How to create a progressive income tax in Pennsylvania
So, it turns out that you can actually create a fair income tax in Pennsylvania.
One of the unfortunate conditions of Pennsylvania politics has been our "uniformity clause," which prohibits taxing any one class of income at different rates. It has stood in the way of creating what most states with an income tax have, a graduated system in which those with higher incomes pay at a higher rate.
A consequence of our uniformity clause is that our state and local taxes, taken together, are among the most regressive in the entire country. The Institute on Tax and Economic Policy lists Pennsylvania as one of the "Terrible Ten" states with the most unjust tax system. It's not hard to understand why. State and local taxes take a little over 12 percent of the income of the poorest fifth of households. They take a little over 10 percent of the middle fifth income bracket. But they only take a little over 4 percent from those in the top 1 percent of households according to income.
Many states, like Pennsylvania, rely on sales taxes that take a larger share of income of those with low incomes than those with higher incomes. But they compensate with a progressive income tax, and the share of taxes paid overall is roughly equal — taking the same percentage of income from poor and rich, or even slightly progressive — taking a higher percentage from the rich. But we can't do that in Pennsylvania because the uniformity clause mandates that our income tax rate be flat.
There is, however, an alternative. A few weeks ago the Pennsylvania Budget and Policy Center proposed bifurcating our personal income tax. Income from wages and interest would still be taxed at the current rate of 3.07 percent. But what we call income from wealth — dividends; net income (from a business, profession, or farm); capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts — would be taxed at a slightly-higher 4 percent.
And Wednesday, senators Art Haywood, D-Montgomery County.; Minority Leader Jay Costa, D-Allegheny County; and Appropriation Chair Vincent Hughes, D-Philadelphia, proposed legislation, SB 1258, that embodies this idea.
This proposal would raise $758 million a year in new revenue. This would get us almost halfway toward closing the structural deficit of $1.8 billion in the fiscal year starting on July 1, 2016. Closing that deficit is critical to avoiding more devastating cuts to education and human services.
Even better, the $758 million would come almost entirely from those who can afford to pay more. A 4 percent tax on income from wealth barely raises taxes for the bottom 60 percent of households, those making $65,000 or less, who would pay between $2 and $28 dollars a year more. It raises taxes by only $55 a year for households making between $65,000 and $101,000. Even the next 15 percent of households, with an income of $101,000 to $201,000, pay just $118 more a year.
It is only when one gets to the top 5 percent of households that the tax really kicks in. And the top 1 percent — those with an income of $463,000 or more — would on average pay $5,304 more. That isn't an insignificant amount of money, but especially when you keep in mind that the top 1 percent has seen huge increases in income in the last few decades, this increase is both reasonable and just.
Despite the uniformity clause, you can raise taxes just on those with high incomes in Pennsylvania. Nothing in the Constitution prohibits different classes of income from being taxed at different rates.
Sometimes a little creativity is needed to find the way out of a sticky political situation. Senator Haywood's proposal has shown us a path toward resolving the current budget crisis and making our tax system far more fair.
Marc Stier is the director of the Pennsylvania Budget and Policy Center.
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