Pennsylvania’s Budget Countdown: Will It Be Ready by July 1?

With the recent nine-month budget stalemate fresh in everyone’s memory, Pennsylvania legislators are vigorously working to avoid another multi-month budget impasse as fiscal year 2017 quickly approaches. With a $1.8 billion structural revenue gap and deep cuts to services at stake, time is of the essence. 

No one seems to know how Pennsylvania’s budget negotiations will shake out this year, including the Governor. House and Senate Republican leaders push to resist tax increases and focus on changes to the retirement system and the state system for wine and liquor sales seems to be setting the stage, but advocates for good tax policy are on the ground making the case for a responsible budget and a fairer state tax system.

I spent some time last week in Harrisburg discussing the state’s budget and the potential for tax policy changes at the Keystone Research Center’s 20th Anniversary Conference. As I emphasized at the conference, Pennsylvania lawmakers have plenty of progressive revenue raising options to choose from to help maintain adequate and equitable levels of funding for vital public services and close their $1.8 billion budget gap.

Since taking office in 2015, Gov. Tom Wolf has proposed several revenue raising options to address the state’s revenue crisis, including: a $1 per pack cigarette tax increase; 40 percent tax on the wholesale price of other tobacco products; expansion of the state’s sales tax base to include cable television services, movie theater tickets, and digital downloads; and a 6.5 percent shale tax on natural gas reserves. Most recently, he proposed increasing the state’s flat personal income tax rate from 3.07 percent to 3.4 percent, coupled with increases to the state’s tax forgiveness credit that would mitigate the impact on low-income families. According to our analysis, this proposal would raise more than a billion dollars of much-needed revenue for state services each year. 

However, these revenue raising proposals have gained little traction. The 2015-16 budget passed by default when Gov. Wolf neither signed or vetoed the bill claiming that it did nothing to tame the state’s structural deficit. Tax increases will, however, continue to play a role in the ongoing budget debate. And the way in which proposed taxes impact low- and middle-income families should be at the forefront of that conversation.

Pennsylvania has one of the most regressive tax systems in the nation. In 2015 the lowest-income taxpayers paid 12 percent of their income in taxes – this is nearly three times the 4.2 percent rate paid by the top 1 percent of earners. This imbalance is largely due to Pennsylvania’s reliance on a flat personal income tax rate and its lack of refundable tax credits. The state’s flat tax does very little to offset the regressivity of the rest of the taxes the state levies, including its heavy reliance on sales/excise and property taxes.

There are a number of steps Pennsylvania lawmakers can take to move toward a “fairer” tax system. If the goal is to raise revenue in an equitable fashion, here are a few possible approaches:

• Increase the personal income tax rate.
• Levy higher rates on capital gains or other forms of nonwage income.
• Revisit costly exemptions already on the books – such as the complete exemption for retirement income.
• Expand the sales tax base to include services and pair that reform with a targeted tax credit to mitigate the effect on low-income Pennsylvanians.
• Amend the restriction against taxing any given class of income at different levels (thereby allowing for a more progressive, graduated rate income tax).

To offset the impact on those families least able to afford a higher tax bill, any of these options could be paired with expanded tax forgiveness credits, a new personal exemption or, better yet, refundable low-income credits such as the Earned Income Tax Credit (EITC).