Wolf pitches massive attempt to fix Pa. school funding inequities with income tax hike

Pennsylvania Gov. Tom Wolf

Pennsylvania Gov. Tom Wolf speaks with the press in Harrisburg. (Office of Gov. Tom Wolf)

Pennsylvania Gov. Tom Wolf is proposing a major overhaul of public school finance, aimed at addressing resource inequities, that would be backed by a significant increase to Pennsylvania’s personal income tax.

Wolf formally presented the $37.8 billion plan at a remote version of his annual budget address Wednesday, saying it is an effort to answer three questions: “What do people need to be able to build a brighter future here in Pennsylvania? What are the barriers that get in their way? And what can we do to help remove those barriers?”

The proposal, which he teased earlier in the week, is is winning him plaudits from many education advocates, but few friends in the GOP-controlled legislature.

Senate Republican leaders, who in recent years have generally made a show of finding at least some common ground after Wolf’s budget proposals, were blunt. The plan, they said, is “dead on arrival.”

Wolf wants to increase the commonwealth’s personal income tax from 3.07% to 4.49% in the next fiscal year — a hike he estimates will net the state around $4 billion over the next fiscal year, but says will include broad exemptions so the increase only affects the top third of earners.

About half of the new revenue would go to schools, and the rest would help fill in big, largely pandemic-induced budget gaps.

“We’re going to stop asking working families to pay the same tax rate my family does,” said Wolf, who ran a very successful business before being elected. “This isn’t about pitting the rich against the poor and the middle class, this is about asking folks who have already made it to shoulder a little more of the burden so that folks who haven’t made it yet have a better chance to do so.”

The governor has largely steered clear of proposing sales or income tax increases since his first budget cycle, in 2015, when he deadlocked with the GOP-controlled legislature and the two camps had a nine-month standoff before finally coming to an agreement devoid of broad taxes.

In the intervening years, Republicans haven’t softened to the idea.

“Raising taxes is not the answer to our problem,” House GOP spokesman Jason Gottesman said. “It’s a non-starter.”

Lawmakers haven’t increased Pennsylvania’s income tax since 2003. The commonwealth currently has one of the lowest rates in the country and is one of nine states that assesses a flat rate on all taxpayers — which means all earners have their income assessed at the same percentage.

That arrangement is explicitly guaranteed in the state constitution via a uniformity clause, which bars progressive tax structures that require higher earners to pay bigger portions of their income. And that clause is the reason why Wolf’s income tax proposal includes expanding an existing tax forgiveness credit in an attempt to give lower earners a break.

Wolf says the exemptions would make it so most Pennsylvanias would not see a higher tax bill.

Under the plan, single people would have their taxes completely forgiven if they make $15,000 or less per year. Married couples who make $30,000 or less would also be forgiven. Each dependent would add an additional $10,000 allowance to the salary calculations. As salaries go up, the level of forgiveness would go down.

A key salary under the plan would be $84,000. That’s the highest income level that a married couple with two children would be able to make without their personal income taxes rising.

Wolf presented the plan as a boon to low-income and working-class families, saying about 67% of Pennsylvanians would either have their taxes reduced or untouched. Republicans came to the opposite conclusion — Gottesman argued that $84,000 for a family of four is squarely middle class, as are even higher salaries.

“I don’t consider that to be the uber-rich who you often hear the left talking about needing to be taxed,” he said.

The median household income in Pennsylvania is about $63,000.

Democratic Appropriations Chair Matt Bradford, one of the legislative leaders charged with examining state revenue and spending, acknowledged that it will be difficult-to-impossible to pass any tax through the GOP-controlled House and Senate.

“Hope springs eternal,” he said.

The personal income tax increase wasn’t the only non-starter in Wolf’s proposal, in Gottesman’s estimation. Also unacceptable to Republican leaders are a slew of Wolf’s perennial proposals: legalizing and taxing adult-use cannabis, increasing Pennsylvania’s $7.25 an hour minimum wage, and a severance tax on the natural gas industry, among others.

“I think that this is the result of the governor not being able to come up with any original solutions to return Pennsylvania back to normal,” Gottesman said. “It shows just how much he’s not taking his responsibility … seriously.”

Republicans don’t have their own plan hammered out yet. Gottesman said they’re focused on getting vaccines out and reopening businesses, not finding new revenue. As an example of their approach, he pointed to efforts to disburse roughly a billion dollars in federal funds, and a bill that would task the National Guard with helping distribute the COVID-19 vaccine.

Bradford said his office has calculated that the revenue shortfall for the next fiscal year will be significant — somewhere between $2.5 and $3.5 billion — something Republicans don’t dispute.

Merely getting people back to work, he argued, won’t fix that.

“We would be foolish to not recognize the structural challenges that are in our budget, that in some cases frankly predate the pandemic,” Bradford said.

Rank-and-file Republicans were quick to echo legislative leaders in criticizing Wolf’s plan.

Representative Seth Grove (R-York), who chairs the House State Government Committee, said on Twitter that he thinks the governor’s strategy of expanding income tax exemptions to get around the uniformity clause is likely unconstitutional. He called the entire proposal a “fiction budget.”

But Wolf — who in recent years has presented fairly moderate budget proposals that have ruffled Republican feathers much less — anticipated the criticism and dismissed it.

“I know that folks on the other side of the aisle are going to point to this budget and tell you all the things it does wrong or all of the things they don’t like,” he said. “But you know what? We’re not in the chamber today … So I’m not talking to them. I’m talking to the people of Pennsylvania.”

More money for schools, and a different distribution scheme

Wolf’s budget proposal includes a plan to dramatically reshape how most education money is distributed in the state.

The governor is calling for a $1.35 billion increase to the state’s basic education subsidy. That budget was about $6.8 billion this school year, unchanged from 2019-20.

In addition to this historically large ask, Wolf also wants to change how existing money is allocated, moving to route it through the student-weighted formula that became law in 2016.

Because the formula has only been applied to increases in aid since that year, Pennsylvania’s wide school resource disparities have remained very much baked into the system.

Currently, nearly 90% of the state’s basic education funding is distributed based on a ‘hold harmless” policy enacted decades ago that bars the state from funding school districts at levels lower than the prior year.

The move away from that policy “will ensure students in every community have the funding to succeed,” Wolf’s release states.

His proposal suggests using $1.15 billion dollars of the education budget to compensate school districts that would otherwise lose money through the change.

Attempts to fast-track school funding equity without making cuts to the many poor, rural districts that have benefitted from the hold harmless policy have been a third rail in Pennsylvania politics for years. Wolf’s plan to keep all districts whole hinges on passing a personal income tax increase to cover the difference.

If it’s successful, it would mean very large funding boosts to the state’s neediest districts, including Philadelphia, Reading, Allentown, Erie, William Penn, and Shenandoah Valley. Wolf’s spokesperson said a district-by-district breakdown would be available Wednesday.

Wolf’s budget also requests an additional $200 million for special education funding across the state, and $30 million for Pennsylvania’s subsidized pre-K programs.

Advocates for greater school funding equity hailed Wolf’s proposal.

“This is a giant step in the right direction,” said Deborah Gordon Klehr, executive director of the Education Law Center. “For years, our school funding system has allowed the students who need the most to get the least because of where they live. This proposal finally recognizes this reality.”

The Education Law Center was part of a coalition that organized a lawsuit against the state in 2014 in an attempt to force it to increase school funding. A trial tentatively scheduled for last summer has been delayed. A report prepared for plaintiffs in the case estimates that public schools in Pa. need an additional $4.6 billion to provide necessary classroom supports.

Klehr said that, even in the unlikely event that the GOP-controlled legislature passes Wolf’s proposal, that case will continue.

“The magnitude of our student’s unmet needs is immense and growing by the day,” she said. “This laudable, impactful, bold, necessary proposal cannot by itself right those deep wrongs.”

Proposed changes to charter schools and private school tax credit programs

Wolf is also proposing major changes in how charter schools, and tax credit programs that benefit private schools, operate.

Wolf says school districts across the state can save over $200 million by paying charter schools for special education students using the same formula that applies to districts, and by reducing the amount of money per student that flows to cyber charter schools.

Wolf has tried and failed to pass these reforms before, and charter advocates again reacted with frustration Tuesday, arguing it is inappropriate to cut any school funding during the pandemic.

“All schools are hurting right now,” said Lenny McAllister, CEO of the Pennsylvania Association of Charter Schools. “This is not the time to pit school districts versus charter schools.”

Wolf is also seeking reforms for two popular programs that incentivize people and businesses to reduce tax burdens by donating money to organizations that give private school scholarships: the Education Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC).

Currently, scholarship organizations can set aside up to 20% of the donation money for administrative costs. Most other states cap it at half that or less.

Wolf proposes capping it at 5%, claiming it would free up $36 million that could go towards tuition.

Advocates for the tax credit programs, which include Republican leaders, have long pushed Wolf to raise the cap on how much money can be funneled through them. Wolf has resisted dramatically expanding the credits, but has allowed them to grow during budget negotiations over the years.

Keisha Jordan is the executive director of the Children’s Scholarship Fund Philadelphia, an organization that benefits from the tax credits. On Tuesday, she said her organization currently sets aside 8% of donations for administrative costs.

“For smaller scholarship organizations that rely on that 20%, that will certainly be devastating to them,” she said.

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