Taxes

The 2017–2018 budget process began with the Governor’s budget address and has continued with hearings of the House and Senate Appropriations Committee. There are certainly no shortages of ideas on how to address Pennsylvania’s structural deficit.

Some think we can spend our way out of the hole.  However, as Winston Churchill once said:  “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to pull himself up by the handle.”

Meanwhile, others want to raise taxes.  Last year, the big push was for higher tobacco taxes, which were passed:  $2.60 per pack and $0.13 per little cigar.  The first cigarette tax was enacted in 1935 as a “temporary” emergency tax of 0.1 cent per cigarette.  It was made permanent in 1951.  If tobacco taxes succeeded in getting people to stop smoking today, Pennsylvania’s budget would have another $1 Billion shortfall – that’s how much the Commonwealth collects from tobacco taxes.

Rarely are the implications of higher taxes put into perspective.  As the late author and humorist Peg Bracken once said:  “Why does a ‘slight’ tax increase cost you two hundred dollars and a ‘substantial’ tax cut save you thirty cents?”  When someone says “this tax increase will only cost a few cents a day,” think about holding 100 pounds and having someone add another five pounds:  it’s heavier, not lighter.

I recently saw an article referencing a new tax plan from 100 years ago where state lawmakers then were proposing a 2.5% tax on coal for highway construction and repairs and for new revenues to municipalities where coal mines or coal washing operations were located.  In 1917, Pennsylvania’s coal production was over 100 million tons and employed 757,317 people.  A hundred years later, total production is 51,169 tons and supports about 36,200 jobs – 13,000 directly related to coal mining.

Obviously, as times change, so do the impacts of taxes, which is why I believe it’s important for government to first live within its means before even considering taxes.  To me, taxes should be the absolute last resort – especially since all levels of government have generally grown faster than taxpayers’ ability to pay.

The Corporate Net Income Tax (CNI) was first imposed in 1935 at a rate of 6%.  In 1977, it was “temporarily” raised to 10.5%, which was made permanent in 1982.  The current rate is 9.99%.  In 1991, the rate reached a high of 12.25%.

In response to the 1936 Johnstown Flood, that General Assembly enacted a “temporary” emergency tax of 10% on liquor, which was to expire May 31, 1937.  Over the years, this sunset date was extended many times until it was made permanent in 1951; the current rate is 18%.

The Realty Transfer Tax was enacted in 1951 – also as a “temporary” tax.  It was made permanent in 1961; its rate has always been 1%.

The Sales and Use Tax was another “temporary” tax first enacted in 1953 and eventually evolved into support for public education.  This “temporary” tax started at 1% and has grown over the years to its current 6% (although the initial 6% was also to be “temporary” until 1969; however, that year, the 6% was made permanent).  Allegheny County imposes another 1% on purchases, while Philadelphia adds 2% for purchases (with 1% being yet another “temporary” tax to address that City’s pension problems).

The Personal Income Tax was imposed in 1971 at 2.3%.  Over the years, the PIT rate has varied (some increases were to automatically “sunset”).  The PIT reached its current high in 2003 when it was set at 3.07%.

“Temporary” taxes are rarely temporary.  That’s why the late Milton Friedman said:  “Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.”

Contacts:

Fred Sembach
Fallon Binner
717-787-5708