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Taxes No, Tax Reform Si

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Repeat after me: There will be no tax increases in Pennsylvania.  There will be NO tax increases in Pennsylvania.

Tom Corbett.jpgThat's the message - clear and direct - you can expect from new Gov. Tom Corbett in his inaugural speech this week, to be reiterated in a month or so when he presents he proposed budget for the new fiscal year that begins on July 1. 

Exit rhetoric.  Enter problem.

As many people now know, Corbett is also facing a deficit of between $4 billion and $5 billion.  The only path to erasing the deficit appears to be substantive cuts in the state's $28 billion operating budget.

But is that the only way? Not really.

It depends what word you attach to the adjective "tax."  No one likes tax increases, for instance. But, how about tax reform? Everyone likes reform.

In the same way, no one likes tax loopholes.  But what if we close some of those darn loopholes? Then we'll have tax fairness. That's something we can all rally around.

Here are five ways to reform the tax system in Pennsylvania, close loopholes and make the tax system fairer - and also raise close to $1 billion in revenue.

None of these ideas are new, but they may gain -excuse the expression - currency during the coming budget crisis.

1. Close the loophole for cigars and smokeless tobacco.  Pennsylvania - along with nearly every other state - taxes the hell out of cigarettes. The money is used to (a) discourage smoking by increasing the cost of same, and (b) feed state programs to ameliorate the health costs of smoking.  So why are cigars and smokeless tobacco not taxed? There's a long explanation for this, but mostly it's a tribute to the smokeless tobacco and cigar lobbyists. According to the Pennsylvania Budget and Finance Committee, Pennsylvania is the only state in the union not to tax smokeless tobacco and one of only two in the U.S. not to tax cigars (Florida is the other.) Why should that be? Tax these tobacco products, too. Estimated additional revenue: $42 million a year.

2. End the vendor discount on the sales tax. Back in the 1950's, when the state sales tax was first enacted, it took a lot of work to compile the list of sales, etc. to determine the taxes due. In recognition of the cost of this green-eye shade labor, the state gave businesses a 1 percent discount on total sales tax collected. Fast forward to 2011. Most businesses keep track of sales with registers tied to computers. Hit one button and you get a figure of total sales.  Hit another and you calculate taxes due. Do they really need a 1% discount to pay for a couple of keystrokes? No. The discount is an antique from another day. End it now.  Estimated additional revenue: $74 million a year.

3. Close corporate tax loopholes.  It's the same old story.  Nominally, every corporation is supposed to pay the state's 9.9 Corporate Net Income tax. So how come only 29 percent actually do pay it? A big part of the answer is that corporations use a varity of loopholes to avoid their fair share.  One of the favorites is to register the corporation in another low- or no-tax state (Read: Delaware) and shelter profits there. There is a way to change this. Make them base their tax on their combined sales in Pennsylvania, regardless of where they hang their corporate hats. Estimated additional revenue: $67 million a year.

4. Charge a natural gas extraction fee. Natural gas companies are pouring into Pennsylvania and stand to make billions (the "b" is correct) from the gas lodged in the Marcellus Shale.  These operations have risk to the environment and to local communities. Right now, taxpayers are running all the risks.  And for this we get? Nothing. Gov. Rendell and others have proposed a natural gas tax.  But there's that dirty word again. So, let us not tax natural gas extraction.  Let us charge a fee to the companies for the gas the Marcellus Shale uses.  The difference between a tax and a fee? One is a tax, the other is a fee.  Estimated additional revenue: $160 million a year.

5. Close loopholes in the sales tax. In the 1950's, when the state sales tax was first enacted it had only a few exemptions: food, clothing and prescription medicine. Over time, though, the list of exemptions has grown to include such items as coal, firewood, flags, magazines, candy and gum, wrapping and packing supplies and caskets and burial vaults.  Why? Because it seemed like a good idea at the time.  Last year, Rendell proposed eliminating these exemptions and also suggested extending the tax to services, such as legal and accounting fees (The proposal would maintain exemptions on educational tuition and health care costs.)

These are not small changes.  Removing the exemptions and taxing services would yield so much, it would enable the state to lower the sales tax rate from 6 percent to 4 percent and still bring in additional money.  The legislature was in no mood to consider such reforms last year.  Maybe this year.  Estimated additional revenue: $532 million.

My thanks to the Pennsylvania Budget and Finance Committee for its research on these issues.  The Committee's website is a good source of information on state finances.  Here is the link to its homepage.

 

Tax Reform Chart.jpg-- TF

 

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