HARRISBURG (TNS) — High-income people in Pennsylvania — and especially those with annual incomes greater than $1 million — pay a significantly lower effective tax rate than people in lower income groups, according to new data from the state Independent Fiscal Office.
The IFO used a used a “tax incidence model” — taking into account income, property, sales, consumption, lottery and many other taxes — to figure out what percentage of income people in six different income ranges pay in taxes. Based on 2022 data, the rate for people with incomes of $50,000 or less was $10.7%; for those with income of $100,000 to $200,000, 10.1%; and for those with income of $1,000,000 or more, 6.9%.
The IFO found Pennsylvania’s tax system to be “moderately regressive,” which isn’t news to those who study Pennsylvania finances. Multiple reports have produced similar results in the past.
Early in 2024, Pennsylvania’s state and local tax system was ranked as the fourth most regressive in the nation in a report from the Washington, D.C.-based Institute on Taxation and Economic Policy.
But the new IFO work may have extra relevance since the state Legislature starts meeting next week in a new, two-year voting session.
While it is unknown whether lawmakers and Gov. Josh Shapiro will tinker with the tax system, it is clear the state’s financial picture is not as rosy as it was a year ago. A previous IFO report indicated Pennsylvania has a $3 billion-plus operating deficit this year, although it has been largely masked by the big financial cushion that existed at the start of the year.
Stephen Herzenberg, executive director of the Keystone Research Center, said the IFO’s work — while limited to Pennsylvania — fit in with the national report. The takeaway on taxes, he said, is that Pennsylvania’s system “is not simply ‘upside down,’ it is one of the most regressive in the country.”
Herzenberg said lawmakers face a tighter fiscal climate, and they must continue addressing a landmark court decision on fair funding of public schools. “You need more revenue, but because we have an unfair tax system, you would need to get more revenue in a fair way,” Mr. Herzenberg said.
Nathan Benefield, chief policy officer for the Commonwealth Foundation, said the system in Pennsylvania has “major flaws” that he described as “things that have been driven by politics, rather than by sound economics.”
Benefield said history shows that when money is tight, state lawmakers often turn to taxes that hit lower-income levels harder. Those include gambling and cigarette taxes.
“A lot of it is driven by which political groups have the least clout and which groups have the most,” he said.
Among the findings on certain types of taxes, the IFO found:
State and local income taxes, which make up 30% of total taxes, have an effective tax rate that is similar across nearly all income groups, ranging from 3.1% to 3.6%. The exception is the 0-to-$50,000 income group, which has a rate of 2.3% in part because retirement income and government benefits like SNAP and housing vouchers are exempt from taxes.
Property taxes have an effective tax rate of 2.5% or higher for all groups with incomes of $200,000 or less. For those with incomes of $1 million or more, though, the effective tax rate is 0.6%. That means people with an income of $1 million or more generally pay a much smaller share of that income in property taxes than the share paid for property taxes by those with lower incomes.
On the other hand, people with incomes of $1 million or more have an effective tax rate of 1.0% in inheritance taxes, while the rate is near zero for all people with incomes of $200,000 or less.
Herzenberg said the state should adopt a form of a “fair share” tax approach that Democrats in Harrisburg have proposed repeatedly. In general, the approach puts one tax rate on wages and salaries, and another — and likely higher — rate on other forms of income including dividends, capital gains, royalties, and rents among other things.
“There are types of income that go mostly to rich people, while wages and salaries go mostly to everybody,” Herzenberg said. “We think the state has the legal authority to charge different rates.”
Benefield said things could be improved by lowering the sales tax rate but broadening the list of items that are subject to it. Items that are not subject to sales tax now include advertising, legal services, and dry cleaning. Even the purchase of a helicopter in Pennsylvania is not subject to the sales tax, he said.
“All those things have been carved out over many decades,” he said.
Pushback, he acknowledged, would be significant. Benefield said, “There is so much political opposition to taking an industry that hasn’t been taxed, and taxing it.”
