Are Pennsylvania's Taxes Uncompetitive?
Everybody’s talking about cutting taxes lately, not only in Washington, but in Harrisburg. Some legislators are talking about cutting the state’s personal income tax, while others want to increase the income tax or the sales tax in order to cut local property taxes. And with the state running a surplus again, many hope Governor Rendell will include tax cuts in his budget proposal this week.
Which of the state's taxes are really too high? And how much of a tax cut is enough? One of the problems legislators have is that once you start proposing to cut taxes, where do you stop?
Eliminating taxes isn't realistic, so there needs to be some way to define what level of taxes is reasonable. One good way to do that is set a goal of making tax rates competitive with other states. While it would be nice to have lower taxes than other places, we should at least try to avoid being higher, particularly a lot higher.
So how do Pennsylvania's taxes stack up?
Pennsylvania’s least competitive state tax by far is the corporate net income tax. At 9.99%, Pennsylvania has the second highest corporate tax rate in the country (only Iowa is higher at 12%). That hasn’t always been true – in 1990, Pennsylvania’s corporate tax was only the 16th highest. But since then, while 13 states decreased their corporate tax rates, Pennsylvania was one of only 10 states to increase its rate (from 8.5% to 9.99%), and Pennsylvania’s increase was the largest of any of the high-tax states. Not only does Pennsylvania have a high corporate income tax rate, but it also is one of only two states that caps the amount of net operating loss carryforwards (the other is New Hampshire), so for many businesses, including startup firms, Pennsylvania has the worst corporate income tax in the country.
The state’s most competitive tax is the personal income tax. Although many people think the tax needs to be cut because it is so much higher today (at 3.07%) than in the past (it was only 2.1% in 1990), Pennsylvania’s personal income tax rate is still lower than in most states. Seven states have no personal income tax at all, and two only tax dividends and interest. But among the remaining 41 states, Pennsylvania has the second lowest rate after Illinois (which has a 3% rate).
Other states with higher personal income tax rates allow deductions and exemptions that Pennsylvania don't, or they have a graduated tax (which Pennsylvania's Constitution does not allow), and that lowers their effective income tax rate compared to Pennsylvania. But even so, it appears that on balance, Pennsylvania’s personal income tax is lower than the majority of states. That’s good news not only for individuals, but also many small businesses, since subchapter S firms pay the personal income tax instead of the corporate tax.
The sales tax is more complex to evaluate. The majority of states (28) have no sales tax at all or a lower sales tax rate than Pennsylvania’s 6% rate. But many of those states apply the tax to items such as food and clothing, making their effective tax rate higher for many taxpayers, particularly low-income families. (Also, the precise sales tax exemptions in a state, such as whether certain business services are taxed, can make a dramatic difference in the state's competitiveness for particular businesses.) And many states also have city or county sales taxes that boost the total tax rate well above Pennsylvania’s 6% rate or even the 7% rate in Pittsburgh and Philadelphia. Overall, the sales tax in Pennsylvania appears to be better than average in terms of competitiveness.
What about the local property tax? Property tax competitiveness is also challenging to evaluate, because of the wide variation in home values across the country. For example, the median amount of property taxes paid by homeowners in Pennsylvania in 2006 was $2,057, 15th highest in the country. In New York, the median amount was $3,301, which is over 60% more. But New York’s median home value was more than double Pennsylvania’s, so relative to home value, New York’s property taxes are actually 23% lower than Pennsylvania’s. In fact, Pennsylvania has the 9th highest local property taxes as a percentage of home value of any state, and the 11th highest property taxes as a percentage of homeowners’ income. (The Pittsburgh region ranks worse on one measure of property tax competitiveness and better on another than the eastern part of Pennsylvania -- see the previous post for more information on how the Pittsburgh Region, rather than the state as a whole, stacks up on property taxes.)
So Pennsylvania's property taxes are clearly uncompetitive and need to be reduced. But to make the state more competitive, the highest priority has to be cutting the corporate net income tax rate. It’s not a coincidence that Pennsylvania has both the second highest business tax and the 14th lowest rate of job growth of any state in the country. Improving the state’s business climate will help attract new jobs, which in turn will boost revenues in all of the state’s taxes, making it easier to cut property taxes while keeping other taxes competitive.
Which of the state's taxes are really too high? And how much of a tax cut is enough? One of the problems legislators have is that once you start proposing to cut taxes, where do you stop?
Eliminating taxes isn't realistic, so there needs to be some way to define what level of taxes is reasonable. One good way to do that is set a goal of making tax rates competitive with other states. While it would be nice to have lower taxes than other places, we should at least try to avoid being higher, particularly a lot higher.
So how do Pennsylvania's taxes stack up?
Pennsylvania’s least competitive state tax by far is the corporate net income tax. At 9.99%, Pennsylvania has the second highest corporate tax rate in the country (only Iowa is higher at 12%). That hasn’t always been true – in 1990, Pennsylvania’s corporate tax was only the 16th highest. But since then, while 13 states decreased their corporate tax rates, Pennsylvania was one of only 10 states to increase its rate (from 8.5% to 9.99%), and Pennsylvania’s increase was the largest of any of the high-tax states. Not only does Pennsylvania have a high corporate income tax rate, but it also is one of only two states that caps the amount of net operating loss carryforwards (the other is New Hampshire), so for many businesses, including startup firms, Pennsylvania has the worst corporate income tax in the country.
The state’s most competitive tax is the personal income tax. Although many people think the tax needs to be cut because it is so much higher today (at 3.07%) than in the past (it was only 2.1% in 1990), Pennsylvania’s personal income tax rate is still lower than in most states. Seven states have no personal income tax at all, and two only tax dividends and interest. But among the remaining 41 states, Pennsylvania has the second lowest rate after Illinois (which has a 3% rate).
Other states with higher personal income tax rates allow deductions and exemptions that Pennsylvania don't, or they have a graduated tax (which Pennsylvania's Constitution does not allow), and that lowers their effective income tax rate compared to Pennsylvania. But even so, it appears that on balance, Pennsylvania’s personal income tax is lower than the majority of states. That’s good news not only for individuals, but also many small businesses, since subchapter S firms pay the personal income tax instead of the corporate tax.
The sales tax is more complex to evaluate. The majority of states (28) have no sales tax at all or a lower sales tax rate than Pennsylvania’s 6% rate. But many of those states apply the tax to items such as food and clothing, making their effective tax rate higher for many taxpayers, particularly low-income families. (Also, the precise sales tax exemptions in a state, such as whether certain business services are taxed, can make a dramatic difference in the state's competitiveness for particular businesses.) And many states also have city or county sales taxes that boost the total tax rate well above Pennsylvania’s 6% rate or even the 7% rate in Pittsburgh and Philadelphia. Overall, the sales tax in Pennsylvania appears to be better than average in terms of competitiveness.
What about the local property tax? Property tax competitiveness is also challenging to evaluate, because of the wide variation in home values across the country. For example, the median amount of property taxes paid by homeowners in Pennsylvania in 2006 was $2,057, 15th highest in the country. In New York, the median amount was $3,301, which is over 60% more. But New York’s median home value was more than double Pennsylvania’s, so relative to home value, New York’s property taxes are actually 23% lower than Pennsylvania’s. In fact, Pennsylvania has the 9th highest local property taxes as a percentage of home value of any state, and the 11th highest property taxes as a percentage of homeowners’ income. (The Pittsburgh region ranks worse on one measure of property tax competitiveness and better on another than the eastern part of Pennsylvania -- see the previous post for more information on how the Pittsburgh Region, rather than the state as a whole, stacks up on property taxes.)
So Pennsylvania's property taxes are clearly uncompetitive and need to be reduced. But to make the state more competitive, the highest priority has to be cutting the corporate net income tax rate. It’s not a coincidence that Pennsylvania has both the second highest business tax and the 14th lowest rate of job growth of any state in the country. Improving the state’s business climate will help attract new jobs, which in turn will boost revenues in all of the state’s taxes, making it easier to cut property taxes while keeping other taxes competitive.
posted by Harold D. Miller at 9:22 AM
4 Comments:
It's hard to get to the meat of your post when one has to read the statement "Eliminating taxes isn't realistic". Huh? Why isn't it realistic?
You are setting up a false argument, and cannot possibly address the problem inherent with the neccesity of a certain amount of taxation.
When those who inflict the taxes that we have to pay are, on average, people who have very little if any experience in the real world of business, odds are business and subsequently people are going to be worse off in the long run.
If you want to give people a feel for what taxes cause, take a tax, and show how consumers and businesses reacted to that tax. Explain, with real world examples how people are affected.
When you write “Pennsylvania has the worst corporate income tax in the country.”, what does that mean? Show how a tax led to a business moving or worse, went out of business. Explain how jobs were lost, and those same people who lost their jobs having to pay higher adn higher prices for other taxed and overregulated products and services.
Sure, there must be a certain amount of taxation for govt. to run. But let’s talk about real world issues that West View boys like me can understand and draw conclusions from.
Competitive taxation is an academic exercise at best, and propaganda at worst. It means to this poster that we have essentially given into endless govt. growth and the govt. knowing best attitude, even if that govt. has barely if any experience to base their confiscation of the fruits of our labor.
D. Jansen
I do support we need a reduction in tax rates in pittsburg. I hope who ever wins in this election 2008 sees this blog to understand what we voters really want.
You are forgetting the fact that many areas have local income taxes as well. Most other states do not have these. So the "favorable" state income tax isn't that favorable at all.
Also, the property taxes in PA are absurd. Talk about a disincentive to own property....
Actually, I'm not forgetting about local income taxes at all. Even if you add in the 1% local earned income tax that exists in a lot of municipalities/school districts in PA, the total income tax rate in Pennsylvania is still below most other states. Also, the local taxes in Pennsylvania are earned income taxes, not total income taxes, so the effective rate is lower for a lot of people.
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