Gov. Tom Wolf’s $40 billion proposed budget for the coming fiscal year promises a major push on education funding to be paid for by increasing income taxes for some upper-income Pennsylvanians, cutting business taxes, and through a major change in the way that natural gas production is taxed.
Wolf pitched his plan by video to state lawmakers, who responded with broadsides about the state’s current tax burden and dire predictions about the blow that a proposed severance tax would have on the energy industry and effect raising the minimum wage to $12 an hour effective July 1 and rising to $15 per hour by 2027 would have on the business community in general.
“The governor’s latest tax scheme would be a fatal blow for many employers across Pennsylvania,” said Senate President Pro Tempore Jake Corman (R-34).
The Pennsylvania Manufacturers’ Association fired back as well. President and CEO David Taylor called Wolf’s plan “an obscene progressive wish list” that was developed without sufficient input from the business community.
“There are any number of bad ideas in this proposal, but what manufacturers want – and Pennsylvanians need – is a competent executive office that is focused on pandemic response and total harm minimization, including safely reopening Pennsylvania’s economy,” Taylor said. “This budget proposal fails to meet our current reality.”
Wolf’s plan for FY 2021-2022 is based on the goal of making it possible for families to hang on financially amid the COVID-19 turmoil while also providing them with the educational and job-training opportunities they will need to thrive over the long haul. “I refuse to tell any young family in Pennsylvania that they just happen to be starting out at the wrong time – that 2021 just isn’t going to be the year we get around to lifting the barriers that stand between them and the future they hope to provide for their children,” Wolf said.
A cornerstone to the strategy will be an overhaul of the state income tax rate, which Wolf said is among the lowest in the nation but has also unfairly taxed lower-income Pennsylvanians at the same rate as wealthier taxpayers. “Pennsylvania has one of the lowest personal income tax rates in the nation,” said Wolf. “For folks who have been lucky enough to build some real financial security, that’s a good deal. But if you’re just starting out, it’s a different story.”
The governor wants to increase the state personal income tax (PIT) rate to 4.49 percent from 3.07 percent, what amounts to a 46.3 percent tax increase, and raise $3 billion annually. A special tax forgiveness credit would be expanded for low earners.
But business advocates say it’s the wrong time to place additional burdens on those who are working to drive the economic recovery forward. “Make no mistake – this plan combined with the proposed minimum wage hike will devastate many of the small businesses in our communities,” said Pennsylvania Chamber of Business and Industry President and CEO Gene Barr.
According to the Commonwealth Foundation, Wolf’s proposed tax hike would hit local, small businesses. Most small businesses—sole owners, partnerships, LLCs, and S-Corporations—pay the Personal Income Tax. Approximately 855,000 small business owners paid the Personal Income Tax in 2018. “Our local small business owners need help, but Wolf seems to be doing everything he can to destroy their livelihoods,” wrote Nathan Benefield, vice president and COO of the Commonwealth Foundation.
Low earners would pay less under the governor’s proposal. The allowances for tax forgiveness would be increased to $15,000 for single filers, $30,000 for married couples, and $10,000 per dependent. Taxpayers with those income levels would end up not having to pay. At the same time, the percentage of tax forgiveness would decline by 1 percentage point for each $500 above the threshold. “For example, this means that families with two children making less than $84,000 will receive a tax cut while a family of four making $50,000 will have their taxes eliminated,” Wolf’s office said in a release.
Wolf pitched his proposal as working out to a tax cut – or at least no increase – for 67 percent of the state while also increasing state revenues by an estimated $4 billion over the course of a full year. And that money would help pay for the aid to education he is proposing and to a 25 percent cut to business taxes. “In order to keep that personal tax rate so low, we charge Pennsylvania businesses one of the highest tax rates in the nation, even as we underfund the schools and job training programs that are supposed to be building our future workforce,” said Wolf.
The energy industry and its allies in Harrisburg have been playing aggressive defense on the idea of implementing a “severance” tax on natural gas production, similar to ones used by many other energy producing states. Pennsylvania currently charges a straight “impact fee” on wells, which goes primarily to the counties where gas and oil is produced.
The impact fees, however, were down around 20 percent in 2019, according to the latest figures from the state Public Utilities Commission. Wolf and other proponents say a severance tax would generate more money than the fees, which would help increase state spending on education, infrastructure and other needed projects.
Critics, however, say the impact fee is, in reality, an onerous tax. Moreover, higher taxes would result in higher electric bills for the same business and families that Wolf is trying to help. “In the midst of an attempted recovery, one of the last thing taxpayers need to endure is higher energy prices,” said State Rep. Jim Struzzi (R-Indiana). “Asking gas drillers to pay more means asking consumers to pay more. That’s easy math.”
The state office of the American Petroleum Institute (API PA) pointed out that, in addition to annual impact fees, Pennsylvania producers are also supporting thousands of well-paying jobs and taking steps to reduce methane emissions and other environmental mitigation steps. “Governor Wolf’s severance tax plan would undo this progress, undermine our economic recovery and risk good-paying jobs supported by the natural gas industry,” said API PA Executive Director Stephanie Catarino Wissman.
Struzzi added that Wolf’s latest call for a severance tax was appropriate for the day after Groundhog Day. “I wish Gov. Wolf would ‘see his shadow’ and realize this proposal has neither the votes to pass in the Legislature nor the support of your constituents,” he said.