In the aftermath of the Trump-GOP tax cut enacted at the end of the last year, some legislators and advocates are calling for Pennsylvania to also cut tax rates for both individuals and corporations in the hopes of spurring economic growth and job creation.
It is hard to think of a worse idea for our political community, not only because it is unfair, but because it has been tried and failed again and again.
Pennsylvania has one of the most unequal tax systems in the country. Low-income Pennsylvanians pay 12 percent of their income in state and local taxes while middle-income Pennsylvanians pay 10 percent. But those with incomes in the top 5 percent pay only 6.8 percent of their income taxes while the top 1 percent pay only 4.2 percent. With a tax system this unfair, why should we emulate a federal tax cut that mostly reduces taxes for those at the top?
It wouldn’t be because cutting taxes for the rich and corporations spurs the economy. Since 2002, corporate taxes have been cut, and cut again, in Pennsylvania. The tax base for the corporate net income tax (CNIT), which has a relatively high rate, but also huge loopholes that allow 71 percent of corporations doing business in our state to escape taxation, has been shrunk. And the second of our two corporate taxes, the capital stock and franchise tax (CSFT), which was designed to ensure that all corporations paid something, has been eliminated entirely. We estimate that these changes cost the PA Treasury almost $4 billion in revenues every year. The corporate share of Pennsylvania taxes has fallen from 30 percent of all revenues to 15 percent today.
Had these drastic cuts not taken place the state would have the funds to fix the inequality in our school funding, which is the worst in nation, and our fourth-from-the-bottom support of higher education. We would have more money for infrastructure. And adequate state funding for our schools would have prevented the rise in property taxes in many Pennsylvania counties.
Have these tax reductions brought us prosperity? Far from it. With the exception of four years — three of which came around the Great Recession — our state has ranked in the bottom half of all states for job growth for fifteen years. Tax cuts led to over 20,000 teachers, social workers, and other public servants being laid off during the Corbett years. With so many losing jobs, consumption and the economy stagnated.
These results shouldn’t surprise us. From a theoretical point of view, taxes account for too small a share of corporate costs to determine where businesses decide to locate or how fast they grow. And most job growth occurs in small businesses that are not organized as corporations and thus pay taxes at Pennsylvania’s very low personal income tax rate. And, most of the time, they don’t have much in the way of profits for their first few years anyway.
When deciding where to locate, businesses look for an educated workforce and ease of access to their suppliers, consumers, and workers. And when they decide to invest in new productive capacity, businesses look to whether demand for what they produce is growing. Taxes on those businesses play little role in determining that. And government expenditures, as well as transfers from wealthy families that don’t spend all they earn to lower- and middle-income families that spend most of what they earn increase consumption and, thus, investment.
For empirical support of the theory, look at Kansas and Louisiana. Both drastically cut business taxes and spending in the last decade. Their plan to create jobs and new economic activity failed. Reductions in taxes created little new investment and jobs and reductions in government spending sent the economies of both states into a tailspin. Tax revenues fell drastically, leading to even deeper government cutbacks, and further economic distress. Meanwhile, the children of both states saw the quality of the education they receive decline.
In contrast, states like California and Minnesota, which increased taxes during the Great Recession to avoid cuts in spending, saw their economies grow and jobs increase.
If we really want to make leave our children a more prosperous Pennsylvania and give them opportunities to advance no matter where in the state they grow up, we should be investing far more in prekindergarten through 12th grade and higher education, as well as in career training and apprenticeships for those who don’t go to college. Investment in the skills and knowledge of our citizens, as well as in public infrastructure, is the way our state and country became a world economic leader while building a strong middle class.
Our failure to keep up those investments, not high taxes, is the reason the top 1 percent in Pennsylvania have seen their incomes grow 125 percent since 1979 while the incomes of everyone else has grown only 12 percent in that time.
Rather than cutting taxes, it’s time to ask the very rich to pay their fair share, while investing in the education and infrastructure that will create prosperity for all of us.
(Marc Stier is the director of the Pennsylvania Budget and Policy Center.)