Who Pays

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Who Pays

• Understanding the impact of taxes on the poor in
  Pennsylvania
• Sharon Ward
• Pennsylvania Budget and Policy Center
• July 28, 2006

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Summary of Discussion

• Pennsylvania is not a high tax state.
• Pennsylvania is not a high spending state
• Pennsylvanias tax system is very regressive
• There are options to reform Pennsylvanias tax
  system
• Progressive tax reform isnt on the table
• Taxes pay for services that sustain individuals
  and communities.

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Pennsylvania A Snapshot
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Revenue and expenditures
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..Are Squarely in the Middle
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Not a High Tax State
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Spending is steady over time
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Tax Policy Principles How to Evaluate Tax
Reforms.

• Fairness Vertical and horizontal equity
• Base-broadening
• Adequacy
• Exportability
• Economic Development Impact
• Neutrality
• Simplicity

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What wrong with our tax system?

• State tax systems provide inadequate (or
  inequitable) revenues for K-12 education and
  other services
• State taxes are regressiverequiring low-income
  taxpayers to pay the highest effective tax rate.
• State tax bases are typically narrow, exempting
  certain transactions or income sources that
  arguably ought to be taxedand endangering the
  states fiscal future.
• Targeted corporate tax incentives distort
  economic decision-making and get in the way of
  free markets.
• State taxes are outdated. Inability to tax
  services, Internet transactions.

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Pennsylvanias Tax System is Regressive
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Building blocks of an unfair tax system
progressive, proportional, regressive taxes.
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The Pennsylvania Income TaxNot All Its Cracked
Up to Be

• One of six states with a flat-rate tax
• Tax base is reduced by complete exemption for
  retirement income
• Local wage taxes hit salaries, but exempt
  unearned income (cap gains, dividends)
• Low-income tax forgiveness credit shields poor
  Pennsylvanians from tax.

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Income Tax Reform Options

• Other state income taxes have several desirable
  features that Pennsylvania lacks, including
• Refundable low-income tax credits. (EITC)
• A meaningfully high top rate. (PAs top rate is
  second-lowest in the nation.)
• Equitable treatment of retirement income.
• Equalize tax treatment of investment income
  (higher rate on capital gains, dividends,
  interest)
• A graduated rate structure.
• Introduce personal exemptions

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Federally deductible taxes are never as
burdensome as they seem.
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Taxing the Wealthy Fairly Why Is It Important?

• In 2006, top 1 of PA income distribution has
  average income of 1 million.
• This group has 17 of all the income in the
  state.
• The poorest 40 put together have only 11 of the
  income.
• The wealthiest 20 of Pennsylvanians have 55 of
  the income statewide.
• In 2006, the wealthiest 1 are enjoying a huge
  windfall from federal tax cuts enacted since
  2001 average tax cut of 38,265.
• Poorest 20 of Pennsylvanians see an average 2006
  federal tax cut of 75.
• Source ITEP, 2006

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Property taxes a big concern

• Less regressive than sales taxes
• Very unpopular (lump sum)
• Especially burdensome for those who are property
  rich but cash poor.
• At the heart of school funding concerns
• Administrative concerns local assessment
  practices vary dramatically

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Rethinking Property Tax Relief

• Exemptions vs. Circuit Breakers
• Exemptions provide general tax reliefwhich means
  theyre expensive and poorly targeted.
• Many states provide especially generous
  exemptions to growing elderly population.
• Circuit breakers can be designed to give tax
  relief to any populationelderly or nonelderlyat
  any income levels.
• Since property taxes can be written off on
  federal tax forms, exemptions that are available
  to all homeowners leak in a way that circuit
  breakers dont.
• A third choice caps on growth in assessed value.
  Very poorly targeted has unintended
  consequences.

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The Sales Tax

• The most regressive major tax in PA
• 6 state rate, additional 1 in two counties
• Generally not deductible on federal income tax
  returns so a dollar paid by PA residents all
  ultimately comes out of their wallets.
• The state exempts many goods (food, clothing,
  medicine) and services (haircuts, laundromats,
  utilities).
• Services are growing as a share of consumption,
  while goods are declining.
• Untaxed Internet-based transactions are eroding
  the tax base even further.

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Corporate Taxes

• Share of state revenue from corporate taxes is
  declining Nationally and in Pennsylvania
• Two Taxes
• Profit-based tax. 9.99 percent tax rate.
• Capital Stock Franchise Tax. Based on a
  combination of income and net worth.
• Options
• Close corporate income tax loopholes
• 73 pay no tax
• Another 23 pay less than 10,000

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Recent State Tax Changes

• 34 states increased cigarette taxes
• Massachusetts repealed a capital gains break and
  New Mexico created one.
• Millionaires tax in NJ, CA, NC
• New Jersey, Oregon, Texas strengthened their
  corporate taxes.
• Louisiana voters enacted a progressive tax swap.
  Other states considered one.
• Dozens of states decoupled from federal estate
  tax and accelerated depreciation provisions.
• Virginia (successful) pushed ambitious tax hike.
• Alabama increased personal exemptions to reduce
  tax liability for low-income earners.
• NJ sales tax increase expanded tax base by
  including new services

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Tax Reform Strategies for Pennsylvania

• Targeted property tax relief low/middle-income
  and renters.
• Income tax higher top rate, low-income credits.
• Sales tax broader base, low rate?
• Corporate tax close loopholes, enact minimum
  tax.
• Recognize the difference between short-term and
  long-term solutions no quick fix.