Why Lawmakers Don’t (And Shouldn’t) Raise Taxes

Terry Madonna and Michael Young have a new column asking why Pennsylvania lawmakers are so loath to raise taxes:

This response differs dramatically from past practice. Throughout most of the 20th century, despite partisan differences, governors and legislatures raised taxes to balance state budgets during recessions. In just the last 25 years, for example, state leaders raised the income tax three times – 1983, 1991, and 2003 – to meet budget shortfalls. Indeed, the pattern of raising taxes to combat recessionary deficits was almost Pavlovian in its predictability.

But not this year! Despite perhaps the worst revenue shortfall in Pennsylvania’s history, a tax increase is simply not in the cards.

The obvious question: What is different now?

Let me offer some quick answers to this question.

For starters, Pennsylvania’s state and local tax burden is significantly higher today than it was in prior years. And while the 1983 income tax raise resulted in a lower rate a few years later, the 1991 and 2003 tax hikes have resulted in a PIT rate that is 46% higher than in 1990.

Pennsylvania Tax Rates and Burdens Before Tax Hikes
Year PIT Rate State and Local Tax Burden Tax Burden Rank
1982 2.20% 9.5% 16
1990 2.10% 9.8% 24
2002 2.80% 9.6% 16
2009 3.07% 10.2% 11
Sources: Tax Foundation, PA Department of Revenue

Maybe lawmakers realize you can’t just keep raising taxes indefinitely.

A second hypothesis is that lawmakers have seen the effect of these higher taxes. That is, Pennsylvania’s growing tax burden resulted in stagnant economic growth. From 1991 to 2009, Pennsylvania ranks 42nd in job growth, 48th in personal income growth, and 47th in population growth among the 50 states.

A final possibility is that lawmakers recognize that our budget deficit is caused not by taxing too little, but by overspending. As Matt Mitchell of the Mercatus Center points out in a recent policy report, spending restraint by states is an untested policy. In fact, nearly every state with a budget deficit would have a surplus if they had merely grown spending to the rate of inflation plus population growth.

This is true in Pennsylvania — even going back just to the start of the Rendell Administration. By growing the General Fund Budget from $20 billion to $28 billion, Gov. Rendell produced a 40% increase in spending, almost double the rate of inflation.