Pa. sales tax looks to climb; so does unfairness, critics say

Pennsylvania soon might raise its statewide sales-tax rate to the second highest in the nation, a move that experts say would hit low-income residents the hardest while making local businesses less competitive with neighbors in Delaware and New Jersey.

And in Philadelphia, where a local sales tax is also imposed, the rate would be the second highest among America's 10 most populous cities.

A framework to end the months-long budget impasse between Gov. Wolf and Republican legislators in Harrisburg includes increasing the sales-tax rate - from 6 percent, to 7.25 percent - to raise $2 billion in new revenue. At least $400 million of that money would go to education. Some of the rest would also be applied to reducing property taxes across the state, although no details have emerged.

In Allegheny County and Philadelphia, where additional local sales taxes are imposed, the total rates would be 8.25 percent and 9.25 percent, respectively. Only Chicago, among the country's 10 most populous cities, would have a higher rate than Philadelphia.

Tax experts say the sales tax extracts an especially high price on the poor. In addition, renters, who constitute 30 percent of the state's households, would receive no direct benefit from property-tax breaks.

"There's a reason why Pennsylvania has one of the most unfair tax systems in the country, and it's the sales tax," said Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, or ITEP, a nonpartisan research group. "The sales tax is the single most regressive revenue source Pennsylvania relies on."

The sales tax is considered regressive because it typically collects a larger share of income from those who make less; the less someone makes, the higher portion of income they must spend for necessities.

In large part due to Pennsylvania's heavy reliance on sales and excise taxes, which generate about 40 percent of the state's revenue, ITEP in a 2015 report ranked Pennsylvania the sixth most regressive state in terms of tax policy.

"Sales taxes," the report said, "inevitably take a larger share of income from low- and middle-income families than from rich families because sales taxes are levied at a flat rate and spending as a share of income falls as income rises."

Clothing and groceries are among items exempt from Pennsylvania's sales tax, so that helps to lessen the blow. Even with that, though, the report estimated that Pennsylvanians in the bottom fifth in income pay 12 percent of their income in state and local taxes; Pennsylvanians in the top 1 percent pay 4.2 percent of their income.

Items such as a cup of coffee at Starbucks, prepared food, blankets, school supplies, sports equipment, child car seats, and cleaning materials are all taxable.

Increasing the sales tax carries few political risks compared with its budgetary rewards, experts said.

"People don't really think about it because you pay it pennies at a time, but sales tax is usually the number-one or number-two source of revenue across a state," said Diane Yetter, founder and president of the Sales Tax Institute, a Chicago-based company that works with businesses on tax issues.

"Most people don't have a real good sense of what they pay in sales tax," said Norton Francis, a senior research associate with the Urban Institute. "Expanding the base is a lot harder."

Expanding the base would mean making more items taxable. Wolf initially recommended a lower rate increase accompanied by expanding the sales tax to some goods that are untaxed.

"Doing it in a broad-based manner like that is not very successful," said Yetter, referring to the policy of increasing the amount of taxable goods rather than raising the rate. "Industries and services that don't have strong lobbying groups lose more frequently."

Wolf also had proposed an increase in the state's income tax - currently at 3.07 percent, it is one of the lowest in the nation - to accompany a smaller sales-tax increase, but that plan is off the table after being soundly rejected by the House.

"By far, the biggest beneficiaries of relying on the sales tax to fund cuts in property taxes are the top 1 percent of taxpayers," according to a Pennsylvania Budget and Policy Center report. It estimated that the sales-tax increase would cost the top 1 percent of taxpayers less than a quarter of what Wolf's original income-tax plan would have cost them.

Lawmakers hope that the increased revenue from the sales-tax hike can be used to both fund schools and reduce the burden of property taxes.

Such a move has the potential to be "heavily skewed" toward high-income individuals, Francis said.

"Who is likely to get left out of that is renters, low-income renters," Gardner said.

The tax also could hurt some businesses, since Pennsylvania's population centers would be near states with lower rates, said Jared Walczak, a policy analyst at the National Tax Foundation.

But for the sake of convenience, most shoppers likely wouldn't change their habits, Yetter said.

While details of any final budget agreement remain uncertain, if the sales-tax increase is enacted, Francis said, one thing is certain.

"That's a pretty big increase, so it's going to have an impact," Francis said. "It's certainly going to be felt."

mnussbaum@philly.com610-313-8114@MatthewNussbaum