Pennsylvania House Majority Whip Kerry Benninghoff, the chamber’s No. 3 Republican leader for the 2019-2020 legislative session, thinks the state’s tax structure should be reformed.
“For the most part, the legislature has been working under the same framework and resources for years in this state,” Representative Benninghoff told Pennsylvania Business Report earlier this month. “Then, during an economic downturn, we’re scratching our heads trying to find new dollars; this has resulted in patchwork solutions that aren’t long term.”
This isn’t just Benninghoff’s personal opinion — the Pennsylvania House Republican Caucus agrees.
“Pennsylvania’s tax structure is not currently working to attract new business, and in many ways encourages our college graduates to leave the state,” said Mike Straub, spokesman for the caucus.
Last year, Benninghoff said he asked for and received the report, Pennsylvania: A 21st Century Tax Code for the Commonwealth, a comprehensive analysis of state tax reform that recommends specific solutions. The report was released in September 2018 by the independent tax policy research organization, the Tax Foundation, in Washington, D.C.
Interestingly, authors of the Tax Foundation report also concluded that “policymakers from across the spectrum recognize that the Commonwealth’s tax code has not kept up with a 21st century economy.”
Benninghoff said that when he asked for the tax report, he had three goals: To determine what Pennsylvania does well to attract new business, what it’s doing poorly, and most importantly, he said, how can the state become more competitive within its own borders and across the nation to successfully attract more businesses down the road.
The 157-page report looks at the state’s economy, including its gross domestic product (GDP), personal income, major industries, employment, and migration patterns, and dissects Pennsylvania’s tax and budget structure, such as corporate net income taxes, personal income taxes, state sales taxes, property taxes, and local taxes, among others.
Benninghoff summarized one of the main takeaways from the report, which Republicans are using to help legislatively guide them this term on changing the state’s tax structure.
“If Pennsylvania wants to attract more new businesses or grow current ones in the state, we must have continuity and consistency in the tax code,” Benninghoff told PBR. “It must be easily understood and readable — in turn, we’ll have better job growth.”
What currently exists, he said, is a tax code that “is only chipping away at an iceberg” and that’s served to complicate an already convoluted system with patchwork solutions.
“We need to be more reflective of where Pennsylvania’s economy is,” said Benninghoff, noting that the state is moving toward a service-based economy.
“And currently we aren’t prepared for that,” he said.
The Tax Foundation recommends broadening the tax base through sales and use taxes, said Benninghoff, who thinks the recommendation could make the state’s tax structure a bit fairer for all residents as compared to doing so via the earned income tax, for example.
“We need to consider this because Pennsylvania is the third-largest aging state in the nation,” he said.
That presents a problem. With a large aging population in the state, it wouldn’t be logical to only tax earned income because “it’s a diminishing resource,” Benninghoff said.
At the same time, an aging population will demand more government-subsidized resources as post-retirement folks live 20, 30, 40 years beyond their retirements, he said.
Their increased need for public and medical services will increasingly drain state finances, Benninghoff said, adding that “new unexpected costs also get thrown in there — such as unforeseen expenditures — so we need to be more creative with the budget.”
In Pennsylvania, for example, some services are taxed, and some aren’t, like commodities, the lawmaker explained.
Take yarn for instance. Benninghoff said that what a buyer plans to do with that raw material determines whether the merchant selling it must pay a 6 percent tax.
“Merchants are supposed to ask buyers what they’re doing with the yarn,” he said. “It’s a nightmare for many of our small merchants — they’re not familiar with the tax code. They don’t know what to tax or what not to tax.”
The situation invariably puts merchants in a position to be financially liable for uncollected debt “and they also are punitively punished,” said the congressman. “It’s a double whammy at the end of the year.”
And, said Benninghoff, “think about the money that gets spent playing ‘gotcha!’ with small merchants for the taxes they don’t collect.”
Instead, Benninghoff said he’s looking “to lower the tax rate, broaden the tax base and make it fairer to encompass what we don’t have.”
Benninghoff also pointed to municipal governments, where the majority of costs are in a judicial service.
“So, if you’re making money illegally through gambling, for instance, and not paying taxes — because those people aren’t filling out W-2 or W-9 [tax forms] to report that income — you’re also not paying into the community services pot,” he said. “A broader sales tax gives consumers … more control and picks up a lot of that underground money.”
If such challenges on Pennsylvania’s tax structure are left unresolved, the state’s Republican lawmakers foresee even tougher problems ahead.
“As the study by the Tax Foundation recommends, we need to find broad-based tax solutions, at lower rates, so taxpayers can have transparency and long-term predictability,” Straub told PBR in an email. “That would in turn give businesses the knowledge to make long-term investments in our state, thus bringing more jobs and taxpayers to our Commonwealth.”
Straub also noted that with the state’s legislative session just getting under way and committees still being assigned, Republicans “look forward to working with members from both sides of the aisle to reach a consensus on a number of tax-related issues that will benefit all Pennsylvanians.”
Benninghoff said he’s concerned that if nothing gets changed and state legislators still expect different results, “then shame on us.”
“We’ve seen the guts and courage of other states to take on these challenges … states that now have surpluses in their budgets,” he said, noting that Pennsylvania lawmakers must be more reflective of the workforce and economy and provide more taxation consistency to help level out the state economy’s expected ups and downs.
“Otherwise, we’ll be unprepared for the future. We’ll limp along through another budget cycle, and unfairly tax certain sets of taxpayers,” Benninghoff said.
Benninghoff said he thinks he knows what would make Pennsylvania more attractive to businesses and why businesses would want to stay in the state or relocate to the Commonwealth.
“Pennsylvania has an aggressive infrastructure improvement program that includes bridge replacements and repairs and expanding highway capacities, going on right now that extends to rail and airports, too,” he said. “A consistent, predictable tax rate, improved infrastructure, and a well-trained workforce are all needed to make Pennsylvania more business friendly and attractive.”
The House Majority Whip said he’s specifically thinking about tomorrow when it comes to the state’s tax structure.
“I don’t want to spend time looking in the rear-view mirror at what we did or should have done,” he said. “This is a new session. Let’s move forward and see what smarter policies we can make happen. We’ve got to let everyone know that Pennsylvania is open for business.”