the state's economy and are critical to economic growth.
The new report's findings have important implications for lawmakers as they contemplate a response to a growing state budget deficit. Ward noted that the deficit is the result of declining state revenue collections resulting from a downturn in the business cycle and national economic forces, not a result of unsustainable spending.

The PBPC study found that Pennsylvania fares less well in two other areas--tax fairness and local tax burden.

The Commonwealth has one of the most "regressive" state and local tax systems in the nation, based on the share of income paid in state and local taxes by poor vs. affluent families. One reason for this is Pennsylvania's flat personal income tax rate. While most states have graduated income taxes that assess higher rates on affluent earners than on middle-class and low-income families, Pennsylvania's Constitution requires all earners (except for the poor and elderly) to be taxed at the same, or "uniform," rate. This prevents Pennsylvania from using a progressive income tax to increase the overall fairness of the tax structure.

"Without a progressive income tax, Pennsylvania's state tax system has no way to offset regressive sales and property taxes," Ward said. "That results in lower-income workers paying a bigger chunk of their paychecks in taxes than wealthier Pennsylvanians."

Pennsylvania also relies heavily on local taxes to fund a variety of services, especially public education.

The state ranks near the bottom in the state share of education spending, in 2005 numbers, with 46 other states providing more state help than Pennsylvania. The heavy reliance on local taxpayers for school funding translates into high tax rates in some lower-income school districts and low tax rates in some high-income districts. Even with high local tax rates, some districts do not have enough wealth and income to fund schools adequately, creating wide gaps in school funding.

PBPC's report also found that property taxes in Pennsylvania, measured against state personal income, are only 95 percent of the national average and lower than most competitor states.

"Pennsylvania has started moving toward greater state funding for public education, but more still remains to be done to put Pennsylvania on par with neighboring states and the national average," Ward said.
AMONG THE REPORT'S MAJOR FINDINGS:

-- State Taxes Are Relatively Low: The personal income tax rate, at 3.07
percent, is the second lowest top rate in the country, while the
6-percent sales tax (7-percent in Philadelphia and Allegheny County) is
in the middle range of all states. The corporate net income (CNI) tax
rate of 9.99 percent is relatively high, although loopholes in the law
(and other factors) mean that 71 percent of companies don't pay any
CNI tax.
-- Pennsylvania state taxes and spending are less than a majority of
U.S. states when measured as a share of state personal income. In
2005, state taxes were 6.3 percent of personal income, ranking the
state 32nd in the nation.
-- Pennsylvania state taxes are less than competitor states. New York
and Ohio had slightly higher rates as a share of personal income,
while Delaware exceeded 8 percent and West Virginia hit 9 percent.



-- Pennsylvania Relies Heavily on Local Taxes: Pennsylvania state and local
taxes combined rank 21st nationally, at 10.7 percent as a share of
personal income, compared to 32nd nationally for state only taxes. This
reflects a heavy reliance on local taxes, and especially on local
property taxes, to fund public services.
-- In 2005-06, local governments and school districts relied on
property taxes to fund 71 percent of services and public education.



-- Local Property Taxes Are Comparatively Low But Contain Significant
Disparities Across Districts: Across the state, property taxes average
3.1 percent of personal income, compared to 3.3 percent nationally, 3.3
percent in Ohio, more than 4 percent in New York, and 5 percent in New
Jersey.
-- At the same time, average property tax rates on residential property
can range from 0.9 percent to 9.7 percent of personal income across
Pennsylvania's 501 school districts. It is not uncommon for
poorer school districts to have higher school property tax rates
than more affluent districts in the same county.



-- Pennsylvania's Tax Structure Squeezes Low-Income Workers:
Low-income Pennsylvanians, living paycheck to paycheck, pay much higher
percentages of their income in taxes.
-- The lowest quintile of Pennsylvanians spends 2.5 percent of their
income on sales tax, while the wealthiest fifth spend 1.5 percent or
less.
-- Overall, the poorest 20 percent pay nearly three times their share
of income in state and local taxes than the richest 1 percent--12.3
cents out of each dollar of income compared to only 4.3 cents for
the richest families (once you take into account that state and
local taxes reduce federal taxable income for most affluent
families). Middle-class families also pay a higher share of their
income in state and local income taxes than the wealthiest 20
percent.



The report proposes that policymakers consider an amendment to the Constitution so that a graduated income tax could be introduced to Pennsylvania. That would tax the income of wealthy earners at a higher rate than lower-income workers.

It suggests the state needs a stable stream of revenue that grows over time to keep up with the cost of services, and highlights challenges to a stable tax system. They include declining corporate tax revenue, the aging population, and a tax system that has not been comprehensively updated and reformed in generations. To address these issues, state policymakers should:

-- Review tax exemptions and tax credits for effectiveness;



-- Close loopholes in the corporate net income tax system that allow
multistate and multinational companies to hide Pennsylvania earnings in
lower-tax jurisdictions. That would generate $616 million a year,
according to the Department of Revenue;



-- Broaden the state sales tax base to include currently exempt luxury
items and expand tobacco taxes to include smokeless tobacco.
Pennsylvania is the only state that does not tax smokeless tobacco.



-- Implement a "severance" tax on the extraction of state
resources from the ground, such as natural gas. Estimates show that such
a levy on natural gas drilling could raise $200 million in new revenue
annually.



The Common Good: What Pennsylvania's Budget and Tax Policies Mean to You is an easy-to-read guide to state and local taxes and Pennsylvania's budget process. It is designed to translate the sometimes esoteric terminology of budget and tax issues into plain language.

"This is a one-of-a-kind publication that will help policymakers, journalists, advocates and all Pennsylvanians navigate the world of public spending and taxes to better understand where their tax dollars go," Ward said.

About PBPC
The Pennsylvania Budget and Policy Center (PBPC) is a non-partisan policy research project that provides independent, credible analysis on state tax, budget, and related policy matters, with attention to the impact of current or proposed policies on working families. To view the new report on state and local tax policy, go to http://www.pennbpc.org/pdf/PBPC_Tax_Primer_08.pdf.

(1) State personal income measures a state's economic activity. It includes the total of all wages, salaries, employer-contributed pensions and insurance, business earnings, rental earnings, dividends, and interest earned by commonwealth residents.
SOURCE The Pennsylvania Budget and Policy Center

http://www.pennbpc.org/pdf/PBPC_Tax_Primer_08.pdf