Lawmakers kicked off budget hearings Tuesday as the Pennsylvania state government faces a multibillion-dollar revenue gap — a hangover from the ongoing coronavirus pandemic — and Gov. Tom Wolf's proposal to raise the state income tax takes center stage.
Democrats defended Wolf's proposal, which is structured to shift the burden to higher earners, at the first House Appropriations Committee hearing, saying it would cut taxes for lower-income workers in a state with one of the most regressive tax structures.
In addition, they said federal aid, if it comes, will not fix the state's long-term deficit while Wolf’s proposal would also fairly fund public schools and open the door to school property tax cuts in some districts.
Republicans, who control the Legislature, questioned whether Wolf's income tax proposal — designed to lower taxes on lower-income households and raise them on higher-income households — is constitutional under case law that interprets the state constitution to require a flat income tax rate, rather than a graduated rate.
One Republican, Rep. Natalie Mihalek of Allegheny County, suggested it was time to look at raising the tax-forgiveness exemption, a key element of Wolf's income tax plan.
But many other Republicans signaled opposition to raising the tax at all, warning that it will hurt people still hurting from the pandemic. One, Rep. Jonathan Fritz, R-Wayne, said that some people who qualify for 100% tax forgiveness wouldn't actually file the form necessary to receive the refund and would get hit with the increase anyway.
Others said Wolf's proposal won't do anything to cut school property taxes or help the poor.
“I think that it's time to change the approach from higher taxes to actually getting out there and doing something that does help those who are poor who have children who are living below the poverty line, and there are lot of things we can do, but a tax increase isn’t one of them," House Appropriations Committee Chairman Stan Saylor, R-York, told Wolf's revenue secretary, Daniel Hassell.
Under the plan for the fiscal year beginning July 1, Wolf, a Democrat, is asking for what his administration calls a $4 billion, full-year income tax increase, or about 25% more.
Some of the money, $1.3 billion, would provide a big boost in aid to public schools, or about 20%. The rest would help fill the deficit, estimated at $2.5 billion by the Independent Fiscal Office, a legislative agency.
Under Wolf's plan, Pennsylvania's flat income tax rate would rise from 3.07% — one of the nation’s lowest — to 4.49%, but so would the threshold for tax forgiveness, shaving about $2.7 billion off of what would otherwise be a $7 billion tax increase.
The threshold for tax forgiveness would rise to $15,000 for single filers from $6,500 currently, and from $10,000 for each dependent from $9,500 currently. So, the exemption for a family of four would go to $50,000 from $32,000 currently, meaning that households of four earning under $50,000 would not pay state income tax.
A household of four earning above $50,000, but below $84,000, would see a tax cut, and overall, two-thirds of income-tax payers would pay less or the same, administration officials said.
A total of 2.2 million tax filers would not pay state income tax, while 2.6 million households would receive a tax cut, administration officials said. The average taxable income of those paying higher taxes under the plan would be $157,000 a year, they said.
Republican lawmakers otherwise have not floated a competing plan to fix the deficit, although they have more than four months to develop one before the new fiscal year starts.
Hassell spent part of the hearing defending the legality of the proposal.
It keeps the tax rate flat in keeping with case law, he said, while there has never been a court challenge to the state’s poverty exemption or case law the dictates how high lawmakers may raise the threshold.
Some other states have a progressive tax rate that puts higher burdens on higher earners, but Pennsylvania is legally prevented from enacting such a rate, unless it changes the state constitution.
“The result is that we have a number of features in our state that results in a concentration of tax liability toward the lower income levels,” Hassell said.
