Tracking the tax increases and decreases in Gov. Tom Wolf’s first term

This story originally appeared on PA Post.

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Almost four years ago, Gov. Tom Wolf proposed big changes for Pennsylvania’s taxes.

He wanted to raise the personal income and sales tax rates, while lowering the corporate net income taxes. He also pushed for a severance tax on natural gas drilling.

The big tax rate changes didn’t go through. Neither did the severance tax.

But in his first term, Wolf and the Republican-controlled General Assembly did manage to agree on a variety of tax increases on cigarettes, digital downloads, Pennsylvania Lottery winnings, fireworks and more.

They gave new power for counties to raise their hotel tax rates.

They allowed the final phase of a gas tax increase to go through, while also allowing the final phase of a business tax repeal to go through.

Four years later, the result has been hundreds of millions of dollars in new revenue, but a projected deficit for the upcoming fiscal year, as well as criticism from the political left and right.

During a Thursday news conference about economic successes in his first term, Wolf highlighted a business tax that was phased out at the end of 2015. He downplayed the effect of targeted tax increases when asked about them. And he deflected when asked whether he anticipated any targeted tax increases in his upcoming budget.

Here’s a look at some significant tax changes over the past four years and how they affect you.

Cigarettes and tobacco products

Cigarettes: Starting Aug. 1, 2016, lawmakers increased the cigarette tax from $1.60 per pack of 20 cigarettes to $2.60 per pack in most of the state. In Philadelphia — which already had a higher cigarette tax — the rate rate increased to $4.60 per pack.

A retailer tax also increased from 6 percent to 7 percent.

Vaping: As part of the same 2016 tax package, lawmakers approved a 40 percent tax on the sale of e-cigarettes when a retailer buys from a wholesaler.

The change also included a one-time floor tax of 40 percent that the retailers had to pay on the value of their inventory.
In 2017, The Philadelphia Inquirer reported that, almost a year into the new tax, it had brought in $13.7 million in revenue and, according to an industry association, more than 100 of the state’s estimated 400 vape shops had closed.

Other tobacco: Also in 2016, lawmakers imposed a new tax on loose tobacco, including smoking tobacco for pipes and chewing tobacco, at a rate of 55 cents per ounce. That also included a floor tax of 55 cents per ounce on the retailer.

Cigars were not included in that tax expansion.

Wolf defended the tobacco changes at the Thursday news conference, saying the cigarette tax was “a matter of trying to get fewer people to smoke. We’ve succeed.”

The increased cigarette and other tobacco taxes have also brought in hundreds of millions of dollars in new revenue over the years.

According to budget documents, general fund revenue under the cigarette tax category increased from about $912 million in the 2015-16 fiscal year to about $1.26 billion the following year.

Meanwhile, revenue in the other tobacco products tax category in the general fund budget increased from zero in 2015-16 to about $84 million in 2016-17.

Sales tax

Digital downloads: Starting Aug. 1, 2016, the state’s 6 percent sales and use tax was extended to items downloaded electronically or digitally. That includes songs, movies, e-books, online games, streaming services and apps.

The state Independent Fiscal Office estimated the change would generate $45.7 million in the 2016-17 fiscal year.

Mike Straub, a spokesman for the House Republican Caucus, said the change “ensures fairness, treating those digital products the same way physical purchases are in Pennsylvania.”

At the Thursday news conference, Wolf said the state’s exemptions for food and clothing makes the sales tax rate “essentially a 4 percent, something like that, tax, which makes it in the bottom half in the United States.”

Discount eliminated: When people buy something and pay the state’s 6 percent sales tax, the seller gets to keep a portion of that money. The idea behind the discount is that it costs businesses money to collect the sales tax and turn it over to the state.

That discount cost the state $80.6 million in the 2015-16 fiscal year, according to the governor’s budget office.

Starting in August 2016, the state reduced the value of the vendor discount. Now, the discount is capped at either $300 annually or 1 percent of the tax collected — whichever is less.

This year, the discount is expected to cost only about $14.3 million.

Across Pennsylvania, more than 188,000 vendors benefit from the discount, according to the state budget office.

“This change is big for some taxpayers, most notably large retailers,” Jason C. Skrinak, a tax expert with RKL professional services firm, wrote after the change. “…This proposal had been circulating around the Capitol for a number of years, as Pennsylvania was only one of 13 states that still offered the unlimited vendor discount for work that was largely automated.”

Other exemptions: Lawmakers made other tweaks, including new exemptions for beer kegs, corrugated boxes involved with snack products, and certain services related to the setup at convention centers.

Personal income taxes

Lottery: Money won from the Pennsylvania Lottery used to be exempt from the state’s personal income tax. But that exemption was eliminated in 2016.

Afterward, the Independent Fiscal Office estimated that the change would increase revenue by $15.2 million in the 2016-17 fiscal year.

During the Thursday news conference, Wolf said the state’s personal income tax rate is “one of the lowest, if not the lowest, in the United States.”

Pennsylvania has a flat rate of 3.07 percent for its personal income tax. Many other states have progressive rates that increase the more someone earns. Seven states have no income tax, according to a 2018 report from the Tax Foundation.

Businesses

Bank shares tax: Beginning Jan. 1, 2017, the tax rate on bank and trust companies increased from 0.89 percent to 0.95 percent.

The amount of the tax is based on the taxable value of the company’s shares in Pennsylvania.

The Wolf administration said the goal of the change was to make a 2013 law dealing with the bank shares tax revenue neutral as was originally intended.

Capital stock and foreign franchise tax: The phase-out began in 2000 under then-Republican Gov. Tom Ridge. Lawmakers delayed the elimination multiple times. Then in 2013, then-Republican Gov. Tom Corbett approved a new phase-out schedule to be completed at the end of 2015.

The tax expired during Wolf’s term without another delay.

“I finished the job,” Wolf said Thursday.

The tax brought in nearly $242 million in revenue in the 2014-15 fiscal year, its last full year in effect.

Corporate net income tax: A case that reached the state Supreme Court prompted Wolf and lawmakers to change a deduction that businesses take for net operating losses.

Previously, the amount was capped at $5 million or 30 percent of taxable income — whichever was greater. The $5 million cap was eliminated and the cap was instead increased to 35 percent of taxable income for tax year 2018 and 40 percent for the following years.

The Independent Fiscal Office estimated that the change would lead to about $207 million more revenue in the 2017-18 budget.

Tax credits: Lawmakers approved a number of changes to tax credits, including an expansion of money available for the Educational Improvement Tax Credit. That increased from $100 million to $125 million for the 2016-17 budget. It increased in the next two years, as well, and it is $160 million in the 2018-19 budget.

That tax credit allows businesses to reduce their tax liability by making contributions to eligible organizations.

Gambling

Table games: In 2016, lawmakers approved a temporary tax increase from 12 percent to 14 percent on gross table game revenue. As part of the change, lawmakers said the tax increase would expire on June 30, 2019.

Expansion: In 2017, lawmakers approved a major gambling expansion in the state, including authorizing qualified truck stops across the state to each host up to five video gaming terminals. The law imposes a 42 percent tax on gross revenue from those terminals.

Fireworks

More options, higher tax: In 2017, lawmakers expanded the kind of fireworks legally available for Pennsylvania residents to buy. They also imposed a new 12 percent tax on the sales price — on top of the normal local and state sales taxes.

In December, a state Commonwealth Court ruling struck down a key part of the new law dealing with tent sales, The Morning Call of Allentown reported.

Hotel taxes

Permission: In April 2016, lawmakers gave most of the state’s 67 counties the power to raise their hotel tax rates from 3 percent to 5 percent.

That year, 15 counties raised their rates. And as of November 2017, an additional 15 counties had raised their hotel tax rate, according to information from the County Commissioners Association of Pennsylvania.

What the changes mean and what’s next

Ahead of his inauguration for a second term, Wolf has highlighted increased education funding, a rise in the number of jobs, and improvements to bridges and roads as signs that his approach is working.

During the Thursday news conference, Wolf mentioned his past support of reducing the corporate net income tax, but said he’s not the only one with a vote in the Capitol. And he has repeatedly called for a severance tax on natural gas drilling.

When asked about some of the past targeted tax increases in budgets, he referred to some as “little things” and part of an effort “to bring the tax code into some sort of compliance with other states, and with what we were trying to do. The economy is changing, and I think folks in this building will continually try to update the tax code and make sure it reflects all therealities of our 21st century economy.”

On the Republican side, House Appropriations Chairman Stan Saylor, R-York County, has said revenue collections have been strong this year and his caucus will be focused on avoiding new taxes or fees.

Meanwhile, the state’s Independent Fiscal Office has projected a deficit of about $1.7 billion for the next budget.

Mark Price, a labor economist with the Keystone Research Center, a liberal-leaning think tank, said that projected revenue shortfall shows that the approach from the governor and General Assembly has been inadequate the past four years. He said “continuing to muddle through” prevents more significant investments in education funding.

On the other end of the political spectrum, Nathan Benefield, vice-president and chief operating officer of the conservative-leaning Commonwealth Foundation, said the targeted tax increases included in the budget deals hurt Pennsylvania in small ways and distorted the overall economy.

Both Price and Benefield have argued for a more comprehensive approach — although they have different ideas for what the end result should be.

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