The Tom Wolf income tax plan: Making the rich pay their ‘fair share’

Part two in a series exploring the issue of taxes in the 2014 Pennsylvania gubernatorial race. Read part one here.

By Eric Boehm | PA Independent

Democratic gubernatorial candidate Tom Wolf says he wants to make taxes in Pennsylvania more fair.

Some of the state’s wealthier residents might question his definition of the word.

But fair or not, Wolf is pushing a plan to overhaul the state’s existing income tax system and replace it with a more progressive model that would ask the state’s wealthier residents to pitch in a larger share of their income.

“I believe there are people who are paying too much,” Wolf said Sept. 22 during the first of three gubernatorial debates. “If we’re going to create a fairer tax system, some people will have to pay more.”

Who would pay more?

Wolf’s campaign says individuals making less than $70,000 annually would not face increased taxes and might get a break on what they pay to the state now; people making more than $90,000 annually would see a tax hike. The $70,000 to $90,000 range remains a grey area, because Wolf’s campaign says it is too hard to pinpoint where the break-even point will fall until after assessing the state’s financial situation next year.

According to the latest figures from the U.S. Census, the median household income in Pennsylvania is just above $52,000 annually. So the average Pennsylvania family is safe from the proposed tax increases.

But Census data also reveals 21 percent of Pennsylvania households — about 2.7 million of the state’s 12.8 million residents — have annual incomes above $100,000 and would be subject to the higher taxes.

Another 12.2 percent of the state’s households — that’s an additional 1.6 million people — earn between $75,000 and $99,999 annually, firmly in the gray area of Wolf’s tax plan.

Now, everyone in Pennsylvania pays the same percentage of their income to the state: 3.07 percent, a figure that hasn’t changed since 2004.

“One of the benefits of a flat tax is that it is very egalitarian. Everyone in the state has the same skin in the game when it comes to paying for their government,” said Antony Davies, a professor of economics at Duquesne University. “If you earn $10,000, you pay $307. If you earn $100,000, you pay $3,070. A progressive tax just further magnifies the extra amount the rich pay.”

A progressive tax effectively divides the population into those who have to pay a larger share of taxes and those who have less to pay. That creates political divisions, as well, Davies warns.

Sharon Ward, executive director of the Pennsylvania Budget and Policy Center, a left-leaning think tank Harrisburg that favors a progressive income tax, says it makes sense to shift the burden toward the rich as part of an overall strategy aimed at “tax fairness.”

Wolf is proposing using the higher state income tax to fund 50 percent of each school district’s costs, with the goal of reducing local property taxes in the process.

That’s a good move, Ward says, because income taxes are linked to an individual’s “ability to pay” while property taxes are not — and as a result tend to be highly regressive and leave some school districts flush with cash while others struggle to make ends meet.

Ward also points to economic data showing Pennsylvania’s richest residents — the top 1 percent of all income-earners in the state — have seen their income grow at a faster rate than the middle and lower classes in recent years.

“You want to have a tax system that people think is fair,” Ward said. “Pennsylvania’s tax system really has not been good for the middle class.”

But Davies warns that soaking the rich with higher taxes can hurt competitiveness by driving businesses and potential investors toward lower-tax states.

A progressive income tax system carries another risk, he says. By shifting a higher burden onto a smaller number of people, the state government’s revenue is more susceptible to changes in the number of rich people in the state and how much the rich are earning.

“Just look at California, which has a highly progressive income tax. If a large number of rich entrepreneurs decide to leave the state or big businesses move away, the state is left with gaping budget deficits,” Davies said.

Davies, who also studies tax and economic issues for the Mercatus Center, a free market think tank at George Mason University in Virginia, has authored reports showing people and investments tend to flow from states with high tax rates and progressive tax systems toward state with low rates and flat taxes.

Pennsylvania is one of just seven states with a flat personal income tax, according to data from the Tax Foundation, a nonpartisan think tank in Washington, D.C., that studies tax competitiveness. The other states with flat tax rates all have higher rates than Pennsylvania, ranging from 3.4 percent in Indiana to more than 5 percent in Illinois and Massachusetts.

But, Ward says, Pennsylvania’s already-low income tax rate could increase by a few percentage points without hurting the state’s competitiveness — particularly with New Jersey and New York, both of which have a top income tax rate near 9 percent, just across the border.

Coming tomorrow in Part Three: the legal and legislative hurdles facing Tom Wolf’s income tax plan