Pa. income tax plan raising $6.2B in revenue gets hearing

HARRISBURG — A new plan that raises $6.2 billion in revenue through a shift in income tax rates for Pennsylvania residents and businesses alike got its first hearing Friday.

House Bill 1773 proposes cutting wage and interest taxes by roughly one-third and nearly doubling the rate for passive income like lottery and gambling winnings, net profits, dividends and gains from rents, royalties, patents, copyrights and those derived through estates and trusts.

Supporters, including the five Democrats who sponsored the bill, say doing so will redistribute the burden so that Pennsylvania’s “most financially vulnerable citizens” will no longer struggle underneath the weight of a “longstanding regressive income tax.”

Rep. Chris Rabb, D-Philadelphia, said during the House Finance Subcommittee on Tax Modernization and Reform hearing that he’s introduced similar bills four times to no avail. He admonished his Republican colleagues for not participating in the discussion about the bill, even though he clarified it’s a starting point and not a final product.

According to the Pennsylvania Budget Policy Center’s 2019 analysis, the bottom 60% of income earners spend nearly twice as much of their income paying taxes as their wealthier counterparts.

Critics, however, note that a 12% tax rate on passive income — up from 6.5% — includes small business owners that employ 2.2 million workers.

The Pennsylvania Chamber of Business and Industry said holding the hearing “sends a chilling message to anyone looking to grow or start a business here.”

Lawmakers on both sides of the aisle worry about the economic pressure cooker Pennsylvania has become. As a shrinking workforce struggles to support a swelling retirement population — known colloquially as the “silver tsunami”— the state’s tax revenues will plummet, digging a budget deficit too deep to fill without steep service cuts and rate raises.

Overall, Pennsylvania’s total tax burden has gotten worse relative to other states, keeping residents more tax-burdened than the average American.

A report released last month from the Independent Fiscal Office found that Pennsylvania’s total taxes per capita ranked 19th overall at $6,710.

While Pennsylvania fares better than New York, New Jersey, Maryland, and Delaware, it lags behind Ohio and West Virginia in total state and local taxes per capita.

The majority of taxes hit residents in the form of income and property taxes at 26.8% and 25%, respectively. Sales and use taxes are third at 19.2%. That mix is close to the national tax burden average; property taxes are 27% of the tax mix, followed by income taxes (26%) and sales and use taxes (24%).

For most taxes, Pennsylvania was in the top half of the national average; its lowest tax was its sales and use tax, ranked 36th nationally.