Hoping to boost Pennsylvania’s economic growth, Rep. Jason Ortitay (R-Washington) recently floated a proposal to lower the Commonwealth’s personal income tax (PIT) rate from 3.07 percent to 2.82 percent.
The proposal comes on the heels of recently enacted federal tax reform that sought to cut taxes for the majority of Americans and spur economic growth but was also projected to grow the national deficit.
The legislation, House Bill 2002, is touted as saving households $500 by lowering the current rate, which has been in place since 2003.
“In 2016, the Commonwealth’s gross domestic product grew 0.6 percent compared to 1.5 nationally,” Ortitay said. “By reducing the PIT, Pennsylvanians would have more money in their pockets to invest back into the economy and hopefully put us more on par with national growth. This statistic does not lie. We must do more to improve Pennsylvania’s fiscal health.”
Outside of saving taxpayers money, Ortitay hopes his legislation will spur small business growth.
“Small businesses file their taxes as personal income as opposed to paying corporate taxes,” he said. “A reduction in the PIT also would stimulate the economy by allowing small businesses to hire more workers and organically encourage growth.”
Outside of the Capitol, opinions were split as to whether a cut in the personal income tax is the right approach for the state to take in terms of economic growth.
The left-leaning Pennsylvania Budget and Policy Center’s director, Marc Stier, said Monday that in a vacuum, cutting the personal income tax is the wrong move for Pennsylvania and its economic growth.
“It’s a bad idea in two respects: Number one, there is absolutely no reason to think that lowering the personal income tax rate will all of the sudden create a huge spurt of economic growth. That has been tried over and over again in other states like Kansas and Louisiana and the results have always been negative: cutting taxes does not lead to economic growth in states. It has actually been tried in Pennsylvania, where we cut business taxes, and there’s no sign of economic growth as a result of cutting those taxes beyond what we might have seen already,” he said.
“The other problem is, if you cut taxes, you get lower revenues and you have to cut spending to balance the budget. What we do have evidence for is that investment in things like roads and bridges, mass transit, K-12 education and, more importantly, in higher education does have an impact in growing the economy.”
Stier said that a better way to grow the economy is by expanding public investment and increasing the minimum wage.
“Pennsylvania is growing slower than our surrounding states, but most of those states spend more than we do, tax more than we do, and have raised their minimum wage,” Stier added.
However, he noted, the Pennsylvania Budget and Policy Center is not wholly unsupportive of lowering the personal income tax rate so long as it is combined with other tax reforms like increasing wealth-based taxes like capital gains taxes, business profits and the inheritance tax.
Earlier this year, the center came out in support of “The Fair Share Tax Plan” unveiled by Senate Appropriations Committee Minority Chairman Vincent Hughes (D-Philadelphia) and Sen. Art Haywood (D-Montgomery).
That plan would raise the tax rate to 6.5 percent on some wealth-based taxes while lowering the personal income tax rate to 2.8 percent.
“We think working-class people and middle-class people in this state do deserve a tax cut,” Stier said Monday, “but we think it should be paid for by increased taxes on the wealthy.”
On the other hand, the conservative-leaning Commonwealth Foundation said Ortitay’s proposal will help get Pennsylvania’s economy moving in the right direction.
“(It) would provide much-needed relief to millions of Pennsylvanians and hundreds of thousands of small business owners who labor under one of the highest tax burdens in the country,” said Commonwealth Foundation senior policy analyst Bob Dick. “The proposal would put more money in the pockets of working people to help them meet their own needs and allow business owners to create more jobs or raise wages for their employees.”
Dick did not buy into arguments against the tax cut.
First, he argued, cutting the personal income tax in a vacuum would not negatively impair Pennsylvania’s ability to budget or provide needed services, noting the economy will grow enough to keep state coffers full.
However, he did note that as tax reform has not taken place, the state should continue to examine the expenditure side of the ledger to ensure it does not continue to run up budget deficits.
“There is some validity to the idea that if we cut taxes across the board, you are going to see more economic growth, and that means ultimately more revenue will go to the state treasury,” he said. “In the interim, while that process is playing out, we have to focus on spending in state government and focus on the expenditure side of the balance sheet, and that means making reductions in spending areas like corporate welfare and corrections to help drive down the cost of government and help avoid running a budget deficit.”
He also did not agree that increasing public funding and investment is necessarily the way to drive the economy forward.
“Tax relief is desperately needed given Pennsylvania’s stagnant economy. Since 1970, the state ranks 49th in job growth, 48th in population growth, and 44th in personal income growth; no one should find this acceptable,” he stated. “Over that same period, what you’ll see is an increase in government spending in just about every single year. If more public investment was the solution, then obviously Pennsylvania’s economy should be humming right now, but we continue growing at a much slower pace than the rest of the nation.”
Rep. Ortitay’s proposal also comes as the legislature is examining a comprehensive strategy toward modernizing Pennsylvania’s tax structure.
In 2017, the House of Representatives unanimously approved a resolution sponsored by Rep. Jake Wheatley (D-Allegheny) to allow a select subcommittee of the House Finance Committee to review Pennsylvania’s tax structure and make recommendations for modernization and improvement.
That subcommittee, chaired by the retiring Rep. Eli Evankovich (R-Westmoreland), held a November 2017 hearing examining the history of Pennsylvania taxes.
A report from the select subcommittee is due to the entire General Assembly by November 30, setting up potential action on any proposed recommendations for the next legislative session.
Currently, House Bill 2002 has been referred to the House Finance Committee for consideration. It has been introduced with 13 co-sponsors, all Republicans.
Jason Gottesman is the Harrisburg Bureau Chief of The PLS Reporter, a news website dedicated to covering Pennsylvania’s government.