Wolf asks for tax increase on Pa.’s top earners amid pandemic, GOP pans proposal as ‘irresponsible’

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HARRISBURG — In one of his boldest budget proposals since taking office, Democratic Gov. Tom Wolf is asking the legislature to significantly boost funding for public schools, legalize recreational cannabis, and approve the first major tax increase in nearly two decades.

But Wolf’s $40 billion spending plan, which he formally unveiled Wednesday, is likely to be dead on arrival in the GOP-controlled legislature, whose leaders wasted little time shredding it with criticism, calling it unrealistic and hurtful to taxpayers.

“The budget he is presenting is completely unsustainable, totally irresponsible, and absolutely crippling to the state’s economy,” said Jake Corman of Centre County, the Senate’s top Republican. “Now is not the time to ask Pennsylvanians to send more of their hard-earned dollars to Harrisburg.”

Still, the Democratic governor, who in recent years has avoided goading Republican leaders with aggressive spending proposals, said he believes his budget blueprint will make the state’s education system fairer and its tax structure more equitable for those reeling from the financial blows of the pandemic.

The budget proposal, Wolf’s seventh, harks back to several of his long-held priorities — a throwback to progressive reforms he and other Democrats have sought for years.

The governor’s plan would boost funding for public schools by $1.35 billion and push billions of existing education dollars through the state’s fair-funding formula, which is set up to help schools that serve disproportionately poor and fast-growing districts.

He would pay for the increase by raising the state’s personal income tax rate, which currently is 3.07%, to 4.49%. However, the Wolf administration said only the top one-third of earners would pay more, because the proposal expands exemptions and tax forgiveness.

The proposal would provide complete tax forgiveness to single people and married couples who make less than $15,001 or $30,001, respectively, while providing a $10,000 allowance for each dependent. The level of tax forgiveness would decline by a percentage point for each $500 added to those thresholds.

That means that families with two children making less than $84,000 will receive a tax cut while a family of four making $50,000 will have their taxes eliminated, the administration said.

“I want to help working families get ahead by reducing their taxes,” Wolf said. “This isn’t about pitting the rich against the poor and the middle class.”

Wolf on Wednesday also rehashed a plan to raise the state’s minimum wage from $7.25 to $12 per hour this July and gradually to $15.

In addition, Wolf’s budget proposal would legalize recreational cannabis. A portion of the revenue would support programs to help individuals and communities that have been adversely harmed by the criminalization of marijuana.

A tax benefit or burden?

Pennsylvania Republicans on Wednesday said Wolf’s budget proposal, specifically the proposed tax and minimum wage increase, would severely hurt small businesses and some families that are struggling during the pandemic.

The chair of the Senate Appropriations Committee, through which all budget bills must pass, said the proposed tax hike would “devastate working families and small business owners, many who already cannot afford their current tax burden, are unemployed, or have been forced to close their business.”

“The governor could not have picked a worse time to propose a 46.3% increase in the personal income tax given the struggles Pennsylvanians continue to face during the worst pandemic of our lifetime,” Sen. Pat Browne (R., Lehigh) wrote in a statement.

The emergence of the coronavirus, and the resulting business closures that Wolf ordered last spring to keep the virus from spreading and overwhelming hospitals with ill patients, devastated the state’s economy.

Before the first cases were diagnosed in Pennsylvania last March, Pennsylvania’s unemployment rate was 4.7%. Currently, it’s 6.7%.

But that does not capture the full financial impact of the virus. In February of last year, employer payrolls in Pennsylvania reached a record 6.1 million jobs, according to federal labor data. By April, in the thick of the shutdowns, payrolls hit rock bottom, dipping below 5 million.

The industries most affected by the economic slowdown in 2020 were restaurants, which lost 115,000 payroll jobs, and non-public colleges and universities, according to a January report by the Independent Fiscal Office.

The pain was felt by the state’s coffers, with revenue plummeting below official estimates. The IFO estimates that $1.4 billion in state revenue was lost due to reduced economic activity brought on by the pandemic, while another $1.9 billion was delayed due to extended tax filing deadlines.

While recent revenue projections have been stronger than expected, the office is projecting Wolf and lawmakers will be grappling with a $2.5 billion deficit when they pass the budget this summer.

In 2020, lawmakers turned to federal relief money to prop up the state budget and they will likely do so again this year. President Joe Biden has vowed to send more money to state governments.

To balance the books, Wolf and the legislature have also leaned on one-time solutions, like borrowing money from special funds. That’s how the governor and state lawmakers plan to fund a $145 million grant program for struggling businesses.

“The state is running a surplus and revenues are coming in above estimate. There’s been a lot of federal money to help the state balance the budget,” said Nathan Benefield, vice president of the conservative Commonwealth Foundation. “But that federal money goes away at the end of this year. And a lot of the long-term problems are back in there.”

Marc Steir, director of the left-leaning Keystone Research Center, said at a news conference Wolf’s tax proposal was critical to raising state revenue.

There could be questions about the proposal’s constitutionality, as it may violate a uniformity clause that says taxes on income have to be set at the same rate. But the same clause includes a “poverty exemption so you can reduce taxes for people with low incomes,” he said.

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