Swann Tax Cuts

A report from the Pennsylvania Budget and Policy Center on the revenue losses from Lynn Swann’s proposed tax cuts would seem to cast doubt on our projections. There are several points worth clarification:
– PBPC includes the Swann’s Net Operating Loss proposal, ours does not
-PBPC uses a 6-year phaseout of the Inheritance tax, whereas our model uses a 14-year phaseout, as detailed to us on request of the Swann campaign.
– Our model is a dynamic model, accounting for economic growth in response to tax reductions. PBPC ignores this effect. Our model projects both revenue increases due to economic growth and increases in other taxes and fees from the proposed cuts.

Also of note:
– PBPC considers the revenue “lost” in a vacuum, noting that

“The revenue loss from the tax cuts would be more than 5% of general fund expenditures by 2007-08 and almost 9% of general fund expenditures by 2009-10 and would likely require major cuts in spending for budget items such as health care, education, and corrections. “

However, this fails to put the revenue “loss” in the context of future years. That is, the revenue loss of 9% refers to this year’s GF budget, but over the last three fiscal years, General Fund spending increased by 19%. Our model projects that each year from 2006-07 to 2009-10 will see an increase in state tax revenue even with the tax cuts (and even if our projections are erroneous, here are $2 billion in spending cuts from the current operating budget without even touching education, health care or corrections).

– PBPC also goes out of its way to defend the state inheritance tax, calling it “among the state‚Äôs more progressive taxes; in 2004, 1.4% of estates, those over $2 million dollars, paid 22% of the total tax.” But progressivity of a tax is determined by tax rates, not the incidence of taxes. The state estate tax is in fact flat (I doubt the PBPC would call a flat income tax “progressive”, though most of the revenue would be paid by higher income households) and, unlike the federal estate tax, has no exemptions for lower value estates–the tax applies to all estates regardless of value.