October 1 2004

Incremental change is how PA's state and local tax systems change - slowly and haphazardly - though not for a lack of ideas and proposals.

(October 2004) Comprehensive, system-wide tax restructuring hasn’t been a priority since Governor Dick Thornburgh created the Pennsylvania Tax Commission in 1979.  That doesn’t mean there’s ever been a shortage of proposals, ideas and recommendations targeting specific parts of the system.  It’s not surprising, then, that a number of measures advocating change are now on the table.

 It seems that every Governor has an agenda – perhaps a wish list – for altering the taxing structure one way or another.  The personal income tax began in 1971 under Governor Milton Shapp. Governor Thornburgh had the Tax Commission.  Governor Robert Casey attempted to restructure local taxes and experienced a fiscal crisis that resulted in significant state tax changes.  Governor Tom Ridge sought and achieved a number of business tax reductions. 

Who’s Proposing What?

Governor Ed Rendell began his administration in 2003 with a major proposal aimed at making Pennsylvania’s schools more effective and stimulating the state’s economy. Rendell proposed an increase in the personal income tax rate, adoption of slot machines at racetracks accompanied by a new state tax on slot machine revenue, broadening the corporate net income tax base, lowering property taxes, and increasing the rate and expanding the base of several small yield taxes. 

In conjunction with his specific tax proposals, Rendell created a Business Tax Commission to examine Pennsylvania’s business tax structure and recommend ways to expand the tax base and lower rates while maintaining revenue neutrality.  The Commission is scheduled to make its recommendations in November.

In addition to the Governor, other policymakers are interested in changing the tax system.  A group of legislators in the House of Representatives known as the Commonwealth Caucus introduced legislation creating a new gross receipts tax on businesses to replace the current sales and use tax.  All receipts from the new tax would be dedicated to financing local education and purportedly would be sufficient to replace all local education taxes.  Not only would state government finance all local education, it would gain a larger voice in how local school districts provide educational services.  Therefore, the proposal has dual purposes – eliminate unpopular property and other local taxes and provide state government greater control over local education outcomes.

In late 2003, a group of labor and business leaders formed a coalition to develop an alternative tax structure titled “Pennsylvania 21st Century Tax Policy Project.”  The effort produced a proposal to modernize much of Pennsylvania’s state tax system.  It incorporated a broadening of the state tax bases of the major taxes and recommended several provisions that would create a higher degree of progressiveness where possible.  The proposal fell short of being comprehensive; limited time and resources resulted in a proposal that excluded certain state taxes and recommended a reduction of local property taxes using state funds but did not address the entire local tax system.  The proposal, however, remains on the table as an example of a fairly comprehensive assessment of state taxes.

What’s Actually Changed?

While none of the three above-described proposals has been adopted in its entirety, the legislature has approved and the Governor has signed several notable changes to the tax system.  The centerpiece of the first change was an increase in the personal income tax from 2.8% to 3.07% in December 2003.  It also included increases in revenues from other sources, such as higher taxes on cigarettes, telephone and cell phone bills.

In the summer of 2004, the legislature approved a second major change to the tax system.  After a hard-fought debate, Pennsylvania will allow slot machines and tax their profits.  The bulk of the taxes collected by state government will be used to reduce local school property taxes on owner-occupied residences.  A small increase in the local income tax will be required as a local match for the state gambling money.

These three examples represent completely different approaches to changing Pennsylvania’s local tax system.  Each seeks a somewhat different outcome, and each was stimulated by different motives; not one is comprehensive. 

The tax increases adopted in the past year do make some changes to the tax landscape.  But, from the “big picture” perspective, is Pennsylvania’s tax system today helping to improve the state’s economic competitiveness?  Not yet.