The Estimated Impact of Gov. Rendells 34 Percent Personal Income Tax Increase Proposal

Executive Summary

A major funding stream for Gov. Ed Rendell’s “Plan for a New Pennsylvania” would come from a 34 percent increase in the Commonwealth’s personal income tax (PIT), from the current rate of 2.8 percent to 3.75 percent. In making his case for the increase, the governor has argued that even with his proposed PIT increase, Pennsylvania’s PIT rate would still be lower “than comparable taxes in 38 other states.”

However, when the actual state personal income tax burden faced by Pennsylvanians is considered (in terms of both personal income taxes per capita and per $1,000 of personal income), it turns out that Gov. Rendell’s PIT increase plan will vault the Commonwealth from below to above the national average on both measures. Specifically,on a per capita basis, Pennsylvania would rise from 33rd to 18th in the nation, and from 35th in to 27th in personal income taxes per $1,000 of personal income.

The data make clear that Gov. Rendell’s proposed personal income tax increase is not the innocuous change that he claims. Although the increased “rate” would remain lower than most states, the tax “take” out of Pennsylvanians’ paychecks would be the single largest personal income tax increase in the nation—in terms of absolute magnitude and on a percentage basis. On a per capita basis, the PIT increase in Pennsylvania would be 700% higher than the national average increase and 2,994% higher in PIT per $1,000 of personal income. This significant tax increase will further weaken Pennsylvania’s competitive position relative to other states and erode one of the only advantages of the Commonwealth’s current tax climate.