Benefits of Reducing the Personal Income Tax

Thank you Chairman Turzai, Rep. Quigley, and members of the House Republican Policy Committee for the invitation to share with you why the Commonwealth Foundation believes that reducing taxes on Pennsylvanian’s Personal Income is critical for the economic health of families and job creators in our Commonwealth.

It doesn’t require a PhD in Economics to understand that when government wants less of something, it taxes it. Take, for example, proposals to raise taxes on tobacco or pornography or fatty foods. When politicians want less of these things, they propose higher taxes. Chief Justice John Marshall enunciated this economic axiom in 1819 when he wrote in a Supreme Court opinion that “The power to tax is the power to destroy.”

In Pennsylvania, Gov. Rendell has employed this tax-and-destroy strategy through his proposals to reduce the number of citizens without health insurance (by raising taxes on businesses) and to reduce our usage of fossil fuels (by raising taxes on oil companies).

But taxation is neither strategic in its ability to destroy something nor can its harmful effects be avoided with surgical precision. For example, in 2004, when the Personal Income Tax was increased by nearly 10% on working Pennsylvanians and small businesses, the unintended consequence of this tax hike was the lost opportunity to create jobs.

Before the legislature capitulated to Gov. Rendell’s demands for higher income taxes just days before Christmas in 2003, the Commonwealth Foundation warned of the destructive impact of raising the Personal Income Tax rate from 2.8% to 3.07% (increasing what the state takes from taxpayers and job creators by 9.64%).

Using our Computable General Equilibrium (CGE) economic modeling program—known as the Pennsylvania State Tax Analysis Modeling Program (PA-STAMP), which was constructed by economists at the Beacon Hill Institute at Suffolk University in Boston, Massachusetts—we were able to analyze the potential impact of the PIT increase on Pennsylvania producers, households, and government. (Note: The model calculates the impact of tax changes on jobs, wage rates, investment, personal income, and disposable income, and can also separate the data into categories by income groups, industry sectors, and state government.)

We projected that the PIT increase from 2.8% to 3.07% would result in nearly 36,000 fewer jobs created in 2004 and 2005 (Note: The actual project was 35,892.) These were jobs that would not be realized because government would extract more taxes out of the paychecks of working Pennsylvanians and take more capital from job-creating entrepreneurs and businessmen and women.

This represents a significant loss of our competitive advantage with other states and nations in this global economy. And so it should be no mystery why Pennsylvania is 38th in the nation in job growth, 40th in personal income growth, and 42nd in population growth during the Rendell tenure. The lesson, of course, is that—while I’m sure that Gov. Rendell does not want fewer jobs or lower incomes or slower population growth—when government taxes something, we’ll always get less of it.

But there another side to this economic truism: If government wants more of something, it can either subsidize it or reduce taxes on it. Of course, Gov. Rendell has taken the idea of subsidization to a new level in Pennsylvania. His so-called “economic stimulus” package from 2004 represents the notion that government can grow jobs by borrowing billions of dollars and redistributing it to politically selected businesses and government projects. The problem with this approach is that it has failed everywhere it has been tried. It may add a few jobs here and there, but it is at the expense of other parts of the economy.

The data demonstrate that states which subsidize “economic development” are among the worst in economic performance. In fact, the 10 states with the highest economic development budgets, per capita, ranked below the national average in job, income, and population growth. In contrast, the 10 states which spent the least on “economic development” had job, income, and population growth which outpaced the rest of the nation. In other words, taxpayer subsidization of job creation is not the most efficient means of promoting fiscal and economic growth.

In contrast, states that cut taxes the most over the past 10 years were among the fastest growing. While states that increased taxes the most (including Pennsylvania), had slower economic growth.

The alternative to subsidization—if government wants more income, job, and population growth—is tax reduction. And a rollback of the Personal Income Tax from 3.07% to 2.8% is a good start.

We’ve run our CGE economic modeling program on Rep. Quigley’s proposal and project that his reduction in the PIT would allow for the creation of an additional 26,671 jobs in the upcoming fiscal year (2008-09). The PIT reduction would also return an additional $644 million of disposable income to the people of Pennsylvania. Of course, this would reduce the net amount of tax revenue flowing into Harrisburg’s coffers by $934 million, but the state would still realize an increase in General Fund Revenues of more than $207 million. In other words, this reduction in the PIT would not mean less overall revenue to the state, but continued growth in state taxes while leaving more money in the pockets of working Pennsylvanians and job creators.

The choice is simple: Do we want more job and income growth or less? By continuing to tax jobs and incomes at the 3.07% rate, we know we will continue to get less of both because “The power to tax is the power to destroy.” It’s time we stopped destroying jobs and incomes in Pennsylvania.

Thank you again for this opportunity, and I look forward to answering your questions.

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Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (, a public policy research and educational institute located in Harrisburg.