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Lawmakers hear state tax proposals

Economists suggest expanding base of some state taxes, lowering tax rates

HARRISBURG — Pennsylvania lawmakers should consider expanding the base of some state taxes and lowering tax rates in order to address long-standing fiscal issues, several economists told members of a House panel Thursday.

That could include making more items subject to the state sales tax and considering making retirement income subject to the Personal Income Tax.

The economists — Robert Strauss, professor of economics at Carnegie Mellon University; Jared Walczak, senior policy analyst at the Tax Foundation; and Paul Yakovlev, associate professor of economics at Duquesne University — testified before a House Appropriations subcommittee on fiscal policy chaired by Rep. Warren Kampf, R-Montgomery.

The focus of the hearing was on Pennsylvania’s tax structure, climate and competitiveness and impact of the recently enacted federal Tax Cut and Jobs Act.

The three economists engaged in a philosophical and analytical discussion of the budgetary pressures facing Pennsylvania mixed with some blunt talk about the political consequences for lawmakers dealing with those pressures.

“I think you guys (lawmakers) are in a pickle,” said Strauss referring to having an inadequate state tax base to support increasing state government spending.

Yakovlev said the state corporate net income tax rate of 9.99 percent sticks out like a sore thumb compared to other states and should be reduced.

“A combination of spending cuts, tax rate cuts and tax base broadening could make Pennsylvania’s economy grow faster without jeopardizing the state’s ability to provide valuable public services,” Yakovlev

said.

Walczak suggested broadening the base of the 6 percent state sales tax to include more services that could generate the revenue to enable cutting state taxes. He added that the low state personal income tax rate at 3.07 percent is one of the “bright spots in Pennsylvania’s tax structure.”

Strauss said Pennsyl­vania faces a “demographic tsunami” due to the exemption of retirement income (Social Security payments, retirement contributions by employers) from the state personal income tax.

State spending on services for the elderly will increase from more than $4.2 billion in 2013 to an estimate of between $5.8 billion and $7.8 billion in 2025 as the population ages, Strauss said.

Meanwhile, the state tax revenue not realized due to the exemption of retirement income from the PIT will increase from $2.5 billion in 2013 to estimates ranging from $5.4 billion to $7.1 billion in 2025.

“The demographics of the state are going to create a revenue problem the likes of which you haven’t seen,” Strauss said.

The House hearing was held less than three weeks before Gov. Tom Wolf unveils his proposed 2018-19 state budget in an address Feb. 6 before the General Assembly.

The House Appro­priations Committee is scheduled to hold several weeks of hearings on the governor’s proposal starting Feb. 21.

While monthly state tax revenue collections are improved from the situation one year ago, the state’s Independent Fiscal Office projected last November that as much as $1 billion in new revenue could be needed to balance the Fiscal Year 2018-19 budget come June.

Wolf’s Budget Secretary Randy Albright and Republican legislative leaders said last month the state’s deficit problems are resolved with passage of the FY 2017-18 revenue package in late October, thus avoiding the need for any broad-based state tax hikes this year.

Yet Yakovlev said Pennsylvania’s ability to pay its short-term bills as measured in terms of cash solvency is among the lowest in the country. The continuing challenge facing state policymakers is to find enough tax revenue to finance a rather high level of government spending, he added.

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