A Fair Share Tax to Support Public Investment in

412 N. 3rd St, Harrisburg, PA 17101 • www.pennbpc.org • 717-255-7156 By Marc Stier and Diana Polson1 April 15, 2019

Executive Summary This paper puts forward the Fair Share Tax plan, a major step toward fixing Pennsylvania’s broken tax system and raising the revenues we need to invest in the public goods that are critical to creating thriving communities and individual opportunity in our state: education, infrastructure, protection for our air and water, and human services. • The Fair Share Tax divides our Personal Income Tax into two new taxes: 1) a tax on wages and interest and 2) a tax on income from wealth (dividends; net income from a business, profession, or farm; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts.) • The Fair Share Tax increases the tax on income from wealth from 3.07% to 6.5% and decreases the tax on wages and interest from 3.07% to 2.8%. • Under the Fair Share Tax, 47% of taxpayers will see their taxes go down, 35% will see no change in their taxes, and only 18% will see their taxes go up. • The Fair Share Tax brings in $2.2 billion in new revenue, 80% of which comes from the richest fifth of Pennsylvania taxpayers and 16% of which comes from out-of-state taxpayers. This means that only a tiny 4% of the additional revenue comes from the bottom four-fifth of Pennsylvania taxpayers. • Considering only Pennsylvania taxpayers who see their taxes increase (I.e., excluding non- residents who pay taxes to Pennsylvania), 51% of the new revenues comes from the top 1% of families, 75% comes from the top 5% of families, and 88% comes from the top 20% of families. • There is little variation in the impact of tax from one county to another or one legislative district to another. The shares of taxpayers in a county that sees a decrease or no change in their taxes ranges from 73% to 91%, with all but four counties at under 80% or over. Under the Fair Share Tax, 81% of taxpayers in urban areas and 86% of rural taxpayers will see their taxes go down or remain the same. • Even after implementation of the Fair Share Tax, the effective rate on the top 1% of Pennsylvania taxpayers will be only 3.9%, less than that of any neighboring state other than Ohio.

1 While Marc Stier wrote the text, many people at PBPC, especially Stephen Herzenberg and Mark Price, have contributed to the line of analysis that led to this paper. We are also very much indebted to Aidan Davis of the Institute for Tax and Economic Policy for her work in analyzing the impact of the Fair Share Tax.

Introduction This paper puts forward the Fair Share Tax plan, a major step toward fixing Pennsylvania’s broken tax system and raising the revenues Pennsylvania needs to invest in the public goods that are critical to creating thriving communities and individual opportunity in our state: education, infrastructure, protection for our air and water, and human services.

The Need for Revenues in the Commonwealth Budget No one who understands Pennsylvania’s budget can seriously deny that we need new, recurring revenues, not just to secure fiscal stability, but to create the Commonwealth that meets our long-term needs and aspirations.

The Public Investment Deficit Our state government has a responsibility to its residents to provide: quality public education at all levels; services for those who need help dealing with poverty, ill health and disability; infrastructure investments; and environmental protection among other things. When the state prioritizes these investments, our communities can thrive—our kids can get a good start in life through quality education, individuals and families can access critical human services, families can live in healthy and safe environments, goods can easily be moved from place to place, and people can access good jobs in a thriving economy. However, when a public investment deficit becomes the norm, low- and middle-income families struggle. We fail to educate and train too many of our children for the jobs of the future, access to work and markets becomes harder for families and individuals, and our health, as well as the natural beauty of the state, is compromised by environmental degradation. Prosperity for all is stunted. In Pennsylvania, the public investment deficit takes on different shapes depending on the funding arena. But a common theme is that Pennsylvanians are losing out.

With regard to our state’s public education system, a public investment deficit means concretely that too many children do not get the quality education they deserve and our economy suffers as a result. Pennsylvania is ranked 46th in terms of the percentage of K-12 funding that comes from the state—it is 37% in Pennsylvania compared to the national average of 47%. As a result, local governments must come up with more money for schools, primarily through property taxes, which individuals in poor communities struggle the most to pay.2 This has led to Pennsylvania having the most unequally funded K-12 schools in the country. In Pennsylvania, more than in any other state in the country, the zip codes and neighborhoods in which children grow up often determine the quality of their schools and strongly influence their future economic success.3

With regard to higher education, our state ranks 47th in the nation in terms of our public investment per capita4, and students are graduating with some of the highest debt in the country. Pennsylvania

2 Data downloaded from https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=SSF_ 2014_00A05&prodType=table. 3 Data from the National Center for Education Statistics found at https://nces.ed.gov/edfin/Fy11_12_tables.asp. Also see https://www.washingtonpost.com/news/local/wp/2015/03/12/in-23-states-richer-school-districts-get-more-local- funding-than-poorer-districts/?utm_term=.1cefcd6cf8c4. 4 University of Illinois Grapevine database Table 4, online at https://education.illinoisstate.edu/grapevine/tables/.

Page | 2 ranks third highest for in-state tuition and fees for public four-year colleges and universities.5 This means that fewer low- and middle-income students can afford to attend college, which affects future earnings and career options. Those who fund higher education through debt find their legs are kicked out from under them before they even begin their careers. And too few Pennsylvanians have more than a high school education—our state ranks 40 of 50 states by this measure. Given the strong relationship between educational attainment in a community and economic and wage growth, the public investment deficit harms everyone in the state.6

We underserve those who are intellectually and physically disabled, those who suffer from mental illness, adults and children who need protection from abuse, and those who through no fault of their own cannot find steady work or cannot afford child care so that they can work. The opioid crisis, with overdose deaths in our state nearly twice the national average, is partly a sign of our failure to adequately fund human services.7

At a time when the rapid expansion of natural gas fracking has created new threats to our air and water, we still suffer from the deep cuts made a decade ago to the Department of Environmental Protection. Public investment in DEP has dropped 39% since 2007-2008.8 This is evidence that Pennsylvania faces a public investment deficit. Our failure to invest in the public goods every individual needs is creating a state where communities are struggling and opportunity is limited.

The Source of our Public Investment Deficit Our public investment deficit did not just happen naturally. And it is certainly not the result of a government that is growing in Pennsylvania. Just the opposite is true.

A Shrinking Government in Pennsylvania Government is shrinking in Pennsylvania. As Figure 1 shows, state government spending in Pennsylvania has been falling as a share of the state’s economy since 1996. Table 1 shows that a large part of this shrinkage took place under the administration of Governor Corbett and continues under Governor Wolf.

5 Data downloaded from: https://trends.collegeboard.org/college-pricing/figures-tables/2018-19-state-tuition-and-fees- public-four-year-institutions-state-and-five-year-percentage. 6 An increase of one year in the average number of years of schooling in an area is associated with an increases of 17.4% in GDP per capita and 17.8% in wages per worker. See Noah Berger and Peter Fisher, A Well-Educated Workforce Is Key to State Prosperity, Economic Analysis Research Network (EARN), August 22, 2013; online at http://www.epi.org/publication/states-education-productivity-growth-foundations/ 7 For more information, see articles on the opioid crisis in Pennsylvania: http://6abc.com/health/gov-wolf-declares-a- disaster-emergency-over-opioid-crisis/2924563/ and https://www.haponline.org/Newsroom/News/ID/2558/PA-Drug- Overdose-Deaths-Up-37-during-2016-On-Average-13-Died-Daily. 8 Diana Polson, Marc Stier, Stephen Herzenberg. “Pointing in the Right Direction but Limited by a Lack of Revenue: An Analysis of the Governor’s Proposed 2019-20 Budget.” Pennsylvania Budget and Policy Center, March 2019.

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Figure 1

State government expenditures dropped during the Governor Corbett years (2012-2015) to 4.25% of Gross State Product (GSP), substantially below the 4.66% average between 1997 and 2011. Expenditures have dropped slightly during Governor Wolf’s first term in office to 4.23%, and his proposed budget for this year would reduce state expenditures to 4.11% of GSP. Projections for 2021- 24 are that expenditures as a percentage of GSP will continue to shrink to 3.97%.

Table 1

Of course, while state spending is declining as a percent of GSP, it has grown in absolute terms. But an increase in spending is necessary to maintain the same level of government services. The population of the state grows in most years, and inflation requires higher levels of spending to maintain the same Page | 4 level of services. And that is especially true in government because inflation in services—which is mainly what government provides—and especially in health care services, tends to be higher than inflation in goods. Technological innovation makes it possible to produce goods, such as computers and cars, that are both cheaper and/or much more capable than they were in the past. But services are far more likely to be labor intensive. That is why we pay relatively more for haircuts and concert tickets today than 20 years ago, while our computers become cheaper and more capable. To maintain the same level of service, government has to slowly grow as a share of GSP over time. Instead, it has shrunk in Pennsylvania.

The Problem is Revenues, but the Solution Is Not General Tax Increases As expenditures shrink in Pennsylvania, our investment deficit grows. But the state cannot spend more than it brings in—so the ultimate source of our investment deficit is that we have been reducing revenues. Look again at Figure 2 and Table 1. Not only our expenditures, but our revenues, have dropped substantially as a share of the GSP.9 While our investment deficit is the result of the state bringing in less revenue than it needs, the solution to this problem is not to raise taxes on everyone. As Figure 2 shows, incomes for most Pennsylvanians have been flat for the last 30 years. But incomes for the top 1%, and even more, for those in the stratospheric heights, have grown fast. The burden for new revenues should fall on those who have been doing well in the economy, not those who are just scraping by. But that is exactly the opposite of where Pennsylvania has been securing tax revenue. Figure 2

9 Careful readers will note that in all three periods under consideration, revenues exceed expenditures as a percent of GDP. So why hasn’t the state been accumulating surpluses? The answer is that revenues each year must exceed expenditures to provide a reserve for tax refunds to those whose withheld tax payments exceed their tax obligation. The refund reserve is, on average, 4% of expenditures or .18% of state GDP. Page | 5

Our Broken Tax System The revenue problem in Pennsylvania is a result of decisions made in the past, in both distant and more recent times.

The Uniformity Clause The greatest limitation on our tax system is the “uniformity clause” of the Pennsylvania Constitution. This clause was introduced in the Constitution created in 1884 at a time when the power of corporations, especially those engaged in railroad and mining industries, was at its greatest. While many states have similar clauses, the uniformity clause in Pennsylvania has been interpreted by our Supreme Court in a way that strictly limits the kinds of taxation the General Assembly can enact. In particular, it requires that Pennsylvania have a flat income tax, prohibiting the introduction of graduated income taxation rates, in which the percentage of income taxed is higher at higher levels of income. Our uniformity clause makes it almost impossible to increase taxes on those whose incomes are rising fast without also taxing those whose incomes are unchanged. And it turns our whole tax system upside- down. Sales taxes and property taxes in every state take a larger share of the income from those at the bottom than those at the top.10 But in most other states, graduated income tax rates reduce the disparity. Because our uniformity clause prohibits graduated tax rates, state and local taxes in Pennsylvania take far more from low-income than from high-income families. As Figure 3 shows, the 20% of Pennsylvania families with the lowest incomes (making less than $20,000/year) pay 13.8% of their income in state and local taxes, while those in the top 1% (making on average $1.7 million/year) only pay 6.0% of their income on state and local taxes. The bottom 60% of income earners on average pay at nearly double the tax rate of what the richest Pennsylvanians pay on average.

10 Sales taxes do so for two reasons. First, those at the middle and top of the income scale save some part of their income but those at the bottom spend all of it in order to meet the necessities of life. Second, sales taxes in many states, including Pennsylvania, tax many goods (although not food, clothing, and medicine) but don’t tax services. As incomes rise, however, families tend to spend more on services. For example, they go out to eat more (and at more expensive restaurants) and partake in more expensive forms of entertainment. Property taxes tend to take a larger percentage of the income of families at the bottom or middle than the top because the value of property owned by families does not tend to rise in proportion to their income. Real estate is generally the only wealth held by those in the middle. Only the rich own substantial intangible property like stocks and bonds. Page | 6

Figure 3

Our upside-down tax system is unjust. Indeed, Pennsylvania’s tax system is so bad that Pennsylvania ranks as the 7th most unfair tax system in the country as identified by the Institute on Tax and Economic Policy (ITEP).11 But our tax system is more than unfair. It also leads to our state’s revenue inadequacy. We simply cannot raise enough revenue if we rely on raising revenues from those whose wages have remained stagnant and if we are unwilling to tax those who have the highest and fastest growing incomes in the state. Our broken tax system makes it impossible to solve our investment deficit.

Corporate Tax Cuts This long-term problem has been exacerbated by decisions made by the General Assembly in more recent years, supported by members of both political parties, to cut corporate taxes. One corporate tax, the Capital Stock Franchise Tax, has been entirely phased out. Meanwhile, changes in the Corporate Net Income Tax have reduced revenues as well.

11 Institute on Taxation and Economic Policy, “Fairness Matters: A Chart Book on Who Pays State and Local Taxes.” March 2019. Accessed at: https://itep.org/wp-content/uploads/030619-Fairness-Matters-Chart-Book_ITEP.pdf. Page | 7

The dramatic decline in the contribution of corporate taxes to General Fund revenues can be seen in Figure 4. Corporate taxes in the early 1970s provided 30% of General Fund revenue. Today it only provides 14%.

Figure 4

If we had not cut corporate taxes in the last 15 years, the commonwealth would be receiving an additional $4 billion a year, funds that could be used to close the public investment deficit in many areas. There would be funds available to invest in education, human services, infrastructure, and protecting our air and water.12

12 Corporate tax cuts were defended on the assumption that they would lead to increased economic growth and the creation of new jobs. This did not happen, as we have shown in Ellis Wazeter and Mark Price, ““The Final Verdict: A Cuts-Only Approach to the Budget Doesn’’t Work,”“, Pennsylvania Budget and Policy Center, June 23, 2015. Available online at http://keystoneresearch.org/finalverdict. See also Mark Price, ““Pennsylvania at Another Crossroads,”“, Pennsylvania Budget and Policy Center, October 6, 2015. Available online at https://pennbpc.org/pacrossrds. State and local taxes are only a small fraction of business costs. While tax reductions for businesses have large effect on the state budget and public employment, they are a small share of business costs and do little to change the market forces that shape employment growth in the commonwealth Commonwealth over the long term. Labor is one of the largest costs for most businesses. Since one of the primary roles of public spending is investment in education and training, which makes workers more productive, our failure to invest adequately in our children now will undercut future prosperity.

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A Tax on Income From Wealth We put forward our proposal for fixing our broken tax system by creating a tax on income from wealth in the spring of 2016.

The Basic Idea Our basic idea is to bifurcate the current personal income tax. Currently, eight classes of income, which are defined under federal law, are subject to the Pennsylvania Personal Income Tax: gross compensation (mostly wages, salaries, and tips); interest; dividends; net income from a business, profession, or farm; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts.13 We propose created two new taxes to replace the Personal Income Tax. The first would be a tax on the classes of income, wages and salaries, and it would be set below the current Personal Income Tax rate. The second would be a tax on the other seven classes which would be set higher than the current Personal Income Tax rate. We call those other seven categories “income from wealth“ because they mostly include income that is earned from the ownership of some kind of wealth (including, among other things, intangible and real property) as opposed to income from work. Most people under the age of retirement have income from compensation, that is, wages, salaries, tips, and interest. But what we call “income from wealth” is mostly earned by those with higher incomes. Thus, by taxing income from wealth at a higher rate we can generate more tax revenue from those whose overall incomes are high and have been growing fast. Given how upside-down our taxes are, we need to start raising more revenue from those whose incomes are going up and give those whose incomes are static or declining a break. That’s why our Fair Share Tax proposal calls for increasing the tax on income from wealth from the current 3.07% to 6.5% while reducing the tax on wages and interest from 3.07% to 2.8%, where it was when Tom Ridge was governor. The Fair Share Tax will raise roughly $2.2 billion, money that we can put towards education, human services, infrastructure, and clean air and water.

The Tax on Income From Wealth and the Constitution While an increase in the tax on income from wealth would raises taxes for those with higher overall incomes and cut taxes for those with lower overall incomes, it still meets the requirement of the uniformity clause, which requires that a tax must be “uniform upon same class of subjects.” The different classes of income are well-defined in both federal and state law. Under the Fair Share Tax each class of income is taxed at a single rate. And variations in the tax rate on different classes of income is a long-standing tradition in federal tax law and that of many states. Moreover, there are three sound reasons independent of the overall distribution of taxes that justify the Fair Share Tax. The huge expansion of inequality in America in the last 35 years is the result of the returns to labor declining relative to the returns to capital or wealth. This is, first, contrary to the basic premise of our country and state. America and Pennsylvanian have always been dedicated to the proposition that hard work should be rewarded. As wages have stagnated, that is increasingly untrue.

13 Pennsylvania Department of Revenue, Pennsylvania Personal Income Tax Guide, revised March 7, 2014, p. 9 of 53; online at http://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/default.aspx. Page | 9

We can partly compensate for the tilt in our economy from labor to wealth by creating a tax system that taxes the latter at higher rates than the former. Second, increasing wealth is also dangerous to our democracy as both our Founders and later advocates for preserving our democracy from huge accumulations of wealth, such as Theodore Roosevelt and Louis Brandeis, warned. Wealth can too easily be translated into political power. Increasing the tax on wealth is one way, among others, to limit the kinds of wealth accumulation that threaten our democracy. Third, racial justice demands that we tilt our tax system from taxing wages to taxing income from wealth. Even after slavery, economic and residential segregation, as well as government policies such as redlining, have made it more difficult for people of color to accumulate wealth relative to white people. Taxing income from wealth more than wages is one way to right the balance.

Misconceptions: Seniors and Small Business Two misconceptions often arise about the impact of increasing the tax on income from wealth. The first is that the tax would disproportionately affect seniors. This might be true if Social Security benefits, pensions, and 401k distributions were to fall under the tax. But they are not taxed at all in Pennsylvania, which will remain one of the most tax friendly states for retirees in the country after the the Fair Share Tax is created. Some seniors do rely on other income from wealth to sustain them during retirement. But this is primarily true only for the wealthiest seniors. In fact, the Institute on Taxation and Economic Policy (ITEP) analysis of the Fair Share Tax finds that three-quarters (76%) of seniors (65+) would see a tax cut or no change in their taxes. Further, the highest-income fifth of seniors (average income $246,100) would pay 92% of the increase in taxes among seniors. The second is a concern that small businesses would be hurt by an increase in the tax on income from wealth because that tax includes business profits. However, under current Pennsylvania law and regulations, owners of many small businesses who actively work in the business, including those classified as “S” corporations, can earn income either as business profits or as “compensation.” The latter would be taxed at a lower rate. Family owned and other small businesses can thus avoid paying more under the Fair Share Tax by taking more of their income as wages rather than business profits.

Who Pays the Fair Share Tax Statewide The Fair Share Tax on Pennsylvania households raises $2.2 billion mostly from those who have the ability to pay more. As Table 2 shows, only 18% of Pennsylvania taxpayers will pay more under the Fair Share Tax. The vast majority of taxpayers, 82%, will see their taxes go down (47%) or remain unchanged (35%). Table 2 Impact of Fair Share Tax on Pennsylvania Taxpayers Decrease 47% No Change 35% Increase 18%

Source: Pennsylvania Budget and Policy Center analysis of data from Institute of Taxation and Economic Policy (ITEP), February 2019 Page | 10

Whose Taxes Are Increased Under the Fair Share Tax? Table 3 and Figure 5 show whose taxes are decreased under the Fair Share Tax but only among Pennsylvanians (i.e. this analysis excludes non-residents who pay income tax to Pennsylvania). Given what we said about the distribution of income from wealth, it should come as no surprise that most of the increase in taxes would be on taxpayers with the greatest income. Fifty-one percent of the money raised from Pennsylvanians by the Fair Share Tax comes from taxpayers in the top 1% of income, with earnings of $590,000 or more and an average income of $1.6 million. Another 24% of taxes raised by the plan from Pennsylvanians comes from taxpayers in the next 4%, from the 95th to 99th percentile, with incomes of $252,000 to $590,000 and an average income of $360,000. Thus, taken together, three-quarters of the new revenue comes from families with incomes in the top 5%. Just 13% of revenues raised from Pennsylvanians comes from taxpayers from the 80th to 95th percentile, with incomes between $112,000 and $252,000, and an average income of $157,000. And only 12% of revenues comes from the bottom 80% of families. Most people with low and moderate incomes do not have the kinds of wealth that is taxed by a tax on income from wealth. But a small portion do. Some of them may be small business owners who could adjust their compensation to reduce the tax. Others may be young people who have inherited some intangible wealth, or older people whose Social Security and pension income is not taxed and thus who have low taxable incomes except for income they earn from investments.

Table 3 Impact of Personal Income Tax Changes All Pennsylvanians, 2019 income levels 2019 Income Group Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1% Income Less Than $24,000 – $44,000 – $68,000 – $112,000 – $252,000 – $590,000 – Range $24,000 $44,000 $68,000 $112,000 $252,000 $590,000 Or More Average Income in Group $ 14,000 $ 34,000 $ 54,000 $ 88,000 $ 157,000 $ 360,000 $ 1,602,000

Tax income that is not wages or interest at 6.5% (Up from 3.07%); Reduce rate on salaries and interest to 2.8% (Down from 3.07%) Tax Change as a % of Income –0.0% –0.0% 0.0% 0.1% 0.2% 0.8% 1.5% Average Tax Change –2 –6 +24 +77 +332 +2,706 +24,680 % Receiving Tax Cut 32% 54% 54% 62% 41% 21% 6% % Facing Tax Increase 8% 10% 16% 25% 26% 50% 83%

Share of Tax Cut for Those Receiving a Cut 4% 13% 18% 30% 25% 10% 1% Share of Tax Increase for Those Facing an Increase 0% 1% 3% 7% 13% 24% 51% Source: Pennsylvania Budget and Policy Center based on data from Institute on Taxation and Economic Policy, 2019.

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Figure 5

Whose Taxes Are Decreased Under the Fair Share Tax? Turning to the distribution of tax reductions in Table 3 and Figure 6 among Pennsylvanians, we can see that 61% of the tax reductions go to families in the middle three quintiles, from the 20th to the 80th percentile. Family incomes in these three groups range from $24,000 to $112,000. Some families in the top 20% would see their taxes reduced under the Fair Share Tax, presumably because they have more wage and interest income than income from wealth. Relatively little tax reduction goes to the bottom 20% with incomes less than $24,000 in part because their incomes are low to begin with and, in part, because many families in this group benefit from the state’s income tax forgiveness program.

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Figure 6

What Each Income Group Pays in the Fair Share Tax Figure 7 gives details on how much the average taxpayer in each category would pay or save under the Fair Share Tax. The top 1% of families would pay substantially more—on average $24,680. Yet this increase is relatively small considering that average income in this group is $1.6 million. In the next group, from the 95th to the 99th percentile—with incomes between $252,000 and $590,000—the additional tax is $2,706. In the group with incomes between $112,000 and $252,000, from the 80th to the 94th percentile, the average tax increase is only $332. Below the top 20%, the average tax increase becomes quite small. In the fourth quintile, it is $77—less than the cost of a cup of coffee once a week for a year—and in the third, middle quintile it is only $24. Remember that these are averages for a large class of families. A few families in this class may see their taxes go up a great deal. Most will see their taxes go down. Taxpayers in the bottom two quintiles will, on average, see a small decrease in their taxes. The averages in both quintiles is quite small, although, as we mentioned above, the lowest quintile benefits from income tax forgiveness and, thus, does not pay substantial income taxes under current law. The average tax cut in the bottom two quintiles also smaller because there are some people with relatively low incomes who receive a large portion their income from (most likely inherited) wealth.

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Figure 7

Out-of-State Taxpayers The data in Table 3 and Figures 5-7 come from data from the Institute on Tax and Economic Policy (ITEP) and are generated by their model of the state. To secure the county-by-county data presented below, we asked the Pennsylvania Department of Revenue (DOR) to project the impact of the Fair Share Tax based on actual tax returns. The results, which are in Figure 8, are broadly similar to the ITEP data, although DOR can’t give us information for the top 1% and 5% of taxpayers. But Figure 8 does point to one striking result: 16% of taxpayers who will see their taxes increase as a result of the Fair Share Tax are not residents of Pennsylvania. Presumably, they live elsewhere but may work part-time in Pennsylvania or own intangible property that generates income they have to report on Pennsylvania tax returns.

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Figure 8

Who Pays the Fair Share Tax: A County-by-County Breakdown There is not a great deal of variation in the impact of the Fair Share Tax on a county-by-county basis. As Figure 9 shows, the range in the percent of taxpayers who would see their taxes reduced or remain unchanged runs from 73% to 91%. In all but four counties, the percent of taxpayers whose taxes are reduced or unchanged ranges from 80% to 91%.

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Figure 9

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There is also not a lot of variation in the impact of the tax on families in different types of counties. In the average county, 85% of taxpayers will see a reduction or no change in their taxes. In urban counties 81% of taxpayers will see their taxes reduced or unchanged; 86% will in rural areas. Eighty-one percent of taxpayers will see their taxes decrease or remain the same in the six rural counties with substantial fracking. This is likely a result of royalties being taxed at the higher rate. But in the rural counties where there is no fracking, the percentage of taxpayers who will see a reduction or no change in their taxes is higher, at 86%.

Table 4 Percentage of taxpayers Number of Type of County whose taxes are reduced or Counties unchanged urban 19 81% rural 48 86% rural fracking 6 81% rural non-fracking 42 86% All Counties 85% Source: Pennsylvania Budget and Policy Center based on PA Department of Revenue data.

Impact by House and Senate Districts We also looked at the impact of the Fair Share Tax in each state Representative and state Senate district. Again, variation from district to district is quite low. In the vast majority of Senate and House districts, 80% to 89% of taxpayers will see a reduction or no change in their taxes under the Fair Share Tax. That data is in Tables 5 and 6 in Appendix 2.

Pennsylvania Taxes on the Top 1% Would Remain Below Most Neighboring States Some politicians, pundits, and citizens always point out that an increase in state taxes will undermine economic activity in the state or drive people to move away. We think this fear is unjustified when tax increases are relatively small, since, as we pointed out above, taxes are a very small portion of business costs. At any rate, there is little to worry about when it comes to the Fair Share Tax. While an increase in the rate on income from wealth to 6.5% sounds like a big jump, keep in mind that the rate is applied to six categories of income, but not to the largest category: wages. Thus, the impact of the higher rate on the overall tax rate, even on the top 1%, is minimized. As Figure 10 shows, even after implementation of the Fair Share Tax, the overall tax rate on the top 1% of families in Pennsylvania would be only 3.9%. This remains the lowest rate of any of our neighboring states, other than Ohio, and is significantly below the tax rates of the top 1% in DC, New Jersey, and New York.

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Figure 10

Conclusion The idea of dividing Pennsylvania’s Personal Income Tax into two parts is not new. People have been talking about it as a way to get around the limits of the uniformity clause for 20 or 30 years. But it was only two years ago that PBPC began to explore the idea in some depth and, more importantly, secure the data to show that the intuitions about the impact of the tax were correct: it is a way to raise more revenue from those with higher incomes and, in doing so, fix our broken tax system. The Fair Share Tax proposal we put forward here calls for an increase in the tax on income from wealth and a small decrease on the tax on wages and interest. Our goal is to generate substantial revenues with which to close our structural deficit and investment deficit while taking a large step toward turning our upside-down tax system right side up.

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Appendix 1: Distribution of the Tax Burden in Neighboring States 13

Figures 11 Delaware

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Maryland

New Jersey

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New York

Ohio

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West Virginia

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Appendix 2: The Fair Share Tax and Legislative Districts

Table 5: Senate Districts Impact of Fair Share Tax by State Senate Districts Percent of population Percent of Senate Legislative with unchanged or population with Senator District reduced taxes higher taxes Lawrence Farnese 1 90.5% 9.5% 2 90.5% 9.5% 3 90.5% 9.5% Art Haywood 4 84.9% 15.1% 5 90.5% 9.5% Robert M. Tomlinson 6 80.5% 19.5% 7 88.0% 12.0% Anthony Hardy Williams 8 88.3% 11.7% Thomas Killion 9 81.0% 19.0% Steven Santarsiero 10 80.5% 19.5% Judith Schwank 11 86.7% 13.3% 12 79.0% 21.0% Scott Martin 13 81.7% 18.3% 14 88.7% 11.3% John DiSanto 15 88.1% 11.9% Patrick Browne 16 86.0% 14.0% Daylin Leach 17 79.7% 20.3% 18 85.8% 14.2% Andrew Dinniman 19 77.7% 22.3% Lisa Baker 20 83.9% 16.0% 21 85.2% 14.7% John Blake 22 87.2% 12.7% Gene Yaw 23 82.7% 17.3% 24 79.8% 20.1% Joseph Scarnati 25 86.1% 14.0% Timothy Kearney 26 82.3% 17.7% 27 87.5% 12.6% Kristin Phillips-Hill 28 87.4% 12.6% David Argall 29 88.1% 11.9% 30 87.0% 13.0% 31 85.2% 14.8% Patrick Stefano 32 88.1% 11.9% VACANT 33 85.9% 14.2% 34 84.0% 16.0% 35 88.5% 11.5% 36 81.7% 18.3% VACANT 37 84.3% 15.7% Lindsay Williams 38 84.4% 15.6% Page | 23

Kim Ward 39 85.8% 14.2% 40 87.2% 12.8% VACANT 41 86.5% 13.5% Wayne Fontana 42 84.4% 15.6% 43 84.4% 15.6% 44 78.7% 21.3% 45 84.6% 15.4% 46 83.5% 16.5% 47 87.8% 12.2% Mike Folmer 48 87.0% 13.1% 49 87.8% 12.2% 50 86.6% 13.4%

Table 6: House Districts Impact of Fair Share Tax by PA House District Percent of population Percent of House Legislative with unchanged or population with Representative District reduced taxes higher taxes Patrick Harkins 1 87.3% 12.7% 2 87.3% 12.7% 3 87.3% 12.7% Curtis Sonney 4 87.3% 12.7% 5 86.1% 13.9% 6 86.2% 13.8% 7 86.3% 13.7% 8 85.5% 14.5% 9 87.3% 12.7% 10 87.3% 12.7% VACANT 11 83.5% 16.5% 12 83.5% 16.5% John Lawrence 13 78.0% 22.0% Jim Marshall 14 87.3% 12.7% Joshua Kail 15 86.1% 13.9% 16 88.2% 11.8% 17 86.9% 13.1% Gene DiGirolamo 18 80.5% 19.5% 19 84.4% 15.6% 20 84.4% 15.6% 21 84.4% 15.6% 22 86.0% 14.0% 23 84.4% 15.6% 24 84.4% 15.6% Brandon Markosek 25 84.4% 15.6% 26 77.8% 22.2%

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Daniel Deasy 27 84.4% 15.6% 28 84.4% 15.6% 29 80.5% 19.5% 30 84.4% 15.6% 31 80.5% 19.5% Anthony DeLuca 32 84.4% 15.6% Frank Dermody 33 84.8% 15.2% 34 84.4% 15.6% Austin Davis 35 84.4% 15.6% 36 84.4% 15.6% 37 81.7% 18.3% William Kortz 38 84.4% 15.6% Michael Puskaric 39 84.1% 15.9% 40 83.8% 16.2% Brett Miller 41 81.7% 18.3% Daniel Miller 42 84.4% 15.6% 43 81.7% 18.3% 44 84.4% 15.6% Anita Kulik 45 84.4% 15.6% 46 83.5% 16.5% Keith Gillespie 47 87.4% 12.6% Timothy O‘Neal 48 82.7% 17.3% 49 83.9% 16.1% 50 85.6% 14.4% Matthew Dowling 51 88.9% 11.1% 52 89.0% 11.0% Steven Malagari 53 78.4% 21.6% Bob Brooks 54 85.4% 14.6% Joseph Petrarca 55 86.1% 13.9% George Dunbar 56 85.8% 14.2% Eric Nelson 57 85.8% 14.2% 58 85.8% 14.2% Mike Reese 59 86.0% 14.0% Jeffrey Pyle 60 87.5% 12.5% 61 78.4% 21.6% 62 86.9% 13.1% 63 85.9% 14.0% R. 64 87.7% 12.3% 65 86.9% 13.1% 66 86.7% 13.3% 67 85.4% 14.6% 68 81.1% 18.9% 69 86.5% 13.5% 70 78.4% 21.6% Jim Rigby 71 89.5% 10.5% Page | 25

Frank Burns 72 89.5% 10.5% Thomas Sankey 73 88.7% 11.3% Dan Williams 74 77.7% 22.3% 75 88.1% 11.9% Stephanie Borowitz 76 86.4% 13.6% Scott Conklin 77 82.4% 17.6% 78 85.7% 14.3% Louis Schmitt 79 88.1% 11.9% 80 88.1% 11.9% 81 86.3% 13.6% Jonathan Hershey 82 86.0% 14.0% 83 86.3% 13.7% 84 85.5% 14.5% Fred Keller 85 81.7% 18.3% 86 86.5% 13.5% 87 84.3% 15.7% Sheryl Delozier 88 84.3% 15.7% Rob Kauffman 89 85.8% 14.2% 90 85.8% 14.2% 91 85.6% 14.4% 92 87.1% 12.9% 93 87.4% 12.6% Stanley Saylor 94 87.4% 12.6% Carol Hill-Evans 95 87.4% 12.6% P. Michael Sturla 96 81.7% 18.3% 97 81.7% 18.3% 98 82.2% 17.8% David Zimmerman 99 81.7% 18.3% 100 81.7% 18.3% 101 86.0% 14.0% 102 86.0% 14.0% 103 88.3% 11.7% Susan Helm 104 88.1% 11.9% Andrew Lewis 105 88.3% 11.7% Thomas Mehaffie 106 88.3% 11.7% 107 88.2% 11.9% 108 88.2% 11.8% David Millard 109 87.5% 12.5% 110 78.8% 21.2% 111 77.2% 22.8% 112 87.0% 13.0% 113 87.0% 13.0% Bridget Kosierowski 114 87.0% 13.0% 115 88.6% 11.4% 116 88.5% 11.5% Page | 26

Karen Boback 117 84.9% 15.1% Mike Carroll 118 88.1% 11.9% 119 88.5% 11.5% 120 88.5% 11.5% 121 88.5% 11.5% 122 89.1% 10.9% 123 89.1% 10.9% 124 88.3% 11.7% 125 88.9% 11.1% 126 86.7% 13.3% Thomas Caltagirone 127 86.7% 13.3% Mark Gillen 128 86.1% 13.9% Jim Cox 129 85.7% 14.3% David Maloney 130 86.7% 13.3% Justin Simmons 131 84.1% 15.9% 132 86.0% 14.0% Jeanne McNeill 133 86.0% 14.0% 134 86.2% 13.8% 135 85.7% 14.3% Robert Freeman 136 85.7% 14.3% 137 85.7% 14.3% 138 85.7% 14.3% 139 84.5% 15.5% John Galloway 140 80.5% 19.5% 141 80.5% 19.5% 142 80.5% 19.5% 143 80.5% 19.5% 144 80.5% 19.5% 145 80.5% 19.5% 146 78.4% 21.6% Marcy Toepel 147 78.4% 21.6% 148 78.4% 21.6% 149 78.4% 21.6% Joe Webster 150 78.4% 21.6% Todd Stephens 151 78.4% 21.6% Thomas Murt 152 79.4% 20.6% Benjamin Sanchez 153 78.4% 21.6% Stephen McCarter 154 78.4% 21.6% 155 77.7% 22.3% 156 77.7% 22.3% 157 77.8% 22.2% 158 77.7% 22.3% Brian Kirkland 159 82.8% 17.2% Stephen Barrar 160 81.0% 19.0% 161 82.8% 17.2% Page | 27

David Delloso 162 82.8% 17.2% 163 82.8% 17.2% Margo Davidson 164 82.8% 17.2% Jennifer O‘Mara 165 82.8% 17.2% 166 82.0% 18.0% 167 77.7% 22.3% Christopher Quinn 168 82.8% 17.2% 169 87.4% 12.6% 170 90.5% 9.5% 171 83.7% 16.3% Kevin Boyle 172 90.0% 10.0% Michael Driscoll 173 90.5% 9.5% 174 90.5% 9.5% MaryLouise Isaacson 175 90.5% 9.5% 176 88.6% 11.4% Joseph Hohenstein 177 90.5% 9.5% 178 80.5% 19.5% 179 90.5% 9.5% 180 90.5% 9.5% 181 90.5% 9.5% 182 90.5% 9.5% Zachary Mako 183 85.8% 14.2% 184 90.5% 9.5% Maria Donatucci 185 89.1% 10.9% Jordan Harris 186 90.5% 9.5% 187 86.2% 13.8% James Roebuck, Jr. 188 90.5% 9.5% Rosemary Brown 189 87.7% 12.3% Movita Johnson-Harrell 190 90.5% 9.5% Joanna McClinton 191 88.3% 11.7% 192 90.5% 9.5% 193 85.1% 14.9% Pamela DeLissio 194 88.7% 11.3% 195 90.5% 9.5% 196 87.4% 12.6% Danilo Burgos 197 90.5% 9.5% Rosita Youngblood 198 90.5% 9.5% Barbara Gleim 199 84.3% 15.7% Christopher Rabb 200 90.5% 9.5% 201 90.5% 9.5% 202 90.5% 9.5% 203 90.5% 9.5%

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