Harrisburg  Capitol

Capitolwire: House Republicans, Democrats don’t agree on anything re: Gov. Wolf’s proposed income tax hike

This piece is shared with permission from Capitolwire.com.

By: Chris Comisac, Bureau Chief, Capitolwire

HARRISBURG (Feb. 16) – It should come as little shock that Gov. Tom Wolf’s state budget proposal to raise the state’s Personal Income Tax (PIT) was a major topic of discussion during the first two budget hearings held by the House Appropriations Committee on Tuesday.

And the significant distance between the positions staked out by the committee’s Republican and Democratic members regarding the tax hike plan should be even less of a shock.

“We need more common sense in government, not more taxes,” said House Appropriations Committee Majority Chairman Stan Saylor, R-York, at the end of the first two hearings, reacting to his Democratic counterpart’s earlier arguments for the PIT hike and Wolf’s other tax proposals.

“I think there needs to be an honest discussion about what a progressive tax program looks like as opposed to a progressive income tax,” said House Appropriations Committee Minority Chairman Matt Bradford, D-Montgomery, when discussion the tax proposal. “What we have at the federal level I think we all know to be a progressive income tax with many different rates; this is not that.”

Bradford said the governor’s plan is a single rate – Wolf would raise the current 3.07-percent rate to 4.49 percent – but expand Pennsylvania’s special tax forgiveness credit – something Bradford called “an arbitrary legislative creation” – to exempt more Pennsylvanians from paying all or some of their income taxes, with the tax forgiveness credit law altered to gradually phase out the credit depending on how much a person’s or couple’s income exceeds the threshold for 100 percent tax forgiveness.

Under the current tax forgiveness program, the annual income limit is $32,000 for a family of four. Wolf is proposing to raise that limit to $50,000; Democrats during the hearing argued that adjusting for inflation, the tax forgiveness program threshold should be around $50,000. Bradford noted the federal poverty level for a family of four is $26,201 and then criticized Republicans who earlier in the hearing seemed to question why Wolf wanted to nearly double what many consider to be the income threshold of “poverty.”

During the hearing, Rep. John Lawrence, R-Chester, said: “We have the term ‘poverty’ defined in law, and the term is defined as an individual who cannot afford the basic necessities of life – we need to be helping these people, we need to be doing everything we can to assist them. The governor’s plan relies upon this ‘poverty exception’ and extends it in some way to folks who can make up to $100,000 a year – that strains credulity of the entire concept of what ‘poverty’ is under the law.”

“I would welcome you to live in reality for about 30 seconds and try to live on $26,201 in Pennsylvania,” said Bradford. “This budget proposes not just cutting your taxes, but zeroing your taxes out. This budget cuts taxes for working Pennsylvanians. No, it does not cut taxes for the highest wage earners, but let’s be honest, that’s not possible because we have real challenges here in Pennsylvania.”

Bradford listed the economic impact of COVID-19, which he said has exposed many economic inequities for various populations that Wolf’s budget seeks to address, as well as a sizable structural deficit that will have to be addressed as lawmakers develop a new state budget in advance of the start of the 2021-22 fiscal year on July 1.

The Wolf administration puts the deficit around $3.5 billion, while the state Independent Fiscal Office, which testified before the committee Tuesday afternoon, has it closer to $2.5 billion.

Either way, there’s a big hole to fill, and Bradford said if people want to get behind federal efforts to generate another COVID-19 stimulus bill, that’s an option, but he noted that’s still only one-time dollars, and argued raising taxes is a responsible way to address state deficits over the long term.

“High wage earners will pay more – they have to – otherwise we’ll be back to the same smoke-and-mirror budgeting that has gotten us into this hole,” said Bradford, acknowledging Wolf’s budget is the start of negotiations.

The type of budgeting to which Bradford was referring – using all sorts of accounting maneuvers, one-time funds, delayed payments, etc. – has been done for decades in Pennsylvania by both Republican majorities and Democratic majorities in the General Assembly, at the request or with the blessing of Republican and Democratic governors.

Republicans during Tuesday’s hearings said Democrats and Wolf – who say they want to fix the state’s regressive tax system and make things “fairer” – aren’t being clear with Pennsylvanians.

GOP members noted that everyone will have to pay the new 4.49-percent rate – meaning it will come out of their paychecks if they have their taxes withheld during the calendar year – and then they’ll have to files a special form to request the tax forgiveness credit and receive a refund of the taxes they paid.

“Those folks, unless they file a Form Rev 419 – which, based on my experience and broader understanding, many do not – will pay a full-scale withholding from their paycheck, they will see less money,” said Rep. Jonathan Fritz, R-Wayne. “Pennsylvanians, especially during the pandemic, are hamstrung, they need every single dollar and every single penny.”

Fritz added that policies like this cause people to leave states.

Republicans and Democrats also had entirely different perspectives on the impact of the tax hike on Pennsylvania business owners and employers.

“Business owners can benefit under his plan,” said Revenue Department Deputy Secretary for Tax Policy Amy Gill, who said department statistics suggest a most sole proprietor business owners should see a tax reduction.

“Over 400,000 business owners will pay less tax under this proposal, and they will see a total tax cut of almost $239 million; over 291,000 [sole proprietorships], which are often the smallest of businesses, pay less tax under this tax proposal, they have a total tax cut of over $174 million and 62 percent of [sole proprietorships] will pay less or the same amount of tax under this proposal,” said Gill, later noting there are roughly 752,000 sole proprietorships operating in Pennsylvania.

Republicans, however, didn’t like what they saw as the department’s efforts to downplay the state’s other small businesses – S Corporations and Partnerships – that don’t do nearly as well under the governor’s proposal.

“The numbers are a little bit different than the [sole proprietorships],” Gill explained. “That is because the average income of a partnership or an S Corp can be higher.”

Gill said there are 540,000 state income tax returns that claim business income from an S Corporation or Partnership, of which 288,000 will pay more under Wolf’s proposal because their average taxable income is $366,000.

Reacting to what he characterized as Revenue Department representatives attempting to make income from S Corps and Partnerships something different from the income from sole proprietorships, Rep. Keith Greiner, R-Lancaster, countered that most small business owners are S Corporations, not corporation tax-paying C Corporations, “and that income does flow through to the individual [tax] return – I think that’s pretty direct” and he estimated those small business owners who have to pay more in income taxes will pay an additional $1.2 billion in taxes.

The Pennsylvania Chamber of Business and Industry has said the tax hike will devastate many of Pennsylvania’s small businesses and place additional burdens on the people upon which the state’s economic recovery is relying.

“Taxpayer groups across Pennsylvania have said Pennsylvania is the fairest tax state in the nation when it comes to our PIT,” said Saylor. “Why? Because there are no big exemptions for corporations, no big exemptions for individuals to deduct all kinds of things that they can on the federal income taxes and graduated tax states, like Maryland, New York and many others where they can.”

“Everybody, no matter what income they have, they pay the same percentage,” Saylor continued. “The only people who seem to not like the fair system we have in Pennsylvania are those who like to raise taxes and create little exceptions for certain people across the commonwealth.”

“I don’t see this tax proposal, in any shape or form, helping minorities or the poor people of Pennsylvania,” Saylor said, and later added the tax proposal hammers “small businesses who have been devastated by this administration and the way its managed” its COVID-19 response.

“Many of the women and men who started those small businesses are now filing for bankruptcy, and we’re proposing a tax increase on them,” said Saylor.

Saylor went on to question the sincerity of Democrats arguing for the tax hike, suggesting there’s more politics than policy to the PIT proposal: “This proposal is not realistic … if it’s so realistic, I look forward to somebody introducing it – on the other side of the aisle because I can assure you there will be no Republicans introducing the bill. If there is sincerity and this is truly a good proposal, let’s see if it gets introduced. I’m willing to bet it doesn’t.”

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