State budget may build on tax reform boom
State lawmakers are heading into budget negotiations with wages rising, record low unemployment, and state revenues surpassing projections — an economic windfall largely due to federal tax reform. With all this great economic news, it would be easy to grow complacent.
But here’s the reality: Pennsylvania still lags other states on the national stage. To attract the investment and job creators that will secure our future, we can — and must — do better. Luckily, lawmakers have the blueprint they need to make our state competitive: Control spending and replicate federal tax reform in our own back yard.
The Tax Cuts and Jobs Act (TCJA) reduced taxes for 90 percent of Americans. It accomplished this by lowering the tax rate for everyone except those in the top two tax brackets and increasing the standard deduction.
In response, dozens of Pennsylvania employers announced raises, including increasing starting wages to $15 an hour. Other employers handed out bonuses, increased contributions to 401(k)s, and made investments that created more jobs.
In Pennsylvania, wage growth reached 4 percent in 2018 and is expected to do the same in 2019 — which is benefitting workers at all levels. Wages are rising fastest among the lowest-paying jobs, according to data from the Federal Reserve Bank of Atlanta.
Hiring is up, too. Today, there are more jobs available in the United States than unemployed individuals seeking work. Pennsylvania’s unemployment rate — 3.2 percent in April — is the lowest in recorded history.
When its people prosper, the state does too. After federal tax reform, state revenue grew by 9.2 percent — a massive improvement over last year’s 2.5 percent growth rate. As of April, state tax collections are $800 million above estimates.
Nationally, tax reform is expected to grow the economy by 1.7 percent. If these changes are made permanent, lower- and middle-income earners will continue to benefit.
While tax reform has helped spur Pennsylvania’s economic growth, we still lag the rest of the nation — and our residents continue moving to other, faster-growing states. This trend is pronounced among younger college graduates. From 2012 to 2017, the commonwealth lost more than 30,000 residents aged 18 to 34. That includes 36 college-educated individuals per day — a “brain drain” that illustrates our current approach of high taxes and overspending is shrinking our labor force and hamstringing economic growth.
Here’s the good news: Lowering tax rates and enacting state spending limits can reverse this trend.
Pennsylvania has the third-highest Corporate Net Income Tax in the country. Iowa and New Jersey levy a higher rate, but only on more profitable corporations and both states are scheduled to lower their top rate. In Pennsylvania, all corporations, including many small businesses, pay nearly 10 percent. Even Governor Wolf, who has supported 11 tax hikes in five years, proposed lowering the corporate rate to 5.99 percent by 2024.
Simplifying the sales tax would also be a big help. Our 6 percent state sales tax ranks 16th in the nation and compliance costs are high given the complexity of what is and isn’t subject to tax. Applying a low-rate, uniform sales tax with fewer exemptions will lighten the tax burden for everyone.
Controlling spending is the other side of the tax reform coin. Absent spending limits, Pennsylvania has built up more than $10,000 in debt per person. That’s where the Taxpayer Protection Act (TPA) comes in.
The TPA holds government growth to the rate of inflation plus population change, allowing for spending growth but keeping it in line with taxpayers’ ability to pay for it. This simple restraint protects Pennsylvania families from unnecessary tax hikes and ensures long-term fiscal health.
Thankfully, many state lawmakers are on board with enforcing long-term fiscal discipline. The Senate Finance Committee recently passed a TPA bill, SB 116, and House lawmakers have introduced their own.
This budget season, let’s build on federal tax reform’s success while enacting commonsense spending limits. Then we’ll turn Pennsylvania back into a destination state for families and job creators.
Tirzah Duren is a policy analyst for the Commonwealth Foundation, Pennsylvania’s free market think tank.