Who Pays
Understanding the impact of taxes on the poor in
Pennsylvania
Sharon Ward
Pennsylvania Budget and Policy Center
July 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
12,281,054
281,421,906
Under 5
5.9%
6.8%
Over 65
15.6%
12.4%
White
85.4%
75.1%
African American
10.0%
12.3%
3.2%
12.5%
HS diploma
81.8%
80.4%
Over 25 BA
22.4%
24.4%
40,106
41,994
9.5%
11.3%
Children <18
13.1%
16.2%
Children <5
16.6%
18.7%
Population
Single race
Latino (1)
Education
Income
Median HH
Individuals below poverty
U.S. Census Bureau. Census 2000
Revenue and expenditures…
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
Rank
Amount
Expenditure
Rank
Per capita
United States…
1,589,856,242
United States…
1
California…
229,289,356
Alaska… 13,446.36
2
New York…
136,520,762
Wyoming… 10,181.77
3
Texas…
90,570,423
North Dakota…
4
Ohio…
76,443,362
5
Florida…
6
7
Amount
Rank
Per capita
United States…
1,406,039,800
1
California…
203,814,714
2
New York…
132,883,277
Wyoming…
7,107.06
2
8,220.21
3
Texas…
77,338,118
New York…
6,891.93
3
New York…
7,080.59
4
Florida…
59,943,442
Delaware…
6,491.52
4
75,176,415
Vermont…
6,928.49
5
Ohio…
58,874,466
Vermont…
6,302.12
5
Pennsylvania…
69,212,674
Delaware…
6,864.88
6
Pennsylvania…
57,353,773
Hawaii…
6,225.15
6
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
5,424.22
United States…
4,797.08
Alaska… 12,293.68
1
…..Are Squarely in the Middle
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
Rank
Amount
Expenditure
Rank
Per capita
United States…
Amount
Rank
Per capita
United States…
1,589,856,242
United States… 1,406,039,800
1
California…
229,289,356
Alaska… 13,446.36
1
California…
203,814,714
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
5,424.22
United States…
4,797.08
Alaska… 12,293.68
1
Not a High Tax State
Taxes Per Capita - Pennsylvania vs. US Average
(Source: Issues PA)
Tax
Tax Per Capita
PA
PA Rank in US
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
Fiscal Year
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
General Fund Appropriations as % of PA Personal
Income
Spending is steady over time
State Spending Has Remained Constant In the Last 20 Years
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
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.
Personal Income Taxes
General Sales Taxes
5.0%
4.0%
4.5%
3.5%
4.0%
3.0%
3.5%
2.5%
3.0%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
—
—
Low 20%
2nd 20%
Mid 20%
4th 20%
Nxt 15%
Next 4%
Top 1%
Low 20%
Property Taxes
2nd 20%
Mid 20%
4th 20%
Nxt 15%
Next 4%
Top 1%
Corporate Income Taxes
3.5%
0.45%
0.40%
3.0%
0.35%
2.5%
0.30%
2.0%
0.25%
0.20%
1.5%
0.15%
1.0%
0.10%
0.5%
0.05%
—
—
Low 20%
2nd 20%
Mid 20%
4th 20%
Nxt 15%
Next 4%
Top 1%
Low 20%
2nd 20%
Mid 20%
4th 20%
Nxt 15%
Next 4%
Top 1%
3
0
Washington
Florida
South Dakota
Wyoming
Nevada
Tennessee
New Hampshire
Texas
Pennsylvania
Illinois
Alabama
Michigan
Louisiana
Arizona
Indiana
Colorado
Connecticut
Georgia
North Dakota
Hawaii
Oklahoma
Rhode Island
Utah
New Jersey
Mississippi
Kansas
New Mexico
New York
Alaska
Arkansas
Massachusetts
Missouri
Iowa
Virginia
Wisconsin
Kentucky
Maryland
North Carolina
Nebraska
Ohio
Minnesota
Idaho
West Virginia
California
Oregon
Vermont
Maine
South Carolina
District of Columbia
Montana
Delaware
Ranking State Tax Unfairness: How Pennsylvania Stacks Up
6
5
4
Ratio of Burdens, 2000
>300%: 8 states
200-300%: 3 states
100-200%: 37 states
<1: 3 states
2
1
A Low- Tax State? Pennsylvania Taxes As a
Share of US Average, by Income Group
5%
—
–5%
19th
highest
39th
37th
38th
–10%
38th
–15%
–20%
40th
–25%
–30%
42nd
–35%
–40%
Low 20 2nd 20 Mid 20 4th 20 Next 15 Next 4
Top 1
California
DC
Vermont
New York
Maine
New Mexico
Nebraska
Idaho
New Jersey
Minnesota
Ohio
Rhode Island
Kansas
North Carolina
Arkansas
Oregon
West Virginia
South Carolina
Oklahoma
Montana
Delaware
Missouri
Connecticut
Kentucky
Wisconsin
Utah
Mississippi
Iowa
Georgia
Hawaii
Massachusetts
Arizona
Virginia
Louisiana
North Dakota
Colorado
Maryland
Michigan
Illinois
Pennsylvania
Indiana
Alabama
Ranking the States: Most Progressive to Least Progressive State
Income Taxes in 2004
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Four state tax comparison
State and Local Taxes in 2002
Shares of family income for non-elderly taxpayers
Alabama
Poorest
20%
Top 1%
$8,300 $682,000
New Jersey
Pennsylvania
West Virginia
Poorest
Poorest
Poorest
20%
Top 1%
20%
Top 1%
20%
Top 1%
$11,000 $1,447,000 $9,100 $897,200 $6,900 $448,000
7.3%
1.4%
1.1%
0.9%
7.2%
5.6%
0.9%
1.5%
6.0%
4.0%
0.7%
1.2%
7.3%
1.4%
1.6%
1.5%
1.9%
0.0%
2.7%
0.0%
-0.4%
0.0%
5.6%
0.4%
1.4%
0.0%
2.5%
0.4%
0.5%
0.1%
5.5%
0.2%
10.6%
0.0%
10.6%
2.79
4.9%
0.0%
3.8%
12.5%
0.0%
12.4%
2.10
8.4%
-2.5%
5.9%
11.4%
0.0%
11.4%
3.26
4.8%
-1.3%
3.5%
9.3%
0.0%
9.3%
1.43
8.7%
-2.1%
6.5%
Institute on Taxation and Economic Policy
ys: January, 2003
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
Poorest 20%
ia
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in
W
es
tV
an
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ylv
Pe
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s
Je
rs
ey
Ne
w
ab
am
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Top 1%
Al
Percent of family income
Percent of Income Paid in State and Local Taxes
by State
The Pennsylvania Income Tax:
Not All It’s Cracked Up to Be
One of six states with a flat-rate tax
Tax base is reduced by complete
exemption for retirement income
Local 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/middleincome 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 shortterm and long-term solutions: no quick
fix.