Pennsylvania's tax burden on individuals and the businesses that employ them is far from a warm welcome to the Keystone State.
Earlier this month, a House appropriations subcommittee hosted a hearing on Pennsylvania’s tax structure and fiscal policy. CF recently covered one subject of the hearing—the lack of transparency pervasive throughout the state budget.
This opaqueness has undoubtedly contributed to Pennsylvania’s onerous tax burden, which was another issue discussed during the hearing. In testimony to the subcommittee, Jared Walczak, a senior policy analyst for the Tax Foundation, highlighted several problems with the commonwealth’s tax structure. One of the most obvious is the Corporate Net Income Tax:
Any consideration of tax reform in Pennsylvania has to begin with the Commonwealth's 9.99 percent Corporate Net Income Tax (CNIT), the second-highest state corporate income tax in the nation after Iowa, where businesses are able to deduct their federal taxes. A reduction in the corporate income tax is long overdue, and important to Pennsylvania's ability to compete with other states.
Reducing the CNIT at a time when Pennsylvania is struggling financially may strike some as untenable, but Walczak offers a solution:
One partial approach to doing so is to pay down rate reductions by curtailing targeted incentives. To its credit, Pennsylvania does not offer as many tax incentives as some of its peers, but several tax preferences in the code do add up. The Keystone Opportunity Zones credit forgoes $79 million each year, while Innovation Zones add another $15 million. The Research and Development credit costs $55 million, and the Entertainment Production credit sets the Commonwealth back $65 million.
CF has offered a similar recommendation, which includes the elimination of tax credits—along with other corporate welfare programs—to help offset the initial loss of revenue from a CNIT rate reduction.
Fortunately, state lawmakers are working to address the state’s uncompetitive tax structure. Two proposals in particular—sponsored by Representatives Seth Grove and Jason Ortitay—would provide a needed boost to Pennsylvania’s underperforming economy.
Rep. Grove’s proposal, the Pennsylvania Tax Cuts and Jobs Act, reduces the PIT from 3.07 percent to 2.8 percent in FY 2019-20. It would also reduce the CNIT to 4 percent over a six-year period, beginning in FY 2021 and ending in FY 2026. The reduction would give Pennsylvania one of the lowest corporate tax rates in the country.
Rep. Ortitay’s legislation would immediately reduce the PIT to 2.82 percent. This new rate nearly matches the rate imposed before the 2003 tax increase signed into law by Gov. Ed Rendell. At the time, CF pointed out the more than 33,100 jobs sacrificed to pay for Harrisburg’s spending wish list.
Moving to reduce the tax burden on working people will boost economic growth and lead to more jobs and higher wages for Pennsylvanians—attracting and retaining workers to our state. A review of the literature and CF’s own analysis confirm as much. The states with the lowest tax burdens experienced better income and job growth than the states with the highest tax burdens over the last 10 years.
Pennsylvania’s decades-long economic struggles demand a shift away from a Harrisburg-centric approach to economic growth and towards one that puts the economic power in the hands of working people. Tax reform is just a first step toward completing this critical power shift.