During the Senate Appropriations Committee’s budget hearing with the state’s Independent Fiscal Office, much of the discussion revolved around the impact of several components of Gov. Tom Wolf’s proposed tax increases for the upcoming 2021-22 Fiscal Year.
The governor’s plan to increase the Personal Income Tax rate by nearly 50 percent would have a demonstrable impact on business – especially small business. According to IFO Executive Director Matthew Knittle, “the majority of the income for small businesses does flow to higher income levels, therefore they would not be available to claim exemption and would be subject to the higher rate at 4.49 percent.” Knittle’s estimation is that 850,000 small businesses currently pay their tax under the PIT. When asked to comment on the opinion that taxing small businesses that are already struggling would not be a good thing for our state’s economic recovery,
Knittle agreed that tax increases are not helpful to economic growth. Further on the PIT, Knittle acknowledged that our state’s PIT rate is low – however, he said that Pennsylvania ranks in the “middle of the pack” in terms of income tax burden because so many local governments also levy an income tax. The PA Chamber has also noted that nonpartisan think tanks like the Tax Foundation have touted Pennsylvania’s 3.07 percent PIT rate as a “bright” spot in an otherwise convoluted and uncompetitive tax structure – which is why our organization is fighting to keep the current rate intact.
The hearing also laid bare the realities of the pandemic’s impact on the state’s revenue generation and private sector. Director Knittle said that his staff estimates 470,000 jobs were lost due to COVID-19, and it will take the state six years to return to pre-pandemic job numbers (though he did confirm his projection that the state’s real gross domestic product and personal income will surpass 2019 numbers by 2022 – so, employment loss will have the most lasting impact.)
To counter this job loss, the IFO is recommending that the state support job retraining programs to get Pennsylvanians back to work in high-demand jobs that can lead to rewarding careers. He added that while the retail and wholesale trade, accommodation, food service and education industries will slowly recover from large job losses and will have difficulties in the future, the transportation, warehousing, delivery and storage industries have experienced growth.
According a story by Pennsylvania Legislative Services, committee Chairman Pat Browne, R-Lehigh, questioned if Gov. Wolf’s tax proposals would create a more competitive Pennsylvania and called the plan to increase spending by 11 percent through various tax increases “way too risky.” Knittle stated that economics is a simple formula that comes to two factors: The number of people working; and their productivity, but there will be “significant challenges going forward.”
Chairman Browne again reflected on the possibility of building unobtainable expectations in the tax system. “To say that 70 percent of the people in the state are getting a tax cut, that’s great, but I don’t want to be saying that to anybody if at the end of the day, they’re not going to get it,” he said.
The IFO’s full budget and economic update is available here.