It’s no secret that Philadelphia has been hit hard by the coronavirus and lockdowns. It was one of the first counties to lock down and one of the last counties to begin taking steps toward reopening through Governor Tom Wolf’s phased plan. That means local businesses and workers in the state’s most populated municipality have endured the most time without making money.
And just when many were starting to think the worst was behind us, Wolf gave his annual budget address last week. Based on his proposals, the city’s residents and businesses might be hit again.
As it stands, the governor’s budget proposal includes a plan to increase the personal income tax (PIT) from the current rate of 3.07 percent to 4.49 percent. He includes increases in income “allowances,” which he says will result in a tax reduction for the “working class.” In reality, according to U.S. Census data, the median household would see a tax increase across most major household categories.
For Philadelphians, a state income tax hike is an even bigger worry than it is for most other Pennsylvanians. Philadelphia is the fifth highest-taxed urban area in the country, barely lower than places like New York City and San Francisco. Apart from the local sales tax, Wolf’s proposal would increase the maximum income tax for Philadelphians from under 7 percent to over 8 percent.
During his address, Wolf said, “the question isn’t whether taxes are unpleasant or necessary. They’re both.” While most people would accept that some taxes are necessary, that isn’t the same as justifying increasing them, especially considering how hard this tax increase will hit Philadelphia’s already struggling small businesses in addition to workers.
Philadelphia is the fifth highest-taxed urban area in the country, barely lower than places like New York City and San Francisco. Wolf’s proposal would increase the total income tax for Philadelphians from under 7 percent to over 8 percent.
According to an NFIB December survey, one-quarter of small businesses nationally will have to close if current economic conditions don’t improve over the next six months. Last August, more than 1,000 Philly businesses had already closed, according to Yelp data. Wolf’s proposed tax hike would disproportionately affect businesses and households that are already struggling.
Despite the name, the PIT isn’t only personal. It’s also the way that 85 percent of the approximately one million businesses in the state are taxed. This is because businesses such as Limited Liability Companies (LLCs), Partnerships, and S Corporations file under the PIT rather than the much higher Corporate Net Income Tax (CNIT).
This simple fact goes against Wolf’s claim that he recognizes how important businesses are to our communities’ economic revival. Even though he proposed that the CNIT be reduced by 25 percent in his address, an increase in the PIT will hit many more businesses. This doesn’t make sense if you want to improve the business climate of the state.
Lawmakers in the General Assembly should reject Wolf’s bad ideas and instead implement policies that would actually improve the business climate and make life easier for workers.
One such reform is permitting all businesses—not just corporations—the ability to carry forward and deduct operating losses. Additionally, Pennsylvania has the 11th highest number of business regulations in the country, with almost 163,000 individual rules. And that doesn’t include Covid-specific regulations. These rules alone result in huge time costs to businesses, especially small ones.
By last August, more than 1,000 Philly businesses had already closed, according to Yelp data.
READ MORE — Tirzah Duren: PA lawmakers must challenge endless lockdowns in 2021
Reducing the myriad of rules and eliminating harmful or needless regulations would not only make it easier for businesses to operate but also make it easier to ensure compliance with the regulations that do matter. Thankfully, there are already many bills introduced that address both these areas and would represent a vast improvement over the status quo.
Wolf was right that the state should make things easier for Pennsylvanians, especially those struggling; however, his tax plan doesn’t do that. Raising taxes on individuals and businesses is not the way to improve job opportunities and economic growth. For Philadelphians who have been hit the hardest during the Covid pandemic, the governor’s budget address wasn’t the message of relief and support they needed to hear.
We can build back better as Philadelphians and Pennsylvanians, but that involves removing barriers and creating opportunity, not adding to existing hardship.
Tirzah Duren is a Policy Analyst for the Commonwealth Foundation, Pennsylvania’s free market think tank. @tzduren