This is what Philadelphia looked like in 1968, the last time the state raised the sales tax statewide. Above is a Vietnam protest.

This is what Philadelphia looked like in 1968, the last time the state raised the sales tax statewide. Above is a Vietnam protest.

The logic behind making Pennsylvania’s sales tax the nation’s second-highest

There’s a saying in Harrisburg right around budget time, and it goes something like this: “Everything falls apart before it comes together.”

Sounds like the name of a My Chemical Romance album, but something like that is happening now in the capitol. What we know about what legislators are calling “a framework”: The budget deal includes $350 million earmarked for public education, another $50 million for special education and a 1.25 percent statewide increase in the sales tax.

So let’s take a closer look, since the 6 percent sales tax has been a bedrock of life in the Keystone State for 47 years. Back in 1968, the average cost of a gallon of gas was 34 cents; a gallon of milk was $1.07; a movie ticket was $1.50. Those same items today cost $2.46, $3 and $8.61.

The deal raises that sales tax that’s been around for so long to 7.25 percent, and in Philadelphia it would rise to 9.25 percent because the city already has an additional 2 percent sales tax compared to the rest of the state (save for Pittsburgh, which has its own 1 percent tacked on.)

That additional cash is supposed to bring in $2 billion that will be used to pay for property tax reductions. But! Right now, since we’re in the let’s-make-a-deal stage and not let’s-write-the-fine-print stage, we don’t know anything about where those dollars will go. More on this later.

Some Democrats aren’t happy with this. Jacking up the sales tax to give a break to people wealthy enough to afford property can be seen as a regressive tax — one that disproportionately affects poor people. Sen. Daylin Leach, D-Montgomery, has called the tentative plan regressive, and his spokesman said “I think Senator Leach would have a hard time finding a reason to support it.”

Other aides are taking a wait-and-see approach, holding out for that fine print. But what about Gov. Wolf, who didn’t get his campaigned-on natural gas tax, and is now trying to sell a deal his own party may have a hard time supporting? A source close to his administration said education funding has always been Wolf’s No. 1 priority, and he was willing to concede on other points in the name of helping schools.

The history behind it

Most Pennsylvanians have been paying a 6 percent sales tax rate since 1968, the same year Lyndon B. Johnson was president and Martin Luther King Jr. was assassinated. Prior to that, the sales tax had slowly crept up since it was enacted in 1954 at just 1 percent.

Under the tax code, Philadelphia City Council has the ability to levy its own sales taxes which has happened twice over the years: In 1991 the sales tax was raised by 1 percent to reach 7 percent, and then the same thing was done again in 2009. So locally, the tax rate is 8 percent, a rate that was made permanent through a resolution last year.

That means that if this budget framework goes through as is, Pennsylvania’s statewide tax will be 7.25 percent, the second-highest statewide sales tax in the country, lower than only California’s. And Philadelphia’s sales tax under this plan would climb to 9.25 percent, which would tie for the seventh highest rate among major cities, according to the Washington-based Tax Foundation.

It’s worth noting, though: At least one Philadelphia lawmaker has already proposed carving out a sales tax increase exception for Philadelphia and Allegheny counties, a proposal that could gain traction among legislators representing the state’s two largest cities.

What the extra cash means for the budget

Lawmakers are saying that this framework tax plan would bring in an additional $2 billion a year in tax revenue for the state. That claim seems to check out. Here’s the math behind it:

In fiscal year 2015, the state brought in about $29.3 billion in tax revenue, and of that, about $9.6 billion came from sales taxes across the state. A 1.25 percent increase in statewide taxes would correlate with a 20.8 percent overall jump in revenue, meaning that with the additional sales tax, Pennsylvania would bring in about $11.7 billion next year in sales taxes alone. So sure, that would correlate with about a $2 billion boost for the budget.

This graph shows how total tax revenue and sales taxes across Pennsylvania have slowly risen over the last five years. The figures are in billions and come from Dept. of Revenue tax data. The 2016 figure is representative of if the tax plan framework were passed as it’s been reported this week.

Screen Shot 2015-11-11 at 10.12.21 PM
Billy Penn

But what’s really interesting about all this is that even before lawmakers were suggesting this hike in sales taxes across the state, the budget office was already predicting a more than $2 billion jump in revenue from sales taxes for the next year based on Governor Wolf’s budget address.

If you remember back in the spring when Wolf unveiled his ideas for how he wanted the state budget to look, he proposed a raise in the sales tax from 6 percent to 6.6 percent (a 10 percent increase in revenue for the state) in addition to lifting exemptions from a bunch of things that Pennsylvanians don’t currently have to pay taxes on, like candy, newspapers, cable TV … and horses.

Eliminating those exemptions as Wolf had proposed would have also increased the sales tax revenue by about 13 percent. So what’s all this mean?

If lawmakers had accepted Wolf’s sales tax plan as is, it actually would have brought in slightly more than $2 billion extra via the sales tax and instead of increasing it for consumers by more than 20 percent, the increase would have been half that but the exemptions on certain items would have been lifted.

But Republicans came out strong against lifting the sales tax exemptions on many of the items Wolf would have wanted it on, and a source close to his administration said legislators are unlikely to accept most of the exemptions he proposed, save for the lifting of a sales tax exemption on digital downloads.

Where the extra money will go

OK, so this is where it all gets a little dicey. Details are scarce at this point, but as it stands, the proposal is to use the extra $2 billion to start an entirely new state fund that would be used exclusively for property tax reductions. What’s unclear is how that money would be divvied up. Because school districts set property tax rates, the state would theoretically dole out cash to school districts.

How would this work? Would districts with more need get more cash, a la the School District of Philadelphia? Would politics be involved in how the money is distributed? When would districts get the cash, and would they be required to use it for property tax reductions? These are all questions that remain unanswered as involved parties still hammer out the details.

With all this additional aid to schools and increase in the sales tax, there’s another piece of this that Republicans are asking for: A provision that would require a local referendum any time a school district wanted to raise property taxes to bring in more cash.

Jake Corman, R-Centre, the Senate majority leader, told reporters this would be a plan that would ensure that property tax rates don’t creep back up over time and then everyone is facing larger sales taxes and the same property taxes.

It’s unclear if Wolf and the Democrats would support such a provision, but education advocates are not happy about it. Some top public education leaders told Newsworks this week that Wolf, if he agreed to a plan like this, would be favoring a short-term solution that could have real implications in the long-run for school districts attempting to raise property taxes because they’re short on cash.

What happens next

Lawmakers are going to keep talking over the next several weeks, and most members of the leadership have said they’re optimistic a plan will be finished by Thanksgiving.

Rank-and-file members of all four caucuses of the general assembly are waiting on the leadership to get them a comprehensive plan to review before they can take the next steps in asking for what they want. For Republicans, it could be additional provisions that taxes don’t continue to rise. For Democrats, it could be asking for minimum wage increases to offset what amounts to a regressive tax plan.

There’s still a lot to go over. As one administration source put it: “Pennsylvania is still the most inequitable state in the country. All of that still has to be worked out.”

Billy Penn reporter Mark Dent contributed.

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