2015 Tax Fairness Recommendations
On Wednesday, February 18, 2015, the Better Choices for Pennsylvania Coalition held a press conference to call on Governor Tom Wolf and the General Assembly to pursue a 2015-16 budget that invests in Pennsylvania families by making the state's tax system fairer.
The Institute on Taxation and Economic Policy recently ranked Pennsylvania's tax system one of the most regressive in the nation, asking more from low- and middle-income families while allowing the wealthy and corporations to escape paying their fair share.
Nineteen ideas to make Pennsylvania’s tax system fairer
One of Governor Tom Wolf’s top priorities is to level the playing field for Pennsylvania’s citizens and businesses, and one area where the playing field is tilted against middle-class families is the tax system.
A recent report by the Institute on Taxation and Economic Policy (ITEP) identified Pennsylvania among the “Terrible 10” states with the most unfair state and local tax systems. Our system asks more of low- and middle-income workers than the wealthy, and makes it hard to raise sufficient funds to pay for public schools, colleges, health care and infrastructure. Our business tax code includes tax breaks for some businesses but not others, and looks the other way at corporate tax loopholes that have been closed effectively in most other states, leaving some businesses to pay far more than their competitors.
The changes we propose are sound tax policy. The PA 21st Century Tax Project, a unique collaboration of business, labor, and economic research groups, identified a set of tax principles that we used as a measuring stick for individual proposals. These principles are centered on tax equity (taxpayers of similar means should pay similar levels of taxation, and effective rates should increase with ability to pay) and tax efficiency (taxes should generate sufficient and sustainable revenues, should be clear and predictable for taxpayers, and should not interfere with competitiveness).
To make Pennsylvania’s tax system work better for people and for business, we recommend the following.
Ending tax loopholes
1. Permanently close most corporate tax loopholes by enacting combined reporting. Twenty-three states, half of the states with corporate income or franchise taxes, have adopted this approach. Combined reporting increases equity by broadening a currently narrow tax base and eliminating unfair tax advantages afforded certain corporations. It can also help raise needed revenue to bridge the state budget gap.
2. Enact an alternative minimum corporate tax. Keep the capital stock and franchise tax (CSFT) at a low rate (0.89 mills or 0.67 mills) and have corporations pay the greater of their CSFT or corporate net income tax (CNIT) liabilities. Almost three-quarters of Pennsylvania corporations pay nothing in corporate income taxes, and 84% pay less than a family earning $35,000. A minimum corporate tax would ensure that every entity contributed something to the common good. Pennsylvania abolished its $200 corporate minimum tax in 2000, but 15 states and the District of Columbia have minimum taxes on corporations, banks, or both.
3. In the last five years, Pennsylvania has become the second largest natural gas producer in the country. Every other major gas producing state has a severance tax that returns to citizens some of the value of this non-renewable resource. The commonwealth should adopt a severance tax comparable to that imposed in West Virginia, while maintaining a local impact fee. As is done in other states, the severance tax would grow with the value of the resource produced and be exported to users of natural gas.
4. In 2014, baseball Hall of Famer Tony Gwynn died of salivary gland cancer, which he blamed on his use of chewing tobacco. There were an estimated 8,390 deaths from oral cancer that year, according to the National Cancer Institute. The World Health Organization’s International Agency for Research on Cancer has shown that chewing tobacco causes oral, esophageal and pancreatic cancer. In January 2015, the New England Journal of Medicine published a report showing significant formaldehyde formation during e-cigarette vaping. Pennsylvania taxes tobacco in the form of cigarettes, but leaves a gaping hole for smokeless products and e-cigarettes, whose health risks- are similarly detrimental. Pennsylvania is the only state that does not have an excise tax on smokeless tobacco. PA should end the loophole, applying the cigarette tax to smokeless products and e-cigarettes. Taxing smokeless tobacco and e-cigarettes helps defray health costs and erases the unintended tax benefit these items receive over cigarettes.
5. Fix the bank tax. In 2013, the state’s bank shares tax was “reformed” to expand the tax base and lower the tax rate by nearly 30 percent. The change was supposed to neither raise nor cut the taxes banks paid. It didn’t work out that way. Tax collections from banks fell roughly $35 million in 2013-14. The bank tax rate should be raised to eliminate this inadvertent tax cut.
6. Revise laws to permit assessment of local property taxes on oil and gas reserves. Until 2002, Pennsylvania’s property tax assessment system treated gas and oil reserves the same as coal and other mineral deposits. A court case created an exemption for oil and gas, but that loophole could easily be addressed by the General Assembly, and should be. Broadening the property tax base allows lower rates for all property tax payers, and increases equity by treating extractive industries the same.
7. Extend the Marketplace Fairness Act to downloadable music. The corner store and Wal-Mart both face the same disadvantage: If you buy a CD, you pay sales tax; if you download it, you don’t. This hurts bricks and mortar retailers. It’s time to level the playing field and treat products the same, regardless of their form or where they are purchased. This change likely could be done by the Department of Revenue without legislative action, as pre-programmed software downloads are already subject to sales tax. It would remove the unintended and unnecessary tax incentive to download music. It also would permit tax revenues to grow as the music industry grows, regardless of the technology.
8. Limit the sales tax vendor discount. Currently, the commonwealth allows all sales tax remitters to keep 1% of total sales tax collections to help defray administrative costs of collecting and transmitting the tax to the state. This discount made sense when returns and checks were written by hand. But in today’s world, this is an expensive relic we can no longer afford. Governors Rendell and Corbett both proposed limiting this discount, and we suggest Governor Wolf do the same.
Making the tax system fairer for working families
Pennsylvania’s flat income tax means that the woman who cleans the office pays the same income tax rate as the CEO. The difference is that state and local taxes take a much larger share out of her paycheck than the CEO’s, which makes it more difficult for her to afford basic necessities. The results are stark – low-income workers pay three times as much a share of their family income in state and local taxes as the top 1%, and middle-class families pay more than twice as much. Making things worse, low- and middle-income families haven’t gained any ground since the recession. It is time for Pennsylvania to change its income tax system to help offset regressive taxes such as fuel and sales taxes.
There are several ways to make Pennsylvania’s tax system fairer for working families. Each of these options reduces the current inequity in state and local taxes for working families.
9. Pennsylvania could adopt a graduated tax rate, which is the approach taken in 36 of 42 states with income taxes. This would require a constitutional amendment.
10. A personal exemption for individuals and couples could be adopted, so a portion of income would not be taxed. At the same tax rate or even a higher tax rate, low- and middle-income families would pay less and higher-income families more. There are different views about whether this approach is allowed under the constitution, and the courts might have to provide some guidance.
11. The commonwealth could adopt a wealth tax. This is a very low tax, like the capital stock and franchise tax, imposed on assets such as stocks and other investments. Since wealthy families own most of these assets, middle-income families would pay little to nothing.
12. Within the state personal income tax, the commonwealth could impose a higher tax on income from wealth, but not from work. The constitution permits a higher tax rate on dividends, capital gains, rents, royalties and other non-wage income. Since most of the wealth is in the hands of households earning more than $150,000, the impact on working families would be small.
13. Expand the Tax Forgiveness Program (permitted under the special poverty provision of the constitution). Increasing the eligibility income level for different family sizes and/or changing the dramatic “cliff effect” would result in an income tax cut for many families.
14. Add a refundable earned income tax credit (EITC) to the state’s personal income tax, based on a percentage of the federal EITC. The EITC offsets taxes paid by working families, and a refundable tax would provide a rebate that would help to offset other regressive taxes paid by working families.
15. Maintain the sales tax exemption for all food items. One of the best features of Pennsylvania’s sales tax system is its tax exemption for food. Property tax elimination plans such as SB 76 would tax food to pay for property tax relief, a bad idea.
16. Create a property tax rebate program for working people. Nineteen states provide property tax relief for working people, in addition to seniors and adults with disabilities. A “circuit breaker” program provides a tax rebate to individuals whose property taxes are high as a share of their income. Eligibility should begin when property taxes are a relatively high share of a family’s income, and the program should be targeted to individuals and families with income at 150% or less of Pennsylvania median income, or about $78,000.
17. Increase the value of the Senior Citizen Property Tax Rent Rebate Program. The base grant amount hasn’t increased in almost a decade. This update could also help increase participation in the program.
18. Pennsylvania’s tax system is regressive, in part, because we rely heavily on sales and excise taxes (gasoline and cigarette). The gasoline tax increase adopted as part of the transportation funding package, although necessary, made our tax system even more regressive. One way to address this is to have a small tax credit for low-income residents of rural areas to help offset higher gas taxes. This could kick in when gas prices are high.
19. Consider a financial transactions tax. Such a surcharge – at rates as small as 3/10 of a percent of each transaction – could generate revenue from each investment purchase by state residents. The vast majority of this tax would be paid by wealthier Pennsylvanians.