Baer: Four ways to make Pa. taxes fairer

Pennsylvania Budget
Want some free advice on taxes, Gov. Wolf?

AFTER WRITING recently about a Tax Foundation book on Pennsylvania's taxes, I got lots of input from lots of places.

Most underscored the book's main point: Reform is needed.

So, as Harrisburg works on another state budget, I figured I'd offer some examples of taxes gone awry.

ONE: Our personal income tax (PIT) of 3.07 percent is second-lowest among states that levy a PIT. Seven don't.

But that's deceptive. We've also got 2,500 municipalities and 500 school districts piling on local income taxes, which most other states do not have.

Worse, our PIT is largely responsible for our national ranking by the Institute on Taxation and Economic Policy as the sixth most regressive tax state.

It's not because we're the sixth largest state. States ranked worse are (from fifth to worst) Illinois, South Dakota, Texas, Florida, and Washington. It's because our PIT's a flat rate. When it is combined with other taxes, lower-income folks pay a higher percentage of income (12 percent) than middle-incomers (10 percent) or higher-income folks (4.2 percent).

Seem fair? Progressive states have progressive rates.

Why don't we? Might have something to do with our business taxes.

TWO: Our corporate net income (CNI) tax is 9.99 percent, second-highest among states with a CNI.

But that's deceptive. Most companies don't pay. And not just because of the "Delaware loophole" allowing Pennsylvania companies to reduce their state taxes by creating holding companies in comparative tax-haven Delaware.

It's because most businesses are taxed at the much-lower 3.07 percent PIT rate, since most (since the mid-1990s) register not as a regular C-corporation but as a limited liability company (LLC).

There are nearly 500,000 LLCs in Pennsylvania, according to the Department of State. That's probably more than in any state save California. They include major law firms, architectural firms, accounting companies, etc.

On the other hand, there are 113,092 C-corps.

And the difference between paying at the 3.07-percent rate and the 9.99-percent rate, according to a 2015 Treasury Department analysis, costs the state hundreds of millions annually - as much as $975 million in a recent year.

If you're thinking a rate between the PIT and the CNI might be fairer, that was tried 12 years ago by a tax reform commission that included then-Revenue Secretary, now-Gov., Tom Wolf.

Guess what happened? You know your state if you guessed "nothing."

THREE: Our 6 percent sales tax (higher in Philly and Pittsburgh) isn't so bad, ranking 32nd among 45 states with a statewide sales tax.

But that's deceptive. We still treat our economy as if it were a goods, rather than a service, economy by keeping tons of services exempt from sales taxes. So our sales-tax revenue lags behind national levels and neighboring states'.

Expanding the tax to stuff such as engineering, legal, real estate, advertising, and more would mean more revenue or a reduced rate.

Expansion has been proposed; but, as you maybe guessed, no sale.

FOUR: We give away sales-tax revenue.

We're one of 13 states allowing retailers to keep 1 percent of the amount of sales tax they collect.

It's a policy harking back to hand-kept bookkeeping and mailing. It cost the state $82.5 million in 2014. Maybe such money could go to better use.

Why do all these things exist? Because reform doesn't.

Because, as reported by the Pittsburgh Tribune-Review, more than 900 lobbyists spent more than $500 million last year on behalf of businesses, professionals, retailers, etc., to push or block state legislation.

Because lobbyists' clients give lawmakers campaign funds.

Because fund-raising/re-election replaces efforts to shape a tax system that's sensible and fair.

baerj@phillynews.com

Blog: ph.ly/BaerGrowls

Columns: ph.ly/JohnBaer