Rumors of a sudden interest on the part of Republicans in raising the personal Income tax (PIT) instead of the sales tax to meet the revenue requirements of the budget framework have floated across 3rd Street to our offices at the Pennsylvania Budget and Policy Center. So I’m going to do something unusual for us—and frankly a bit uncomfortable—and give some conservative arguments for preferring the PIT over the sales tax.
First, a PIT increase is for three reasons likely to place a smaller burden on businesses than a sale tax increase. For those goods and services on which the sales tax is imposed, the tax is paid on every purchase. It thus dissuades some people from making purchases. It especially dissuades those who live near a border with a state that has a lower sales tax from buying goods in Pennsylvania. The PIT in Pennsylvania also has less impact on overall consumption because it has little (and sometimes no) impact on those with low incomes, who spend all their income, but a bit more impact on those with high incomes, who save a portion of their income.
Second, the PIT can raise a great deal of money with only a small increase in the tax rate. Conservatives always tell us that the higher the tax rate, the more taxes distort and reduce economic activity. A 0.1% increase in the PIT raises roughly $400 million.
Third, the Pennsylvania PIT is flat. It takes the same percentage of income from poor and rich. Flat taxes have long been a favorite of many conservatives.
Fourth, the PIT may be more acceptable to much of the public. People are reminded of the sales tax with every purchase they make. The PIT takes a small amount from paychecks every week or two, and after the first paycheck, a small increase is barely noticeable. (Contemporary right wingers, who thrive on generating antipathy to government may think this is a bug not a feature. But traditional conservatives, who value comity over contention, would surely agree.)
As progressives, we at PBPC aren’t entirely comfortable with some of these arguments, although there are good progressive reasons to be concerned about public support for taxation and the impact of taxes on businesses. For example, we don’t agree that either tax would have a negative impact on economic activity—quite the opposite if it is used restore state funding on education, human services and other needs. We would also love to figure out a way to make the Pennsylvania PIT fairer moving from a flat tax to one with a higher tax rate on those with more income.
But these four arguments are typically made by conservatives and if you accept them, then the Pennsylvania Personal Income Tax is the best—or perhaps it should be “least bad” way—to raise the revenue we need on the table today.
And we do need the revenue because, don’t forget, balancing budgets without gimmicks is also a conservative principle!