At a Glance: The budget provides for the largest income tax ever, although Governor Tom Wolf has described it as a major reform that would actually only increase taxes for about a third of all applicants. The governor is also conducting another state corporate tax reform.
What it means:
Wolf would reset the income tax rate from 3.07 percent to 4.49 percent, a whopping 46.3 percent increase that dwarfs any previous increase in the tax’s history. The proposed increase would generate nearly $ 3 billion in new revenue annually based on current economic forecasts.
But it’s not a direct increase for everyone. Due to a simultaneous dramatic expansion of the existing tax forgiveness program in Pennsylvania, which allows some applicants to exempt part of their income from taxation, the changes would lower taxes for 40 percent of all applicants and leave another 27 percent largely in the status quo, according to Wolf.
Most of the increase would fall in the top third of the state’s wage earners.
Supporters say the proposal would enable a transformative infusion of cash into public school districts while providing relief to those who need it most while asking more of those who are luckier.
But in the majority republican assemblies of the legislature, an opposition to the plan is already forming.
“Governor Wolf and his Democratic allies are proving once again that they have forgotten Main Street and every middle-class family in the Commonwealth,” said Senate President Pro Tempore Jake Corman, R-Center County. “Now is not the time to ask the Pennsylvanians to send more of their hard-earned dollars to Harrisburg.”
Wolf’s plans would also widen the tax base of state tax on corporate profits by requiring multi-state corporations to file earnings for all affiliates from January 1, 2022. Wolf says his plan will fill a loophole that several state-owned companies are forced to avoid paying this tax by setting up a holding company in another state and moving profits there.
This so-called “combined reporting” would be combined with a lower tax rate applicable for tax years beginning on or after January 1, 2022. It is proposed to lower the tax rate from 9.99 percent to 8.99 percent and then further to 8.29 percent in 2023; 7.49 percent in 2024; 6.99 percent in 2025; and 5.99 percent in 2026 and beyond.
Supporters say the changes will help Pennsylvania-based companies first as they pay the existing tariff, while many larger, multi-state and multinational corporations get a free pass. While the changes are expected to raise an additional $ 208 million in 2021-22, Wolf argues that over time, the reduced tax rate will lower taxes for everyone and improve the state’s business climate.
Gene Barr, president of the Pennsylvania Chamber of Commerce and Industry, said Wolf’s drive to restructure the tax would undermine the benefit of lowering the tax rate and throw many businesses into a swamp of new tax litigation.
“It’s a huge mistake,” Barr said, claiming that most of the state’s so-called “Delaware loophole” problems were fixed in 2013.
The governor is not proposing a change in state sales tax.