Our Current Budget is Holding Us Back
Our state’s budget is holding Pennsylvanians back. The state does not spend adequate to the needs of Pennsylvanians and yet Pennsylvanians of low- and middle income bear a considerable tax burden. Meanwhile, the state budget contains a structural deficit of at least $1 billion! As a consequence, Pennsylvanians have a state government that is both ineffective and in precarious financial health.
We can do better. We have to do better.
Our state needs to spend at a level adequate to the needs of Pennsylvanians and it needs to deal with its structural deficit. We can do both by raising new sources of revenue and reducing government waste so we can stretch public funds further. I think it is very important that we raise new revenue without increasing the tax burden on middle- and low income Pennsylvanians and seniors on fixed income. It is also important that we reduce government waste without also reducing services to Pennsylvanians.
In what follows I offer five initial suggestions for how to raise revenue WITHOUT raising taxes on low- and middle-income Pennsylvanians:
Closing the Delaware Loophole
Enacting a reasonable severance tax on natural gas extraction
Legalizing recreational marijuana
Taxing wealth* (as defined below) at 4%
Raising Pennsylvania’s minimum wage
What follows is not -- and cannot be – an exhaustive policy statement on how to raise additional revenue. Instead I offer some ideas for raising state revenue that I will bring to Harrisburg as the State Representative for the 97th District. These five ideas taken together would raise $1.89 billion a year and would allow us to deal with the structural deficit and begin investing in priorities like education, infrastructure, and paying down our looming pension debt faster.
Why We Need Additional Revenue
I would like to explain why I think we need to raise new revenue at all. In short, it it because we are in such deep debt that we cannot CUT our way out of it.
Since the 2010 election, our state House of Representatives has been largely controlled by a circle of so-called “fiscal conservatives” who have prescribed the same medicine no matter the time and season: austerity. Their answer to seemingly every problem is to lower expectations and “tighten belts.” In the wake of our country’s 2008 economic crisis, we had to cut spending. In 2011, for instance, our state cut K-12 education funding by a drastic 17%! Ten years later and after a historic 9-year bull-market run, the advocates of austerity have kept singing the same song. After passing the 2018-19 budget in these high economic times, they returned home elated to tell their constituents that they had yet again kept spending below the rate of inflation.
But what they overlook is that that our population is growing and so is our state economy. They choose to ignore the fact that our population is also aging and new and different needs are emerging as a result. Accepting on faith that economic growth means a reduction of needs, they don’t pay attention to the needs that emerge WITH a growing economy. They choose to ignore, for instance, that we need more Pennsylvanians with post-secondary schooling to fill the new jobs created by our changing economy. They overlook that the school-aged populations of communities like Manheim Township are growing rapidly and that local taxpayers are chafing under the increased expense this involves. They ignore the fact that yesterday’s infrastructure has aged and is now insufficient. They ignore the fact that by not contributing to the Rainy Day Fund for a decade, we have left ourselves unprepared for the next economic crisis. They ignore the fact that climate change is upon us and we need our government to encourage the transition to renewable energy.
In my view, the point of the Commonwealth is to serve the people of Pennsylvania and empower them to live lives of dignity and self-determination. We don’t need big government. We need good government. What responsible person tells their children and elderly parents “to make due with less” when they need something? What responsible person does not plan for the future by paying off their debts and putting something away in case a storm comes?
Our state’s investments are not keeping pace with the needs of our people or our state’s economic growth. Those who counsel continual austerity have gotten their way -- for years. Unfortunately, not all problems can be addressed this way.
five Ideas for Raising Revenue
#1. We must close the Delaware Loophole that allows corporations operating in Pennsylvania to shelter taxable assets in holding companies just over the border. The loophole allows companies to avoid paying our state’s corporate income tax.
We can enforce our existing laws and increase our state revenue by closing the Delaware Loophole. We can do this, as our neighboring states have already done, by mandating combined reporting. Republicans in Harrisburg often complain that our state tax on corporate income is too high at 9.9%. Very well, let’s take the painfully obvious step of closing the Delaware Loophole so that our effective tax rate on corporate income is higher and then we can lower the official tax rate.
The Pennsylvania Department of Revenue recently analyzed a plan to close the Delaware Loophole while reducing our tax on corporate profits to 7.9%. The department’s analysis was that this proposal would generate $330 million in new state revenue. Notice that such a proposal would increase state revenue significantly without increasing the tax burden on working Pennsylvanians. Let’s do it.
#2. We need to impose a severance tax on natural gas extraction of somewhere between 2% and 3.5%. Such a tax would not -- when combined with the existing Impact Fee -- impose a burden on the natural gas industry any higher than what the industry faces in other energy-producing states. I bother to point this out since the energy lobby has spent a lot of money in Pennsylvania (an estimated $60 million) to try to spook legislators and voters in Pennsylvania into believing that imposing such a severance tax would force companies to leave the state. This is not the case. They will not leave. The industry is simply trying to protect its profits, and we should neither be surprised nor swayed by its efforts.
It is important that we add a severance tax because it is a tax on volume and we can expect that natural gas production will increase in the next few years as several pipelines come online that connect the Marcellus Shale to the global market. (By the way, this is another very good reason that the Natural Gas Industry is not leaving Pennsylvania!)
Without a severance tax, we are leaving vital funds on the table while our state’s resources are shipped abroad. A severance tax in the range I propose would yield at least $250 million a year and more if and when natural gas production increases. Once again, this is a way to raise revenue to eliminate the structural deficit or to spend on priorities like environmental protection (which would be appropriate!) without increasing the tax burden on working Pennsylvanians.
#3 I think we should consider legalizing recreational marijuana considering the significant revenue that states like Colorado have raised by doing the same. There is a big upside and some downside to legalizing recreational marijuana, but given that our state legislators have proven willing to take all the revenue they can that is generated by alcohol and tobacco sales as well as gambling, I think we should have a serious discussion about legalizing and taxing marijuana in the General Assembly. I want to be part of that conversation. The Pennsylvania Auditor General recently estimated that a reasonable tax on sales of marijuana would generate $500 million a year. Notice that this is, once again, a way to raise revenue to plug the deficit that does not increase taxes on working Pennsylvanians or seniors on fixed income. So let’s discuss whether Pennsylvania should move in this direction.
Notice that proposals 1-3 alone would address our state’s troublesome structural deficit WITHOUT raising personal taxes on working Pennsylvanians and seniors.
#4 I think we should return to consider a proposal that has been brought forward to tax wealth at a modest rate. In Pennsylvania we do not have a progressive income tax that taxes in proportion to the means of the taxpayer. We are one of only a few states that has a flat income tax (of 3.07%). For this reason, our state’s system of taxation has been called one of the most regressive in the country in the sense that people of lower income pay a much higher proportion of what they have in income and sales taxes than do wealthy people. A tax on wealth would not include wages, the money one receives from public or private pensions of any kind, or owning property.
Rather wealth would be defined as income from dividends, capital gains, net income from rents, royalties, patents, copyrights, gambling and lottery winnings, and income from estates and trusts. If we taxed wealth defined in this way at 4% the Pennsylvania Budget and Policy Center estimates that we could raise more than $750 million a year, with the bottom 2/3 of Pennsylvania’s households paying no new taxes and with the top 1% of households – those making $463,000 or more a year – paying $5300 more per year on average. This proposal would help make our state tax system less regressive and it would also go a long way toward funding long-neglected priorities like higher education and rebuilding our infrastructure without increasing taxes on low- and middle-income Pennsylvanians who cannot afford to pay.
A tax on wealth is a much better idea, in my view, than increasing either the income- or sales tax as some proponents of eliminating property taxes have recently suggested. This is because raising income- and sales tax will impact ALL Pennsylvanians and make our tax system more regressive by burdening low- and middle-income Pennsylvanians more than they already are. Moreover, we cannot change our income tax rate without amending the State Constitution, which is very difficult to do. A tax on wealth would not have to clear this hurdle and would do much to boost state revenue while reducing the regressiveness of our state system of taxation.
#5 I support raising the state minimum wage to $12 with some exceptions to protect farmers and those who work for tips. This is a revenue-raising idea because it would impact many Pennsylvanians by helping to lift them out of poverty, thereby increasing how much they end up paying in state sales- and income tax and reducing the demands they make on public assistance programs. Raising the minimum wage would be very impactful for many Pennsylvanians. For while only 49,000 Pennsylvanians earn the current $7.25, about a million Pennsylvanians make less than $12 an hour.
When it comes to the minimum wage, we are either leaving it flat and thus allowing it to diminish against the rate of inflation, or we are preserving the very idea of minimum wage by increasing it along with inflation. Our current rate of $7.25 is the federal minimum wage, a wage lower than that mandated by neighboring states. By leaving our minimum wage at the federal rate, we are impoverishing Pennsylvanians in order to allow employers to create low-paying jobs. A full-time worker making $7.25 an hour grosses about $15,000 a year. That is entirely inadequate.
The federal minimum wage in 1968 was $1.60/hour. Today it is $7.25 but adjusted for inflation that $7.25/hour would be worth $1.00/hour in 1968! Conversely, if we adjusted for inflation that $1.60 in 1968, it would be about $11.84, or just under the $12 an hour that Governor Wolf recently has proposed.
So there is good reason to increase the minimum wage significantly today. But how much revenue would raising the minimum wage to $12 an hour produce? According to Pennsylvania’s Independent Fiscal Office, it would result in about $60 million in new state revenue.
How much can we raise and what would it do?
The five ideas I have discussed above would raise $1.89 billion in new revenue to deal with our state deficit and increase investment in key priorities. Importantly, none of these new ideas would raise personal taxes on low- and middle-income Pennsylvanians and seniors on fixed income. We can work our way out of our current budgetary problems. But doing so will require fresh ideas and a willingness to try to raise money rather than simply relying on cutting a state government already throttled by years of austerity.
Send me to Harrisburg to turn our state’s finances around.