PA Senate Votes to Raise Taxes Now and In the Future

The Pennsylvania Senate this afternoon gave their approval to the municipal pension “reform” bill, even after the House stripped out almost all of the weak reforms. The legislation was poorly crafted from the get-go (our analysis is here), and the House made a bad bill even worse.

The final legislation:

  • Allows Philadelphia to increase its sales tax from 7% to 8%, two percentage-points higher than its Pennsylvania suburbs, and a full eight percentage-points higher than neighboring Delaware, which has no sales tax.
  • Allows cities with already underfunded pensions to defer payments into those pension plans, causing them to be further underfunded.
  • Assigns cities (excluding Philadelphia) into a category based on their funding level, with various reforms required (see our blog post here, but note the changes below).

The House amendments to the bill:

  • Removed a requirement to freeze pension benefits on poorly funded plans (including Philadelphia) – i.e. cities can increase the cost of these plans, even though they can’t afford the benefits now.
  • Removed the requirement for Philadelphia to established a new plan for new employees (other cities in “Distress Level III” would still face that requirement).
  • Removed the option to provide a defined contribution option (i.e. 401k-model retirement plan). This is what cities should be required to do to have meaningful pension reform.

This bill is no longer a missed opportunity for pension reform, but only serves to exacerbate the crisis facing Pennsylvania cities. Not only is it a vote to raise taxes now, but the deferment of payments pushes costs onto future taxpayers, and will likely mean more tax increases in the future.

For more on this subject, attend one of our economic forums on Pension and Politics: Why Your Taxes will Skyrocket.