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Pennsylvania Business Council Foundation

PENNSYLVANIAILLUSTRATED

A VISUAL GUIDE TO TAXES & THE ECONOMY

PENNSYLVANIA I L L U S T R AT E D

A V I S U A L G U I D E T O T A X E S & T H E E C O N O M Y

Copyright © 2016 Tax Foundation

ISBN: 978-1-942768-10-4

1325 G Street NW, Suite 950 • Washington, DC 20005 • (202) 464-6200taxfoundation.org

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IntroductionTaxes are complicated. Each state’s tax code is a multifaceted system with many moving parts, and Pennsylvania is no exception. This chart book aims to help readers understand Pennsylvania’s overall economy and tax system from a broad perspective. It also provides detailed illustrations to each of Pennsylvania’s major taxes—individual income taxes, business taxes, sales and excise taxes, and property taxes—to help make the complicated task of understanding the state’s tax code a bit easier.

These charts were complied by Tax Foundation staff and edited by Nicole Kaeding.

Joseph Henchman Vice President, Legal & State Projects Tax Foundation

David Patti President Pennsylvania Business Council Foundation

Nittany Lion Shrine, Photo AI R

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Table of ContentsChapter 1: An Overview of the Pennsylvania Economy 1Pennsylvania’s Income per Person Is Losing Ground to Its Peers 2Pennsylvania’s Metro Income Tends to Be Higher than Non-Metro Income 3Pennsylvania Has One of the Largest State Economies in the Nation 4Professional and Business Services, Real Estate, and Manufacturing Comprise the Largest Portion of Pennsylvania’s Economy 5Health Care, Professional and Business Services, and Government Employ the Most People in Pennsylvania 6Metro-Area Employment in Pennsylvania Varies Greatly from Non-Metro Employment 7Pennsylvania’s Unemployment Rate Fared Better than the National Average during the Great Recession 8Pennsylvania Has Struggled with Bouts of Out-Migration 9Pennsylvania’s Economy Is Transitioning from Goods to Services 10

Chapter 2: Pennsylvania’s Tax Code: An Overview 11Pennsylvania Taxes at a Glance 12Pennsylvania’s Tax Climate Has Room to Improve 13Pennsylvania’s Business Tax Climate Trails Its Peers’ 14Pennsylvania Tax Collections Continue to Grow 15Corporate Income Taxes Do Not Provide Stable Revenue 16Pennsylvania Has the 15th Highest Tax Burden in the Nation 17Pennsylvania’s Tax Burden Exceeds the National Average 18Pennsylvania, like All States, Relies Heavily on Federal Aid 19Pennsylvania’s Numerous Tax Authorities Complicate Tax Filings 20

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Chapter 3: Individual Income Taxes 21Pennsylvania’s Individual Income Tax Rate is Lower than its Peers 22Pennsylvania’s Individual Income Tax Rate Has Increased over Time 23Pennsylvania Individual Income Tax Collections Continue to Grow 24Pennsylvania’s Local Taxes Increase Individuals’ Tax Burdens 25Individual Income Tax Expenditures Total $7 Billion for Fiscal Year 2017 26

Chapter 4: Business Taxes 27Pennsylvania Has an Extremely High Corporate Income Tax Rate 28Pennsylvania Has Historically Had a High Corporate Income Tax Rate 29Tax Credit Programs in Pennsylvania Distort the Tax Base 30Pennsylvania Businesses Pay More than Just Corporate Income Taxes 31Effective Tax Rates Vary by Industry, but Many Exceed National Medians 32The Number of Pass-Through Entities Is Growing in Pennsylvania 33Local Taxes Increase Businesses’ Tax Burdens 34

Chapter 5: Sales Tax 35Pennsylvania’s Combined State and Local Sales Tax is Middle-of-the-Road 36Pennsylvania’s Sales Tax Rate Has Been Steady Since the 1960s 37Sales Tax Collections per Capita Lag other States 38Pennsylvania’s Sales Tax Applies to A Small Portion of the Economy 39Not All Sales Tax Expenditures Are Equal 40

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Chapter 6: Other Taxes 41Pennsylvania’s High Tax on Natural Gas 42Pennsylvania State Excise Taxes on Cigarettes and Alcohol 43Pennsylvania Taxpayers Face High Wireless Taxes 44Realty Transfer Taxes Add to the Cost of Buying or Selling a Home 45The Value of Pennsylvania’s Gas Tax Has Returned to Historic Norms 46

An Overview of the Pennsylvania Economy

CHAPTER 1

The following charts illustrate the current and past performance of Pennsylvania’s economy. We show how various economic indicators, such as personal income per capita, state gross domestic product, employment composition, migration, and unemployment, have changed over time. We compare Pennsylvania to five other states—Florida, North Carolina, Ohio, Texas, and Virginia—which compete with Pennsylvania for jobs and opportunity.

South Renovo, Clinton County, Pennsylvania, photo Nicholas A. Tonelli

CHAPTER 1 | 2

Pennsylvania’s Income per Person Is Losing Ground to Its PeersPersonal Income per Capita as a Percent of the U.S. Level, Pennsylvania and Selected States (1929–2014)

For much of the first half of the 20th Century, Pennsylvania’s personal income per capita exceeded the national average. In 1929, Pennsylvania’s personal income per capita was 110 percent of the U.S. level. By 1960, however, Pennsylvania lost ground and converged with the national average, staying roughly the same since then. Over the last several decades, many of Pennsylvania’s peers have made up ground. For instance, North Carolina has increased its personal income per capita from 47 percent of the national average in 1929 to 85 percent in 2014, and Virginia has surpassed Pennsylvania, achieving personal income per capita at 110 percent of the national average.

Source: Bureau of Economic Analysis, Regional Economic Accounts, “Annual State Personal Income and Employment.”

0%

20%

40%

60%

80%

100%

120%

140%

1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

United StatesFlorida

North Carolina

OhioPennsylvania

Texas

Virginia

3 | PENNSYLVANIA ILLUSTRATED

Pennsylvania’s Metro Income Tends to Be Higher than Non-Metro IncomePersonal Income per Capita, Metro and Non-Metro Pennsylvania (1969–2014)

Personal income per capita is not uniform throughout Pennsylvania, with metro areas having consistently higher levels of personal income than non-metro areas. In 1969, personal income per capita in metro areas was $25,544, compared to $20,481 in non-metro areas. Since then, income in metro areas has grown at a faster rate than in non-metro areas, reaching $49,119 in 2014, an increase of 92 percent. In comparison, non-metro-area income grew just 79 percent to $36,749 in 2014. The disparity is likely a result of the differing industry composition between metro and non-metro Pennsylvania (see page 7).

Note: Counties designated by the Bureau of Economic Analysis as metropolitan are Adams, Allegheny, Armstrong, Beaver, Berks, Blair, Bucks, Butler, Cambria, Carbon, Centre, Chester, Columbia, Cumberland, Dauphin, Delaware, Erie, Fayette, Franklin, Lackawanna, Lancaster, Lebanon, Lehigh, Luzerne, Lycoming, Mercer, Monroe, Montgomery, Montour, Northampton, Perry, Philadelphia, Pike, Washington, Westmoreland, Wyoming, and York. Source: Bureau of Economic Analysis, Regional Economic Accounts, “Local Area Personal Income and Employment.”

$0

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$20,000

$30,000

$40,000

$50,000

$60,000

1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

Metro

Non-Metro

CHAPTER 1 | 4

Pennsylvania Has One of the Largest State Economies in the NationState Gross Domestic Product, Selected States (2014)

In 2014, Pennsylvania had the sixth largest state economy based on state gross domestic product. It was only outranked by California, Texas, New York, Florida, and Illinois. It is followed closely by neighbors Ohio (7th), New Jersey (8th), Virginia (11th), and Maryland (15th).

Source: Bureau of Economic Analysis, Regional Economic Analysis, “Gross Domestic Product (GDP) by State—GDP in current dollars.”

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3

45

7 8 1115

1 Top Five Largest State Economies

Pennsylvania

Neighboring States

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$2,500

California Texas NewYork

Florida Illinois Pennsylvania Ohio NewJersey

Virginia Maryland

6


Professional and Business Services, Real Estate, and Manufacturing Comprise the Largest Portion of Pennsylvania’s EconomyPercent of State GDP by Sector, Pennsylvania Statewide (2014)

Pennsylvania’s economy is dominated by five industries: professional and business services (12 percent), real estate (12 percent), manufacturing (11 percent), government (10 percent), and health care and social assistance (9 percent). In combination, these five industries comprised 54 percent of Pennsylvania’s gross domestic product in 2014. Because no one sector is larger than 12 percent, policymakers must be focused on creating a productive environment for all industries.

Source: Bureau of Economic Analysis, Regional Economic Accounts, “Gross Domestic Product (GDP) by State—GDP in current dollars.”

Professional & Business Services

12%

Real Estate 12%

Manufacturing11%

Government10%

Health Care & Social Assistance

9%

Finance & Insurance

6%

Wholesale Trade

6%

Retail Trade5%

Information4%

Construction3%

Management 3%

Transportation & Warehousing 3%

Administrative & Support Services 2%

Mining & Oil and Gas Extraction 2%

Accommodation & Food Service 2%

Other Services (Except Government) 2%

Educational Services 2% Utilities2%

Arts, Entertainment, & Recreation 1%

Agriculture, Forestry, & Fishing 1%

CHAPTER 1 | 6

Health Care, Professional and Business Services, and Government Employ the Most People in PennsylvaniaPercent of Total Nonfarm Employment by Sector, Pennsylvania (2014)


16%

Professional & Business Services

13%

Retail Trade11%

State & Local Government

11%

Manufacturing10%

Lesiure & Hospitality9%

Financial Activities5%

Other Services4%

Transportation& Utilities

4%

Construction4%

Education Services 4%

Wholesale Trade 4%

Federal Government

2%

Information2%

Mining &Logging

1%

The majority of Pennsylvania employees work in service-providing sectors. Health care and social assistance (16 percent), professional and business services (13 percent), and state and local governments (11 percent) employ the most individuals in Pennsylvania. This measure differs from state GDP produced by sector, due to some industries requiring more labor than others. For instance, health care and social assistance is the fifth largest industry in Pennsylvania, but employs the most people.

Note: Percents may not add to 100 due to rounding.Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages (Pennsylvania Statewide for All establishment sizes, All Employees, Private Establishments).


Metro-Area Employment in Pennsylvania Varies Greatly from Non-Metro EmploymentIndustry Employment as a Percent of Total Area Employment, Metro and Non-Metro Pennsylvania (2014)

State economies are diverse; different industries concentrate in different areas of a state. Comparing employment by metro and non-metro areas illustrates this point.

Manufacturing represents 7.6 percent of employment in metro areas, but 12.6 percent of employment in non-metro areas. Mining and oil and gas extraction is 0.5 percent of metro-area employment, compared to 4 percent in non-metro areas. In contrast, finance and insurance is 5.7 percent of metro employment, compared to only 3.2 percent in non-metro areas.

Note: Counties designated by the Bureau of Economic Analysis as metropolitan are Adams, Allegheny, Armstrong, Beaver, Berks, Blair, Bucks, Butler, Cambria, Carbon, Centre, Chester, Columbia, Cumberland, Dauphin, Delaware, Erie, Fayette, Franklin, Lackawanna, Lancaster, Lebanon, Lehigh, Luzerne, Lycoming, Mercer, Monroe, Montgomery, Montour, Northampton, Perry, Philadelphia, Pike, Washington, Westmoreland, Wyoming, and York. Source: Bureau of Economic Analysis, Regional Economic Accounts, “Local Area Personal Income and Employment.”

6.5%

5.5%

1.0%

2.3%

5.0%

4.1%

1.8%

5.7%

14.3%

1.4%

2.0%

7.6%

0.5%

5.6%

7.1%

3.4%

10.4%

8.5%

3.6%

0.3%

3.4%

6.1%

3.3%

4.3%

1.2%

5.7%

1.7%

0.9%

3.2%

13.0%

0.8%

0.7%

12.6%

4.0%

6.2%

3.0%

2.3%

11.4%

11.6%

4.8%

0.5%

2.4%

Accommodation & Food Services

Administrative & Support Services

Agriculture, Forestry & Fishing

Arts, Entertainment, & Recreation

Construction

Educational Services

Federal Government

Finance & Insurance


Information

Management

Manufacturing

Mining & Oil and Gas Extraction

Other Services (Except Government)

Professional, Scientific, & Technical Services

Real Estate

Retail Trade

State & Local Government

Transportation & Warehousing

Utilities

Wholesale Trade

MetroNon-Metro

CHAPTER 1 | 8

Pennsylvania’s Unemployment Rate Fared Better than the National Average during the Great RecessionMonthly Seasonally Adjusted Unemployment Rate, Pennsylvania and the U.S. (1976–2015)

Pennsylvania’s recent unemployment rate history can be divided into four distinct periods. From 1976 until 1986, Pennsylvania’s unemployment rate was higher than the U.S. average. It peaked at 12.6 percent in 1983, 2 percentage points above the U.S. average. From 1986 to 2009, the Pennsylvania rate tracked closely with the U.S. rate as a whole with little variance between the two rates. During the Great Recession, Pennsylvania’s diversified economy insulated the rate from increasing above the national average. Pennsylvania’s unemployment rate peaked at 8.7 percent, outperforming the U.S. average of 10 percent. It has since returned to closely tracking the U.S. average unemployment rate.

Source: Bureau of Labor Statistics, Local Area Unemployment Statistics.

0%

2%

4%

6%

8%

10%

12%

14%

Pennsylvania

United States

1976 1981 1986 1991 1996 2001 2006 2011


Pennsylvania Has Struggled with Bouts of Out-MigrationMigration to and from Pennsylvania Based on the Number of Federal Tax Exemptions Claimed (1991–2011)

Pennsylvania has experienced net out-migration since the early 1990s. Since 1991, 3,883,137 individuals have left the state of Pennsylvania, compared to 3,747,635 entering the state. On average, Pennsylvania loses 4,208 people each year. Individuals leaving Pennsylvania are disproportionately relocating to Florida, North Carolina, and Virginia, while New York, New Jersey, and Connecticut are statistically overrepresented among individuals moving to Pennsylvania. To some degree, though, the rate of out-migration has slowed in recent years. From 1991 to 2000, the state lost 145,008 individuals, but from 2001 to 2010, it gained 16,093 individuals. In 2010 and 2011, the state did lose more residents than it gained, however, so that trend could be reversing again.

Source: Internal Revenue Service, Statistics of Income Tax Stats, “State-to-State Migration Data.”

0

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100,000

150,000

200,000

250,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

State Inflow State Outflow

CHAPTER 1 | 10

Pennsylvania’s Economy Is Transitioning from Goods to ServicesGoods and Services as a Percent of Total Private State GDP, Pennsylvania Statewide (1963–2014)

The composition of Pennsylvania’s economy has changed dramatically over the past 50 years. The goods-producing sectors of the economy, such as manufacturing, constructing, and mining, have decreased in relative size as economic growth has been concentrated in the services-producing sectors. In 1963, the goods-producing sectors comprised 41 percent of gross domestic product. It fell to just 21 percent in 2014.

Source: Bureau of Economic Analysis, Regional Economic Accounts, “Gross Domestic Product (GDP) by State—GDP in current dollars.”

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90%

Goods

Services

1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

11

Pennsylvania’s Tax Code: An Overview

CHAPTER 2

State and local governments in Pennsylvania rely on a variety of taxes to fund operations. Some types are well known, such as the individual income, property, and corporate income taxes. But others are less discussed, such as excise taxes on cell phones and alcohol, and the state’s inheritance tax. The state also receives significant revenue transfers from the federal government to help meet the state’s health insurance, transportation, and education needs.

In general, Pennsylvania residents face a high state and local tax burden. Residents paid 10.2 percent of their income to state and local taxes in fiscal year 2012, above the national average of 9.9 percent. Tax collections continue to rise, even after adjusting for inflation. Inflation-adjusted collections are up 26 percent over the past 20 years.

Tax rates contribute to a state’s competitiveness, but other factors matter as well. Tax bases and tax structures play an essential role in determining the strength of a state’s tax climate. Pennsylvania’s corporate, property, and unemployment insurance tax structures are not competitive with those of its peer states.

Heinz Field, photo Bernard Gagnon

CHAPTER 2 | 12

Pennsylvania Taxes at a Glance

Note: All collections listed on this page are state and local per capita collections for the 2013 fiscal year. Federal aid and state debt figures are also for the 2013 fiscal year. Income per capita is for the 2014 calendar year. Individual and corporate income tax rates are ranked according to the top rate if the state has a graduated-rate individual or corporate income tax. These rates and ranks are as of January 1, 2016. “State debt” is defined as the outstanding debt at the end of the fiscal year, as calculated by the Census Bureau.Source: Tax Foundation, Facts & Figures 2016: How Does Your State Compare?

General Info Rank Nat. Avg.Income per capita $47,679 16th $46,049

Federal aid as % of gen. revenue

30.42% 29th 30.03%

State debt per capita

$3,678 20th $3,594

Tax Freedom Day April 22 32nd April 24

Individual Income TaxNumber of brackets 1

Tax Rate 3.07%

Tax Rate Rank 44th

Collections per capita (2013) $1,201

Collections rank (2013) 15th

Property TaxCollections per capita $1,376

Collections rank 21st

Effective residential property tax rate

1.47%

Corporate Income TaxNumber of brackets 1

Tax rate 9.99%

Tax rate rank 2nd

Collections per capita $201

Collections rank 10th

Sales TaxState rate 6.00%

State + average local rate 6.34%

State + average local rank 32nd

Collections per capita $778

Collections rank 37th

Excise Taxes Rate Rank

Gasoline taxes and fees

50.4¢ per gallon

1st

Cigarette taxes $1.60 per pack

22nd

Spirits taxes $7.23 per gallon

18th

Beer taxes $0.08per gallon

45th

Cell phone taxes 14.14% 9th

Other TaxesCapital Stock Tax None

Inheritance Tax 4.5-15%

Estate Tax None

This page provides a brief, broad overview of tax rates, tax collections, and other basic structural features of Pennsylvania’s tax code.

For all rankings, 1 indicates the highest rank among the 50 states.


Pennsylvania’s Tax Climate Has Room to ImprovePennsylvania Ranks 32nd out of 50 in the State Business Tax Climate Index (2016)

The State Business Tax Climate Index measures the structure of each state’s tax code by reviewing over 100 different variables. States with low rates, broad bases, and simple structures score the best. Pennsylvania’s rank suffers from its unusually high corporate income tax rate, inheritance tax, and complex unemployment insurance tax structure, among other things. Pennsylvania currently ranks 32nd in the country on our Index.

Note: A rank of 1 indicates the state’s tax system is more favorable for business; a rank of 50 indicates the state’s tax system is less favorable for business. The snapshot date is July 1, 2015. DC’s rank does not affect other states’ rankings, but the figure in parenthesis indicates where it would rank if included. Source: Tax Foundation, 2016 State Business Tax Climate Index.

(#42)DC

VA#30

NC #15

SC #36

GA#39

FL #4

AL#29

MS#20

TN #16

KY #28

OH#42IN

#8IL

#23MO#17

AR#38

LA #37

IA#40

MN#47 WI

#43 MI#13 PA

#32

NY#49

ME#34

TX#10

OK#33

KS#22

NE#27

SD#2

ND#26

MT#6

WY#1

CO#18

NM#35

AZ#24

UT#9

NV#5

ID#19

OR#11

WA#12

CA#48

AK#3

HI#31

WV#21

#25MA

#45RI

#44CT

#50NJ

#14DE

#41MD

#46VT

#7NH

10 Best Business Tax Climates

10 Worst Business Tax Climates

CHAPTER 2 | 14

Pennsylvania’s Business Tax Climate Trails Its Peers’State Business Tax Climate Index Rankings, Pennsylvania and Selected States (2016)

With the exception of Ohio, all of Pennsylvania’s peer states have better structured tax codes. Florida and Texas do not have individual income taxes. North Carolina dramatically overhauled its tax code in 2013, vaulting ahead of Pennsylvania from 44th to 15th. Virginia ranks well due to its flat corporate income tax and well-structured sales tax. Pennsylvania’s structure makes it less competitive than these states.

Note: A rank of 1 indicates the state’s tax system is more favorable for business; a rank of 50 indicates the state’s tax system is less favorable for business. The snapshot date is July 1, 2015. Component rankings do not average to the overall rank. States without a given tax rank equally as number 1 in that component. Texas does not have an individual income tax, but its Margin Tax affects its individual income tax component ranking.Source: Tax Foundation, 2016 State Business Tax Climate Index.

OverallCorporate Tax Rank

Individual Income Tax Rank

Sales Tax Rank

Unemployment Insurance Tax Rank

Property Tax Rank

Florida 4 17 1 17 3 20

North Carolina 15 7 14 31 11 32

Ohio 42 26 47 30 6 11

Pennsylvania 32 47 17 25 50 38

Texas 10 41 6 37 15 34

Virginia 30 6 39 6 38 39


Pennsylvania Tax Collections Continue to GrowPennsylvania State Tax Collections (1950–2013, in 2014 Dollars)

Pennsylvania’s state tax collections have grown from $4.3 billion in 1950 to $34.5 billion in 2013, after adjusting for inflation. This is an increase of 700 percent over the past 63 years, and a 26 percent increase over the past 20 years. Tax collections did dip during the Great Recession, but have nearly recovered to pre-recession levels.

Note: Dollar amounts are inflation adjusted based on the annual average Consumer Price Index for All Urban Consumers (CPI-U) with a 2014 base year.Source: Census Bureau, State and Local Government Finances.

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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

CHAPTER 2 | 16

Corporate Income Taxes Do Not Provide Stable RevenueAnnual Percent Change in Pennsylvania State Tax Collections by Tax Type (1976–2014)

Pennsylvania’s tax structure is uniquely susceptible to economic downturns due to its heavy reliance on the corporate income tax. Corporate income tax revenue fluctuates wildly, due to the possibility of corporations’ profits being reduced to zero during recessionary years. This makes it difficult for the state to budget during tough economic times, as corporate income tax revenues have swung as much as 36 percent year-over-year. In contrast, sales tax revenue is relatively reliable since consumption continues even during economic downturns.

Source: Census Bureau, State and Local Government Finances.

-30%

-20%

-10%

0%

10%

20%

30%

40%

1976 1981 1986 1991 1996 2001 2006 2011

Sales Tax

Individual Income Tax

Corporate Income Tax


Pennsylvania Has the 15th Highest Tax Burden in the NationState-Local Tax Burdens as a Percent of State Residents’ Income (FY 2012)

A state’s tax burden is the amount of income residents in that state pay in state and local taxes to both their home state and other states. Pennsylvania residents pay taxes to other states when they travel, booking hotel rooms, buying gas, and making other purchases.

Pennsylvania residents paid 10.2 percent, or $4,589 per capita, of personal income to state and local taxes in fiscal year 2012. Of that amount, Pennsylvania governments received $3,385 and other state and local governments received $1,204 from Pennsylvania residents.

Note: Total state-local tax burdens include all taxes levied by state and local governments. For a full list of taxes included, see Tax Foundation, “State-Local Burden Rankings: Methodology” (January 2016).Source: Tax Foundation, State-Local Tax Burden Rankings FY 2012.

VA9.3%#27

NC9.8% #20

SC 8.4% #42GA

9.1%#32

FL 8.9% #34

AL8.7%#39

MS8.6%#41

TN 7.3% #47

KY9.5% #24

OH9.8%#19

IN9.5%#22

IL11.0%

#5MO9.3%#29

AR10.1%#17

LA7.6% #45

IA9.2%#31

MN10.8%

#8 WI11.0%

#4 MI9.4%#25 PA

10.2%#15

NY12.7%

#1

ME10.2%#13

TX7.6%#46

OK8.6%#40

KS9.5%#23

NE9.2%#30

SD7.1%#49

ND9.0%#33

MT8.7%#38

WY7.1%#48

CO8.9%#35

NM8.7%#37

AZ8.8%#36

UT9.6%#21

NV8.1%#43

ID9.3%#26

OR10.3%#10

WA9.3%#28

CA11.0%

#6

AK6.5%#50

HI10.2%#14

WV9.8%#18

10.3% #12MA

10.8% #9RI

12.6% #2CT

12.2% #3NJ

10.2% #16DE

10.9% #7MD

10.6% (#10)DC

10.3% #11VT

7.9% #44NH

State-Local Tax Burden as aPercentage of State Income

Lower

Higher

CHAPTER 2 | 18

Pennsylvania’s Tax Burden Exceeds the National AverageTotal State-Local Tax Burden as a Percent of State Income, Pennsylvania and the U.S. Average (FY 2012)

Since 1977, Pennsylvania’s tax burden has been consistently larger than the U.S. average. That means that Pennsylvania residents are paying more in state and local taxes than the residents of many other states.

Source: Tax Foundation, State-Local Tax Burden Rankings FY 2012.

8.80%

9.00%

9.20%

9.40%

9.60%

9.80%

10.00%

10.20%

10.40%

10.60%

10.80%

11.00%

1977 1982 1987 1992 1997 2002 2007 2012

Pennsylvania

United States


Pennsylvania, like All States, Relies Heavily on Federal AidFederal Funding as a Percent of State Government General Revenues (FY 2013)

State and local taxes produce a large share of any state’s revenue, but transfers from the federal government also provide a large source of funding for every state. More than 30 percent of Pennsylvania’s state funding came from the federal government in fiscal year 2013. These transfers support a variety of programs, such as health insurance, education, and transportation.

Note: Figures are calculated by dividing the amount of each state’s “intergovernmental revenues” from the federal level to the state level by the state’s “general revenue,” as estimated by the Census Bureau. General revenue includes all taxes but excludes utility, liquor store, and insurance trust revenue. DC is not included because it is designated as a local jurisdiction.Source: Census Bureau, State and Local Government Finances.

VA22.9%#47

NC32.5% #25

SC 30.2% #30GA

37.3%#7

FL 31.5% #28

AL36.1%

#9MS

42.9%#1

TN 39.5% #3

KY35.1% #12

OH33.6%#19

IN33.4%#20

IL25.9%#40

MO38.2%

#5

AR32.9%#22

LA41.9% #2

IA31.9%#27

MN26.4%#39 WI

27.7%#36 MI

32.8%#23 PA

30.4%#29

NY28.0%#34

ME35.3%#10

TX32.6%#24

OK33.8%#17

KS24.9%#44

NE32.1%#26

SD39.0%

#4

ND19.0%#50

MT37.4%

#6

WY35.2%#11

CO27.8%#35

NM36.6%

#8

AZ34.8%#14

UT29.0%#31

NV25.0%#43

ID34.4%#15

OR35.0%#13

WA27.3%#37

CA25.0%#42

AK22.4%#48

HI21.5%#49

WV34.1%#16

28.7% #32MA

33.6% #18RI

23.4% #46CT

25.5% #41NJ

24.8% #45DE

28.6% #33MD

33.2% #21VT

27.1% #38NH

Federal Aid as a Percentage of State General Revenue

Lower

Higher

CHAPTER 2 | 20

Pennsylvania’s Numerous Tax Authorities Complicate Tax FilingsThe Number of Individual Income Tax, Property Tax, and Sales Tax Authorities for Selected States (2016)

A key measure of a state’s tax complexity is the number of taxing authorities within that state. Pennsylvania’s high number of tax authorities is attributable to its complex local individual income tax structure. While most states forego local income taxes, Pennsylvania allows 500 school districts and more than 2,500 localities the ability to assess an income tax. Pennsylvania’s number of total taxing authorities is only close to Texas which has a dramatically larger population, geographic area, and economy.

Note: These totals reflect the number of individual income tax, property tax, and sales tax jurisdictions in the selected states. There exist numerous other taxing authorities in each state.Source: Author’s calculations based on state and local government documents.

674

1,766

1,334

3,1403,013

413

0

500

1,000

1,500

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2,500

3,000

3,500

TexasFlorida PennsylvaniaOhio VirginiaNorthCarolina

21

Individual Income TaxesCHAPTER 3

Pennsylvania’s flat state income tax is one of the bright spots in its tax system. Of the 41 states that tax wage income, Pennsylvania is one of only eight with a single-rate, rather than a graduated-rate, structure. At 3.07 percent, Pennsylvania’s rate is the second lowest for any state with an individual income tax. Only North Dakota, at 2.9 percent, is lower. Because Pennsylvania does not have a standard deduction or personal exemption, it has the broadest income tax base in the country.

The simplicity at the state level, however, is partially undone by the complexity in Pennsylvania’s local earned income tax. Municipalities and school districts assess local income taxes, coming together to create more than 3,000 taxing authorities. Employers must review each employee’s work and home address to determine withholding, a time-consuming task.

Substantially increasing taxpayers’ liabilities, local rates vary from 0.5 percent to Philadelphia’s 3.9102 percent, yielding a maximum state-local combined rate of 6.9802 percent.

Swann Memorial Fountain, photo Ken Thomas

CHAPTER 3 | 22

Pennsylvania’s Individual Income Tax Rate is Lower than its PeersTop Marginal Individual Income Tax Rate and Rank and Numbers of Brackets for Selected States 2016

Pennsylvania is one of only eight states that has a flat rate. Of the states that tax individual income, Pennsylvania has the second lowest individual income tax rate in the nation. Pennsylvania’s rate is competitive among states that tax individual income. However, there are seven states, including Florida and Texas, which do not have an income tax. An additional two states only tax interest and dividend income. Pennsylvania is one of only eight states that has a flat rate.

Source: Tax Foundation, “State Individual Income Tax Rates and Brackets for 2016.”

Top Marginal Rate Top Rate Rank Number of Brackets

Florida 0% 44 --

North Carolina 5.75% 25 1

Ohio 4.997% 34 9

Pennsylvania 3.07% 42 1

Texas 0% 44 --

Virginia 5.75% 25 4


Pennsylvania’s Individual Income Tax Rate Has Increased over TimeIndividual Income Tax Rate, Pennsylvania (1971–2016)

Pennsylvania did not institute its individual income tax until 1971, later than many other states. Since its inception, the rate has never been above 3.1 percent. It began at 2.3 percent in 1971, was lowered to 2.0 percent in 1974, and increased to 2.2 percent in 1978. It inched higher to 2.45 in 1983, and was slowly lowered back to 2 percent. The rate peaked in 1991 at 3.1 percent, it was decreased in 1992 to 2.8 percent and stayed there until 2003. Finally, in 2004, the rate was set at 3.07 percent where it has stayed since. Last year, the Governor proposed a new rate of 3.7 percent (an increase of more than 20 percent), but his proposal was rejected by the legislature.

Source: Pennsylvania Department of Revenue, The Tax Compendium (December 2014); Pennsylvania Office of the Budget, 2016-2017 Governor’s Executive Budget.

0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

CHAPTER 3 | 24

Pennsylvania Individual Income Tax Collections Continue to GrowTotal State Individual Tax Collections per Capita, Pennsylvania and the U.S. (1977–2014, in 2014 Dollars)

Since 1977, Pennsylvania’s inflation-adjusted individual income tax collections have increased 118 percent, tracking closely with the national average of 115 percent. Per capita collections have grown from $387 in 1977 to $845 in 2014, in inflation-adjusted terms. While the long-term trend is positive, collections do fluctuate with the business cycle; collections fell quickly in 2002 and 2003 and again in and 2009 and 2010.

Note: Dollar amounts are inflation adjusted based on the annual average Consumer Price Index for All Urban Consumers (CPI-U) with a 2014 base year. Source: Census Bureau, State and Local Government Finances; Census Bureau, American Community Survey; Bureau of Labor Statistics, Consumer Price Indexes.

$0

$200

$400

$600

$800

$1,000

$1,200

1977 1982 1987 1992 1997 2002 2007 2012

Pennsylvania

All States


The funds raised by these local income taxes are split between municipalities and school districts. There are 500 school districts and more than 2,500 municipalities in Pennsylvania.

Pennsylvania’s Local Taxes Increase Individuals’ Tax BurdensSelected Local Earned Income Tax Rates for Pennsylvania Localities (2016)

Pennsylvania’s state income tax is one of the lowest in the country, but municipalities and school districts in Pennsylvania impose hefty local income taxes. These rates vary from as low as 0.5 percent to Philadelphia’s 3.9102 percent . The bulk of localities have rates of 1 percent due to a state statutory limit. To increase the rate above 1 percent, localities must agree to repeal other types of taxes or be given special permission, which is the case in Pittsburgh and Philadelphia. Note: Residents of the localities flagged by an asterisk

are also subject to an annual Local Services Tax of $52. Source: Pennsylvania Department of Community and Economic Development, Municipal Statistics.

State Income Tax RateLocal Income Tax Rate

Pittsburgh City,Pittsburgh SD*

Philadelphia City,Philadelphia SD*

Amity Twp,Berks County*

Reading Twp,Adams County

SusquehannaTwp, Dauphin*

County

Middletown Twp,Bucks County*

3.00%

3.07% 3.07% 3.07% 3.07% 3.07% 3.07%

3.91%

1.55%

3.60%

1.00%0.50%

0%

1%

2%

3%

4%

5%

6%

7%

8%

6.07%

6.98%

4.62%

6.67%

4.07%3.57%

CHAPTER 3 | 26

Individual Income Tax Expenditures Total $7 Billion for Fiscal Year 2017Individual Income Tax Expenditures, Pennsylvania (FY 2017)

In Pennsylvania, the exclusions for retirement income and employer-provided benefits are the largest individual income tax expenditures. Income from pensions, Social Security, or other retirement benefits are not considered taxable income in Pennsylvania. Similarly, the value of the benefits provided by an employer, like health insurance, are also excluded from taxable income. Pennsylvania also provides tax forgiveness credits for low-income taxpayers.

Source: Pennsylvania Office of the Budget, 2016-2017 Governor’s Executive Budget: Tax Expenditures.

Retirement Income$3.18 billion

(46%)

EmployerContributions

for Benefits$2.56 billion

(37%)

$377 millionResident Credit

(5%)

Property Tax Forgiveness$265 million

(4%)

$562 millionOther

(8%)

27

Business TaxesCHAPTER 4

All taxes paid by businesses are ultimately borne by individuals, whether it’s in the form of higher prices, lower wages, or smaller returns on investment. In Pennsylvania, businesses paid $26 billion in total taxes in 2013, primarily on taxes other than the corporate income tax, the most recognized type of business tax.

Pennsylvania’s structure has numerous flaws. Its corporate income tax rate is the second highest in the nation at 9.99 percent. The high rate encourages firms to reorganize as “pass-through” businesses. Pass-through businesses pay the much lower individual income tax rate, which can benefit a firm greatly. In fact, the number of pass-throughs in the state is increasing rapidly. In 1991, C corporations—those taxed under the corporate income tax—were the most prevalent business structure. In 2012, they were only the third most common structure.

Beyond exposure to corporate income taxes, Pennsylvania businesses struggle with local gross receipts taxes, as they are based on a firm’s sales, not its net income.

Citizen Bank park, photo Kevin Ward

CHAPTER 4 | 28

Pennsylvania Has an Extremely High Corporate Income Tax RateCorporate Income Tax Rates by State (2016)

Pennsylvania’s state corporate income tax rate of 9.99 percent is the second highest in the nation. The only state with a higher top marginal rate is Iowa, but due to the state’s atypical allowance of a deduction for federal taxes paid, the effective rate can be lower than Pennsylvania’s. North Carolina, Virginia, and Florida all have corporate taxes far below Pennsylvania’s at 4.0, 6.0, and 5.5 percent respectively.

Note: The asterisk (*) indicates states that do not have corporate income taxes but do have gross receipts taxes with rates not strictly comparable to corporate income tax rates.Source: Tax Foundation, “State Corporate Income Tax Rates and Brackets for 2016.”

VA6.00%

NC4.00%

SC 5.00%

GA6.00%

FL 5.50%

AL6.50%

MS5.00%

TN 6.50%

KY6.00%

OH*IN6.50%

IL7.75%

MO6.25%

AR6.50%

LA8.00%

IA12.00%

MN9.80%

WI7.90% MI

6.00%PA

9.99%

NY6.50%

ME8.93%

TX*

OK6.00%

KS7.00%

NE7.81%

SD

ND4.31%

MT6.75%

WY

CO4.63%

NM6.60%

AZ5.50%

UT5.00%

NV*

ID7.40%

OR7.60%

WA*

CA8.84%

AK9.40%

HI6.40%

WV6.50%

8.00% MA

7.00% RI

9.00% CT

9.00% NJ

8.70% DE

8.25% MD

9.40%DC

8.50% VT

8.50% NH

Top State Marginal Corporate Income Tax Rate

Lower

Higher


Pennsylvania Has Historically Had a High Corporate Income Tax RatePennsylvania Corporate Net Income Tax Rate (1935–2016)

Historically, Pennsylvania’s corporate income tax rate has been one of the highest in the country, having been above 8 percent since 1969. The Pennsylvania rate is currently below its peak of 12.25 percent from 1991 to 1993, but has not changed since 1995 and remains well above those of Pennsylvania’s peer states.

Source: Pennsylvania Department of Revenue, The Tax Compendium (December 2014); Pennsylvania Office of the Budget, 2016-2017 Governor’s Executive Budget.

0%

2%

4%

6%

8%

10%

12%

14%

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

CHAPTER 4 | 30

Pennsylvania offers a number of tax credits to corporations in the state. These credits narrow the corporate tax base, create two problems for the state. First, it reduces the amount of revenue that the corporate tax collects, meaning that rates must be higher to collect the same amount of revenue. Second, it distorts decision making by firms. For instance, firms are strongly encouraged, due to the tax credit, to locate in enterprise zones even if the location would not otherwise be ideal. The costs of these tax credits frequently outweigh the benefits.

Tax Credit Programs in Pennsylvania Distort the Tax BaseCorporate Income Tax Credit Programs (FY 2017)


Administrative and Structural

$2.51 billion(85%)

Social

(6%)$168 million

Economic Development$254 million

(9%)


Pennsylvania Businesses Pay More than Just Corporate Income TaxesPennsylvania Total State and Local Business Tax Liability by Tax Type (FY 2014)

A common misunderstanding is that the corporate income tax is the only tax paid by businesses. In reality, firms pay a variety of taxes. For instance, the land that a firm owns is subject to the property tax, and the goods that it purchases could be subject to the sales tax.

In fiscal year 2014, Pennsylvania firms paid a total of $26.1 billion in taxes. The property tax made up the largest portion of the total bill at $8.7 billion. Other large tax categories assessed on businesses are the sales tax ($4.1 billion) and excise taxes ($3.6 billion).

Source: Council on State Taxation and Ernst & Young LLP, Total State and Local Business Taxes (FY 2014).

$8.7

$4.1

$3.6

$4.2

$3.1

$2.5

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

PropertyTax

SalesTax

ExciseTax

IncomeTaxes

Unempl.Insurance

Tax

License andOther Taxes

Billi

ons o

f Dol

lars

CHAPTER 4 | 32

The Tax Foundation’s Location Matters study calculates the tax bills for seven firms in different industries in every state, once as a new firm and once as a long-standing, or “mature,” firm. Under the Pennsylvania tax code, effective tax rates vary widely by industry. Mature capital-intensive manufacturing operations rank fourth best in the nation. For comparison, mature corporate headquarters, retail stores, and distribution centers rank poorly nationally at 49th, 48th, and 46th respectively.

Effective Tax Rates Vary by Industry, but Many Exceed National MediansTotal Effective Tax Rates for Select Pennsylvania Business Types, New and Mature Firms (2015)

Note: The total effective tax rate only includes state and local tax liability, not federal tax liability.Source: Tax Foundation, Location Matters: The State Tax Costs of Doing Business (2015).

23.1%25.2%

12.5%14.1%

22.9%

31.6%

4.2% 5.4%6.6%

10.2%

22.3%

31.1%

41.0%

56.8%

49th 29th 48th 4th 11th 34th 46th

0%5%

10%15%20%25%30%35%40%45%50%55%60%

CorporateHeadquarters

R&DFacility

RetailStore

CallCenter

DistributionCenter

Capital-IntensiveManufacturer

Labor-IntensiveManufacturer

Mature New Mature New Mature New Mature New Mature New Mature New Mature New

Income Taxes Property Taxes Sales Taxes Unemployment Insurance Taxes

Tota

l Effe

ctive

Tax

Rat

e

The state offers research and development (R&D) incentives, but they do little to offset the state’s high tax burdens. Both new and mature firms consistently experience above-average tax liability.


Pass-through businesses, such as S corporations, limited liability corporations, and partnerships, are taxed under the individual income tax code, rather than the corporate income tax code. The disparity between the corporate income and individual income tax rates in Pennsylvania gives firms a large incentive to structure as pass-throughs, instead of as C corporations. Even when adding on local income taxes (which get as high as 3.9102 percent in Philadelphia), the rate on pass-throughs is much lower than 9.99 percent. Over the past 25 years, the number of pass-throughs has increased substantially, growing by 269 percent since 1991.

The Number of Pass-Through Entities Is Growing in PennsylvaniaNumber of Business Filers by Organizational Structure by Year (1991–2012)

Note: The number of pass-through businesses includes S corporations, limited liability corporations, and partnerships, and does not include sole proprietorship.Source: Pennsylvania Department of Revenue, The Statistical Supplement to the Pennsylvania Tax Compendium Fiscal Year 2014-2015 (December 2014); Census Bureau, County Business Patterns.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

C Corporations

Pass-Throughs

CHAPTER 4 | 34

Localities in Pennsylvania assess their own business taxes, called business privilege and mercantile taxes. These taxes are charged on a firm’s revenue, not its net profit, and can quickly increase a firm’s tax liabilities.

Gross receipts taxes like these are considered one of the most destructive types of taxes by most economists, due to the tax pyramiding that results from them—when taxes are assessed at multiple levels of the production process, final products have several layers of taxation embedded in the price.

Local Taxes Increase Businesses’ Tax Burdens Selected Local Business Privilege and Mercantile Taxes (2016)

Note: A mill equals $1 in taxes paid for $1,000 in revenue. Philadelphia’s rate of 1.415 mills is not strictly comparable as the city exempts the first $100,000 in gross receipts, but adds a 6.41 percent net income tax. Localities vary rates by industry. The rates listed above are the maximum assessed rate in each locality.Source: Local tax forms and statutes.

Mill

s

1.415

2.25

1.5 1.5

0.0

0.5

1.0

1.5

2.0

2.5

PhiladelphiaReading City Middletown Township,

Bucks County

WhitemarshTownship,

MontgomeryCounty

35

Sales TaxCHAPTER 5

Pennsylvania’s sales tax consists of two parts. The first is the state rate of 6.0 percent, which is competitive among Pennsylvania’s peers. The second is the local rate of 1 percent in Alleghany County and 2 percent in Philadelphia. Pennsylvania’s average combined state and local rate is 32nd highest in the country. However, Pennsylvania’s proximity to Delaware, which doesn’t have a sales tax, encourages residents to engage in cross-border arbitrage, as purchasing goods in Delaware could save Philadelphia residents 8 percent in sales taxes.

States tend to levy sales taxes on goods, even though the service sector now makes up a much larger share of the economy than when sales tax statues were written in the 1950s. Over time, the decreasing tax base has contributed to the stagnation of sales tax collections per capita in Pennsylvania even as the rate has increased.

Hammerschlag Hall and the Cathedral of Learning, photo Dllu

CHAPTER 5 | 36

Pennsylvania’s combined state-local sales tax rate is middle-of-the-road nationally. It includes a 6 percent state rate and an average local rate of 0.34 percent. The combined rate ranks as the 32nd highest rate in the country. It is lower than neighbors New Jersey (6.97 percent), Ohio (7.14 percent), and New York (8.49 percent). However, Pennsylvania borders Delaware, which has no sales tax. Southeastern Pennsylvania residents can cross the border into Delaware and purchase items tax-free. This presents a challenge to policymakers. They must balance the need for revenue with the strong competition from a no-tax neighbor.

Pennsylvania’s Combined State and Local Sales Tax is Middle-of-the-RoadCombined State and Average Local Sales Tax Rates, Pennsylvania and Neighbors (as of January 1, 2016)

Source: Tax Foundation, “State and Local Sales Tax Rates in 2016.”

VA5.63%#41

NC6.90% #25

SC 7.22%

#18GA7.01%#21

FL 6.66% #30

AL8.97%

#4MS

7.07%#20

TN 9.46% #1

KY6.00% #37

OH7.14%#19

IN7.00%#22

IL8.64%

#7MO7.86%#14

AR9.30%

#2

LA9.00% #3

IA6.79%#28

MN7.27%#17 WI

5.41%#44 MI

6.00%#37 PA

6.34%#32

NY8.49%

#9

ME5.50%#42

TX8.17%#12

OK8.82%

#6

KS8.60%

#8

NE6.87%#26

SD5.84%#40

ND6.82%#27

MT

WY5.42%#43

CO7.52%#15

NM7.51%#16

AZ8.25%#11

UT6.69%#29

NV7.98%#13

ID6.03%#36

OR

WA8.89%

#5

CA8.48%#10

AK1.78%#46

HI4.35%#45

WV6.20%#34

6.25% #33MA

7.00% #22RI

6.35% #31CT

6.97% #24NJ

DE

6.00% #37MD

5.75% (#41)DC

6.17% #35VT NH

Combined Sales Tax Rate

Lower

Higher


Pennsylvania’s Sales Tax Rate Has Been Steady Since the 1960sPennsylvania State Sales Tax Rate (1954–2016)

Pennsylvania passed its first state-level sales tax in 1954, setting it at 1 percent. It increased five times, reaching 6.0 percent in 1968. The rate has not changed since then, and it is currently the 16th highest state rate in the country.

Note: These rates do not include local sales tax rates.Source: Pennsylvania Department of Revenue, The Tax Compendium (December 2014).

0%

1%

2%

3%

4%

5%

6%

7%

1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

CHAPTER 5 | 38

Sales tax collections per capita in Pennsylvania have grown since the late 1970s. Since 1977, per capita collections are up 48 percent. The rate of increase lags that of the U.S. as a whole. Nationally, collections have increased 55 percent.

Pennsylvania collections grew quickly until 2000, when they stagnated. Collections fell during the Great Recession and are slowly returning to 2000 levels.

Sales Tax Collections per Capita Lag other StatesState Sales Tax Collections per Capita, Pennsylvania and U.S. (1977–2014, in 2014 Dollars)

Note: Dollar amounts are inflation adjusted based on the annual average Consumer Price Index for All Urban Consumers (CPI-U) with a 2014 base year.Source: Census Bureau, State and Local Government Finances; Census Bureau, American Community Survey; Bureau of Labor Statistics, Consumer Price Indexes.

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1977 1982 1987 1992 1997 2002 2007 2012

Pennsylvania

All States


An ideal sales tax is one that is levied on all final consumer purchases. By taxing a broad range of transactions, the rate can be kept low and still raise sufficient revenue.

When the first American sales tax was created in Mississippi in 1930, it was levied on tangible goods, which was an overwhelmingly large part of the overall economy. Most other states followed suit with this model. However, the economy has become more service based since then. Pennsylvania’s sales tax has represented around 30 percent of its economy since 1970. By failing to tax consumer services, the sales tax inherently favors the services sector over the goods sector and forces the rate to be higher than it would be otherwise.

Pennsylvania’s Sales Tax Applies to A Small Portion of the EconomyPennsylvania Sales Tax Breadth (1970–2013)

Note: Sales tax breadth is defined as the ratio of the implicit sales tax base to state personal income.Source: Professor John Mikesell (Indiana University).

0%

10%

20%

30%

40%

50%

1970 1975 1980 1985 1990 1995 2000 2005 2010

CHAPTER 5 | 40

Not All Sales Tax Expenditures Are EqualPennsylvania Sales and Use Tax Expenditures, by Type (FY 2017)

When states quantify tax expenditures, they often mistakenly lump structural provisions with other carve-outs when the two should be distinct. The former are tools used to ensure the sales tax is correctly structured, and 37 percent of expenditures fall into this category in Pennsylvania. Other carve-outs represent public policy decisions, such as exempting food and prescription drugs from the sales tax. These total 26 percent in Pennsylvania.

Not taxing personal services also reduces the sales tax base. In Pennsylvania, personal services comprise 31 percent of sales tax expenditure.


Business Inputs

(37%)

Personal Services

(31%)

Social Policy$6.59 billion

$5.56 billion

$4.71 billion(26%)

$1.11 billionStructural

(6%)

41

Other TaxesCHAPTER 6

The previous chapters have covered individual income, corporate income, and sales taxes, but Pennsylvania and its localities assess other taxes too.

The first remaining category of taxes is excise taxes. Excise taxes are taxes on specific products, such as cellphone service, alcohol, cigarettes, gasoline, and natural gas extraction. These taxes differ from sales taxes that broadly apply to all final transactions. Pennsylvania’s state and local excise tax collections per capita are 13th highest in the country at $662 per person.

The second category of taxes is property taxes. In addition to real property taxes, Pennsylvania and localities assess realty transfer taxes when an individual buys or sells property.

Downtown Pittsburgh from the Duquesne Incline, photo Dllu

CHAPTER 6 | 42

Pennsylvania’s High Tax on Natural Gas Natural Gas Severance Taxes, Selected States (2016)

Resource-rich states, like Pennsylvania, find ways to tax resource extraction. Pennsylvania, along with 10 other states, taxes natural gas extraction from shale formations. Some states, like West Virginia, tax the value of natural gas produced. Others, like Ohio, assess a flat charge on the amount produced. Pennsylvania does it differently with its impact fee. It assesses a flat fee per well that decreases over time and varies by the market price of gas. In 2015, Pennsylvania’s Independent Fiscal Office estimated the impact fee’s one-year effective rate at 5.5 percent.

Governor Wolf has proposed changing this to a severance tax of 6.5 percent of the value produced, leading to the highest tax in the nation.

Note: Interstate comparisons of state severance taxes are difficult due to the varied structures. The lifetime effective rates listed above are based on calculations by Pennsylvania’s Independent Fiscal Office and allow for easier comparisons. Pennsylvania’s rate listed above is based on Governor Wolf’s current proposal. Source: State tax forms and statues; Pennsylvania Independent Fiscal Office.

WV: 5.0%OH: 1.1%TX: 3.9%

Severance Tax: 7.5% Impact Fee: + 1.1%Total: 8.5% (Proposed)

State Excise Tax Rates on Cigarettes, Spirits, and Beer (as of January 1, 2016)

Note: Wine is subject to the state’s 6 percent sales

Facts & Figures 2016: How Does Your State Compare?

$1.60 per pack,

22nd highest in U.S.

Beer: $0.08 per gallon,

45th highest in the U.S.

Spirits: $7.23 per gallon,

18th highest in the U.S.

CHAPTER 6 | 44

Pennsylvania Taxpayers Face High Wireless TaxesCharges on Wireless Service, Pennsylvania and the U.S. Average (as of July 2015)

Wireless taxes in Pennsylvania are the ninth highest in the country. When the various federal, state, and local taxes are combined, Pennsylvania residents pay an effective tax rate of 20.60 percent. This is much higher than the U.S. average of 17.96 percent.

These rates are much higher than sales taxes in Pennsylvania. The average state and local sales tax rate is 6.34 percent, or one third of the effective wireless tax rate.

Source: Tax Foundation, “Record High Taxes and Fees on Wireless Consumers in 2015.”

0%

5%

10%

15%

20%

25%

PennsylvaniaU.S. Average

Average State + Local

Rate11.5%

Average State + Local

Rate14.14%

Federal Rate6.46%

Federal Rate6.46%

Combined Total Rate17.96%

Combined Total Rate20.6%


Realty Transfer Taxes Add to the Cost of Buying or Selling a HomeSelected Local Realty Transfer Taxes (2016)

Pennsylvania is one of 36 states that assess a realty transfer tax. A realty transfer tax is assessed when a piece of real property changes ownership. The tax is charged at time of sale. Both sellers and buyers are jointly liable for the state tax of 1 percent, and the cost of the tax is traditionally split between the parties.

Localities assess realty transfer taxes on top of the state rate. The local rates are generally higher than the state rate. The rate is 4 percent in Reading City, which adds considerable costs to the sale of real estate. Local rates are split between municipalities and school districts.

Source: Pennsylvania Department of Community and Economic Development, Municipal Statistics; Pennsylvania Department of Revenue, The Tax Compendium (December 2014).

Local RateState Rate

Pittsburgh City Philadelphia Benner Twp,Centre County

Reading City,Berks County

SusquehannaTwp, Dauphin

County

MiddletownTwp, Bucks County

4% 4%

2%

5%

2% 2%

3% 3%

1%

4%

1% 1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1%1%1%1%1%1%

CHAPTER 6 | 46

The Value of Pennsylvania’s Gas Tax Has Returned to Historic NormsPennsylvania Gasoline Tax Rate, Nominal and Real (1931–2015)

Pennsylvania’s gas tax was first passed in 1931 at 3 cents per gallon and has increased periodically, reaching 51.5 cents per gallon in 2015. The blue line shows each year’s tax rate expressed in today’s cents. For instance, the 5 cents per gallon rate in 1950 is the equivalent of 49 cents per gallon today.

Past gas tax increases have eroded over time, but the 2014 shift in calculation method has returned the gas tax to its historical norms in inflation-adjusted terms, and the tax will increase tax annually under the new structure.

Note: Amounts of inflation were adjusted based on the annual average Consumer Price Index for All Urban Consumers (CPI-U) with a 2015 base year. Rates include the state gasoline excise tax, oil company franchise tax, and underground storage fee.Source: Pennsylvania General Assembly, Consolidated Statues; U.S. Federal Highway Administration, Highway Statistics; Bureau of Labor Statistics, Consumer Price Indexes.

0¢

10¢

20¢

30¢

40¢

50¢

60¢

70¢

80¢

1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Mot

or F

uel T

ax R

ate

(cen

ts p

er g

allo

n)

Tax Rate in 2015 cents

Tax Rate in nominal cents

AttributionsCenter for State Tax Policy

Joseph Henchman Vice President, Legal & State Projects

Scott DrenkardDirector of State Projects

Nicole KaedingEconomist

Jared WalczakEconomist

Publications

Melodie BowlerEditor

Dan CarvajalDesigner

Front Cover: Independence Hall, photo David AmslerBack Cover: Asylum Township, photo Nicholas A. Tonelli

About the Tax Foundation

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. Our Center for State Tax Policy uses research to foster competition between the states and advises policymakers on how to improve their tax systems.

About the Pennsylvania Business Council Foundation

The Pennsylvania Business Council Foundation, an affiliate of the Pennsylvania Business Council, stimulates and encourages Pennsylvania citizens, and especially business persons, to take a more active part in civic and political affairs. The PBC Foundation commissions research, publishes reports and conducts seminars to disseminate unbiased information on issues of civic affairs. The PBC Foundation does not advocate the adoption of any public policy proposal, or the election or defeat of any candidate. The PBC Foundation works for increased and better informed voter participation. The organization is s a charitable organization approved by the IRS under section 501(c)(3) of the Code (EIN 20-0771774). The PBC Foundation is registered with the Commonwealth of Pennsylvania Department of State, Bureau of Charitable Organizations (certificate 36887).

Taxes are complicated. Each state’s tax code is a multifaceted system with many moving parts, and Pennsylvania is no exception. This chart book aims to help readers understand Pennsylvania’s overall economy and tax system from a broad perspective. It also provides detailed illustrations to each of Pennsylvania’s major taxes—individual income taxes, business taxes, sales and excise taxes, and property taxes—to help make the complicated task of understanding the state’s tax code a bit easier.

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