Who Pays

Understanding the impact of taxes on the poor in Pennsylvania

Sharon WardPennsylvania Budget and Policy CenterJuly 28, 2006

Summary of Discussion

Pennsylvania is not a high tax state. Pennsylvania is not a high spending state

Pennsylvania’s tax system is very regressive There are options to reform Pennsylvania’s tax

system Progressive tax reform isn’t on the table

Taxes pay for services that sustain individuals and communities.

Pennsylvania: A Snapshot

Demographic PA US

Population 12,281,054 281,421,906

Under 5 5.9% 6.8%

Over 65 15.6% 12.4%

Single race

White 85.4% 75.1%

African American 10.0% 12.3%

Latino (1) 3.2% 12.5%

Education

HS diploma 81.8% 80.4%

Over 25 BA 22.4% 24.4%

Income

Median HH 40,106 41,994

Individuals below poverty 9.5% 11.3%

Children <18 13.1% 16.2%

Children <5 16.6% 18.7%

U.S. Census Bureau. Census 2000    

Rank Rank Rank

United States… 1,589,856,242 United States… 5,424.22 United States… 1,406,039,800 United States… 4,797.08

1 California… 229,289,356 Alaska… 13,446.36 1 California… 203,814,714 Alaska… 12,293.68 1

2 New York… 136,520,762 Wyoming… 10,181.77 2 New York… 132,883,277 Wyoming… 7,107.06 2

3 Texas… 90,570,423 North Dakota… 8,220.21 3 Texas… 77,338,118 New York… 6,891.93 3

4 Ohio… 76,443,362 New York… 7,080.59 4 Florida… 59,943,442 Delaware… 6,491.52 4

5 Florida… 75,176,415 Vermont… 6,928.49 5 Ohio… 58,874,466 Vermont… 6,302.12 5

6 Pennsylvania… 69,212,674 Delaware… 6,864.88 6 Pennsylvania… 57,353,773 Hawaii… 6,225.15 6

7 Illinois… 61,255,138 Oregon… 6,819.47 7 Illinois… 53,429,176 Massachusetts… 5,994.31 7

8 Michigan… 57,461,347 Rhode Island… 6,727.96 8 Michigan… 52,684,622 Rhode Island… 5,913.52 8

9 New Jersey… 50,588,543 Ohio… 6,676.28 9 New Jersey… 46,455,897 New Mexico… 5,793.32 9

10 North Carolina… 44,371,161 Hawaii… 6,520.81 10 Massachusetts… 38,405,514 California… 5,686.48 10

States Ranked by Revenue and Expenditure Total Amount and Per Capita Total Amount: 2004

(Amounts are in thousands. Per capita amounts are in dollars)

Revenue Expenditure

Amount Per capita Amount Per capita

Revenue and expenditures…

…..Are Squarely in the Middle

Rank Rank Rank

United States… 1,589,856,242 United States… 5,424.22 United States… 1,406,039,800 United States… 4,797.08

1 California… 229,289,356 Alaska… 13,446.36 1 California… 203,814,714 Alaska… 12,293.68 1

2 New York… 136,520,762 Wyoming… 10,181.77 2 New York… 132,883,277 Wyoming… 7,107.06 2

3 Texas… 90,570,423 North Dakota… 8,220.21 3 Texas… 77,338,118 New York… 6,891.93 3

4 Ohio… 76,443,362 New York… 7,080.59 4 Florida… 59,943,442 Delaware… 6,491.52 4

5 Florida… 75,176,415 Vermont… 6,928.49 5 Ohio… 58,874,466 Vermont… 6,302.12 5

6 Pennsylvania… 69,212,674 Delaware… 6,864.88 6 Pennsylvania… 57,353,773 Hawaii… 6,225.15 6

7 Illinois… 61,255,138 Oregon… 6,819.47 7 Illinois… 53,429,176 Massachusetts… 5,994.31 7

8 Michigan… 57,461,347 Rhode Island… 6,727.96 8 Michigan… 52,684,622 Rhode Island… 5,913.52 8

9 New Jersey… 50,588,543 Ohio… 6,676.28 9 New Jersey… 46,455,897 New Mexico… 5,793.32 9

10 North Carolina… 44,371,161 Hawaii… 6,520.81 10 Massachusetts… 38,405,514 California… 5,686.48 10

11 Massachusetts… 41,615,765 Massachusetts… 6,495.36 11 North Carolina… 37,050,568 Minnesota… 5,656.60 11

12 Virginia… 35,739,829 West Virginia… 6,416.63 12 Georgia… 34,196,775 Connecticut… 5,579.73 12

13 Washington… 35,085,947 California… 6,397.23 13 Washington… 32,510,057 Maine… 5,568.11 13

14 Georgia… 34,814,306 Maine… 6,319.34 14 Virginia… 30,370,027 West Virginia… 5,449.10 14

15 Wisconsin… 34,753,272 Wisconsin… 6,314.18 15 Minnesota… 28,831,675 New Jersey… 5,348.98 15

16 Minnesota… 29,708,220 New Mexico… 6,205.85 16 Wisconsin… 28,577,240 Washington… 5,237.64 16

17 Maryland… 28,395,564 Montana… 5,881.00 17 Indiana… 25,373,330 Oregon… 5,232.02 17

18 Indiana… 26,917,365 Minnesota… 5,828.57 18 Maryland… 25,343,680 Michigan… 5,214.23 18

19 Missouri… 26,320,416 New Jersey… 5,824.82 19 Tennessee… 22,164,577 Wisconsin… 5,192.09 19

20 Oregon… 24,488,705 Michigan… 5,686.99 20 Missouri… 22,038,965 Ohio… 5,141.87 20

21 Tennessee… 23,920,818 Washington… 5,652.64 21 Arizona… 21,748,803 South Carolina… 5,104.28 21

22 Arizona… 23,753,397 Pennsylvania… 5,584.37 22 South Carolina… 21,427,748 Montana… 5,060.75 22

23 Louisiana… 23,730,239 Connecticut… 5,578.38 23 Louisiana… 20,471,959 North Dakota… 5,028.12 23

24 Colorado… 23,081,951 Utah… 5,439.01 24 Kentucky… 20,072,526 Mississippi… 4,939.75 24

25 Alabama… 21,568,441 Mississippi… 5,291.65 25 Alabama… 19,544,560 Kentucky… 4,846.10 25

26 South Carolina… 21,241,956 Louisiana… 5,265.20 26 Connecticut… 19,523,465 Pennsylvania… 4,627.54 26

27 Kentucky… 20,180,416 North Carolina… 5,195.69 27 Oregon… 18,788,196 Arkansas… 4,608.85 27

28 Connecticut… 19,518,768 Iowa… 5,178.31 28 Colorado… 18,060,533 Maryland… 4,557.40 28

29 Oklahoma… 17,520,326 Arkansas… 5,172.79 29 Oklahoma… 14,914,919 Iowa… 4,546.00 29

30 Mississippi… 15,351,077 Maryland… 5,106.20 30 Mississippi… 14,330,205 Louisiana… 4,542.26 30

Amount Per capita Amount Per capita

States Ranked by Revenue and Expenditure Total Amount and Per Capita Total Amount: 2004

(Amounts are in thousands. Per capita amounts are in dollars)

Revenue Expenditure

Not a High Tax State

Taxes Per Capita - Pennsylvania vs. US Average(Source: Issues PA)

 Tax  Tax Per Capita  PA Rank in US

  PA  US   

 Property $884.97 $969.26  29

 General Sales  $608.32  $774.33  36

 Individual Income  $771.34  $704.43  19

 Corporate Income  $97.20  $97.76  14

 Total Taxes  $3,051.88  $3,142.56  22

Spending is steady over time

State Spending Has Remained Constant In the Last 20 Years

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1987

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Tax Policy Principles: How to Evaluate Tax Reforms.

Fairness: Vertical and horizontal equity Base-broadening Adequacy Exportability Economic Development Impact Neutrality Simplicity

What’ wrong with our tax system?

State tax systems provide inadequate (or inequitable) revenues for K-12 education and other services

State taxes are regressive—requiring low-income taxpayers to pay the highest effective tax rate.

State tax bases are typically narrow, exempting certain transactions or income sources that arguably ought to be taxed—and endangering the state’s fiscal future.

Targeted corporate tax incentives distort economic decision-making and get in the way of free markets.

State taxes are outdated. Inability to tax services, Internet transactions.

Pennsylvania’s Tax System is Regressive

Building blocks of an unfair tax system: progressive, proportional, regressive taxes.

General Sales Taxes

—

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Low 20% 2nd 20% Mid 20% 4th 20% Nxt 15% Next 4% Top 1%

Personal Income Taxes

—

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Low 20% 2nd 20% Mid 20% 4th 20% Nxt 15% Next 4% Top 1%

Corporate Income Taxes

—

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

Low 20% 2nd 20% Mid 20% 4th 20% Nxt 15% Next 4% Top 1%

Property Taxes

—

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Low 20% 2nd 20% Mid 20% 4th 20% Nxt 15% Next 4% Top 1%

Ranking State Tax Unfairness: How Pennsylvania Stacks Up

Ratio of Burdens, 2000>300%: 8 states

200-300%: 3 states100-200%: 37 states

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A Low- Tax State? Pennsylvania Taxes As a Share of US Average, by Income Group

19th highest

38th 39th 37th

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42nd

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Ranking the States: Most Progressive to Least Progressive State Income Taxes in 2004

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Poorest 20% Top 1%

Poorest 20% Top 1%

Poorest 20% Top 1%

Poorest 20% Top 1%

$8,300 $682,000 $11,000 $1,447,000 $9,100 $897,200 $6,900 $448,000

7.3% 1.1% 7.2% 0.9% 6.0% 0.7% 7.3% 1.6%1.4% 0.9% 5.6% 1.5% 4.0% 1.2% 1.4% 1.5%

1.9% 2.7% -0.4% 5.6% 1.4% 2.5% 0.5% 5.5%0.0% 0.0% 0.0% 0.4% 0.0% 0.4% 0.1% 0.2%

10.6% 4.9% 12.5% 8.4% 11.4% 4.8% 9.3% 8.7%0.0% 0.0% 0.0% -2.5% 0.0% -1.3% 0.0% -2.1%

10.6% 3.8% 12.4% 5.9% 11.4% 3.5% 9.3% 6.5%2.79 2.10 3.26 1.43

Source: Institute on Taxation and Economic PolicyWho Pays: January, 2003

Four state tax comparisonState and Local Taxes in 2002

Alabama New Jersey Pennsylvania West Virginia

Shares of family income for non-elderly taxpayers

Percent of Income Paid in State and Local Taxes by State

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The Pennsylvania Income Tax:Not All It’s Cracked Up to Be

One of six states with a flat-rate taxTax base is reduced by complete exemption for retirement incomeLocal wage taxes hit salaries, but exempt unearned income (cap gains, dividends)Low-income tax forgiveness credit shields poor Pennsylvanians from tax.

Income Tax Reform Options

Other state income taxes have several desirable features that Pennsylvania lacks, including: Refundable low-income tax credits. (EITC) A meaningfully high top rate. (PA’s top rate is

second-lowest in the nation.) Equitable treatment of retirement income. Equalize tax treatment of investment income

(higher rate on capital gains, dividends, interest)

A graduated rate structure. Introduce personal exemptions

Federally deductible taxes are never as burdensome as they seem.

Taxing the Wealthy Fairly: Why Is It Important?

In 2006, top 1% of PA income distribution has average income of $1 million.

This group has 17% of all the income in the state. The poorest 40% put together have only 11% of

the income. The wealthiest 20% of Pennsylvanians have 55%

of the income statewide. In 2006, the wealthiest 1% are enjoying a huge

windfall from federal tax cuts enacted since 2001: average tax cut of $38,265.

Poorest 20% of Pennsylvanians see an average 2006 federal tax cut of $75.

Source: ITEP, 2006

Property taxes: a big concern

Less regressive than sales taxes Very unpopular (lump sum) Especially burdensome for those who are

“property rich” but “cash poor.” At the heart of school funding concerns Administrative concerns: local assessment

practices vary dramatically

Rethinking Property Tax Relief

Exemptions vs. “Circuit Breakers” Exemptions provide general tax relief—which means

they’re expensive and poorly targeted. Many states provide especially generous exemptions to

growing elderly population. Circuit breakers can be designed to give tax relief to

any population—elderly or nonelderly—at any income levels.

Since property taxes can be written off on federal tax forms, exemptions that are available to all homeowners “leak” in a way that circuit breakers don’t.

A third choice– caps on growth in assessed value. Very poorly targeted; has unintended consequences.

The Sales Tax

The most regressive major tax in PA 6% state rate, additional 1% in two counties Generally not deductible on federal income tax

returns– so a dollar paid by PA residents all ultimately comes out of their wallets.

The state exempts many goods (food, clothing, medicine) and services (haircuts, laundromats, utilities).

Services are growing as a share of consumption, while goods are declining.

Untaxed Internet-based transactions are eroding the tax base even further.

Corporate Taxes

Share of state revenue from corporate taxes is declining: Nationally and in Pennsylvania

Two Taxes: Profit-based tax. 9.99 percent tax rate. Capital Stock Franchise Tax. Based on a

combination of income and net worth.

Options: Close corporate income tax loopholes

73% pay no tax Another 23% pay less than $10,000

Recent State Tax Changes

34 states increased cigarette taxes Massachusetts repealed a capital gains break– and New

Mexico created one. “Millionaires tax” in NJ, CA, NC New Jersey, Oregon, Texas strengthened their

corporate taxes. Louisiana voters enacted a progressive tax swap. Other

states considered one. Dozens of states decoupled from federal estate tax and

accelerated depreciation provisions. Virginia (successful) pushed ambitious tax hike. Alabama increased personal exemptions to reduce tax

liability for low-income earners. NJ sales tax increase expanded tax base by including

new services

Tax Reform Strategies for Pennsylvania

Targeted property tax relief: low/middle-income and renters.

Income tax: higher top rate, low-income credits.

Sales tax: broader base, low rate? Corporate tax: close loopholes, enact

minimum tax. Recognize the difference between short-

term and long-term solutions: no quick fix.