By Nathan Benefield
After nearly five months of gridlock, a new state budget framework has been announced. The plan would raise the sales tax rate to the second-highest in the nation while promising property tax relief for homeowners in return.
At this point, it’s tempting to call any progress on budget agreement a victory, but is this tentative framework truly a “win” for Pennsylvanians?
Let’s start with the good: It appears taxpayers will be spared a personal income tax hike. A spike in utility bills caused by a new severance tax is also off the table. Additionally, Governor Wolf’s plan to expand the sales tax to 45 items like nursing homes, day care, funerals, and college textbooks has reportedly been dropped.
That’s great news, given Pennsylvanians already face the 10th-highest tax burden in the nation, but not everything is so rosy.
Under this budget plan, Pennsylvania would see the first sales tax hike in nearly 50 years and would have the second-highest rate in America. At 7.25 percent, the new rate would be 21 percent higher than the state’s current 6 percent rate.
It gets even worse for Pittsburgh residents who would pay a crushing 8.25 percent, and Philadelphia’s sales tax would spike to 9.25 percent. Delaware retailers, which benefit from no sales tax, should cheer, but business in the Keystone State would suffer.
The sales tax hike would collect about $2.1 billion more from consumers, while providing only $1.5 billion in property tax relief.
What about the leftover money? It will be used to replace $600 million in gambling funds formerly allocated to property tax relief that would now be redirected to additional spending.
Most homeowners would benefit from this tax shift, but businesses—which pay an estimated 40 percent of all sales taxes—and renters would lose. They would pay the higher sales tax but see no reduction in property taxes or rents under the current proposal.
In one sense, progress has been made. Wolf’s initial budget proposal in March called for the largest tax increase in the nation, costing an astonishing $1,400 per Pennsylvania family of four. While this sales tax is far lower, taxpayers should be asking what they’ll get in return for any increase.
Much is still being worked out behind the scenes, and there’s still an opportunity to act on crucial issues like pension reform, liquor privatization, and corporate welfare reform.
First, true liquor privatization—allowing private retailers to sell wine and spirits and ending the government monopoly over distribution—must be part of any deal. This would give consumers greater selection and convenience, generate recurring revenue, and end the state’s conflict of interest as both alcohol salesman and liquor law enforcer.
Though Wolf vetoed privatization this summer, Pennsylvanians still strongly support the measure because it makes fiscal sense and common sense.
In any serious discussion of property tax relief, lawmakers must first address the primary cause of property tax increases: unsustainable public pension costs. Only by moving to a defined-contribution plan, like a 401(k), will we stop the bleeding and end the political manipulation that created a $53 billion unfunded pension debt.
Moreover, any property tax shift should include strict controls over future school tax increases. Pennsylvania ranks near the top on education spending, while residents face some of the highest property taxes. To give taxpayers more control, lawmakers should give voters the chance to approve any school tax increase—a right residents of other states, like our neighbors in Ohio, already have.
For anyone looking to cut budget waste, this one’s hard to miss: Pennsylvania hands out nearly $700 million in corporate welfare subsidies through grant and loan programs. These subsidies provide businesses an unfair advantage at taxpayer expense and should be eliminated.
Finally, any budget agreement should include a long-term pledge that government will not recklessly overspend our hard-earned dollars. The Taxpayer Protection Act, supported by 64 percent of Pennsylvania voters according to a recent poll, would limit spending growth to the rate of inflation plus population growth.
Pennsylvanians need a state budget, but they don’t want promises of relief that hide higher taxes. Before we ask taxpayers for more, the governor and lawmakers should ensure tax dollars are spent well. True reforms that will set our state—and our families—on the path toward lasting prosperity should be part of any budget deal.
Nathan A. Benefield is vice president of policy analysis for the Commonwealth Foundation
Sales Tax Hike Problem For Pa.