Pennsylvania’s Income Tax Competitiveness

The New York Times covered Gov. Rendell’s proposed 16% increase in the Personal Income Tax. Immediately before citing the Commonwealth Foundation, the article states that “Pennsylvania currently has the nation’s second-lowest state income tax, and even with the increase would have the fourth lowest, Mr. Rendell said.”

While this is technically true when simply comparing tax rates, the Governor’s statement is just another misleading statistic he will use in his campaign to raise taxes.

As noted in our news release, the argument that we can “affordâ€? a personal income tax increase because we have the second lowest rate among the 43 states that impose such a tax (note: 7 do not, and 2 only tax interest and dividends). Furthermore, many states have bottom rates – those on the first few thousand dollars of income for all households – below Pennsylvania’s and many have personal/standard deductions, child deductions, tax credits, and so forth which lower the tax burden. Pennsylvania actually has the 28th highest personal income tax collection per capita. In other words, while our tax rate may be amongst the lowest, the tax take from working Pennsylvanians’ paychecks is far higher than the Governor suggests.

But there’s more – Pennsylvania also allows local governments to collect income taxes, something many states do not. When looking at both state and local income taxes collected per person, Pennsylvania ranked 16th highest in 2006 at nearly $1,000 per person. Gov. Rendell’s proposed $1.5 billion tax increase would add about $120 per person – and would move Pennsylvania up (other states holding rates steady) to the 13th highest per-capita income tax collection. Only 12 states would take more in income taxes per person. Suddenly Pennsylvania doesn’t looks so competitive.

In addition, solely looking at the PIT rate–and then declaring that Pennsylvanians are under-taxed–ignores the overall tax burden in the Commonwealth. The reality is that Pennsylvanians shoulder the 11th highest state and local tax burden in the nation.

So a PIT increase is hardly as innocuous as the Governor suggests, and any increases in any taxes would only make things worse in Pennsylvania. Indeed, if the Governor gets his way, you can guarantee that those who can move out of state, will do so …