PA Budget Facts 2010: Pennsylvania Sales Tax Expansion

Pennsylvania faces a projected General Fund shortfall approaching $1 billion.  In February, Gov. Rendell proposed a $29 billion budget for FY 10-11 that increases business taxes, imposes new taxes on natural gas and tobacco products, and expanding the sales tax to include many goods and services currently exempt. This is the fourth in a series of fact sheets on the PA state budget.

Gov. Rendell's Proposed Sales & Use Tax Expansion

• Gov. Rendell has proposed lowering Pennsylvania's Sales & Use Tax from 6% to 4% and expanding the tax to 74 goods and services currently not taxed.
  • Philadelphia charges an additional 2%, and Allegheny County 1%, on top of the state rate.
  • Major exemptions that would remain include: health care, food, clothing, tuition, prescription drugs, gasoline, manufacturing materials, and purchases by charitable organizations and governments.
    
• Broadening the Sales & Use Tax base provides greater tax neutrality and fairness - i.e., not picking and choosing favored special interests for an exemption - and the lowered rate would make many goods less expensive for Pennsylvanians.  However, the proposed tax change is not revenue neutral.
  • The Sales Tax expansion would result in an estimated $531 million in additional revenue next year, and $900 million per year when fully implemented, coming out of the pockets of Pennsylvanians.

• Rendell would also eliminate Sales & Use Tax vendor compensation.
  • Vendors that collect the Sales & Use Tax and submit their collections properly and timely receive a 1% rebate on their collections; 99% goes to the state.
  • This change represents a $74 million tax increase.
    
• There have been previous efforts to broaden the Sales & Use Tax base to lower the rate and to reduce property taxes, but they were defeated by political opposition.
  • The largest item, advertising, faces opposition by both advertisers and newspapers.
  • Taxing of specific services like accounting, consulting, engineering, computer programming, dry cleaning would affect those providers.
  • Taxing popular items like coal and flags also draw objections.
  • The taxing of gratuities, as businesses wouldn't be able to pass that on to customers, would result in less pay to employees like waiters and waitresses.
  • Gov. Rendell proposes a repeal of the helicopter exemption that was used to entice Rep. Houghton to vote for last year's budget deal.
    
• Based on the Pennsylvania State Tax Analysis Modeling Program (PA-STAMP), the increased collections will result in 10,000 fewer private sector jobs in 2011 and a loss of 15,000 jobs by 2012.

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For more information on the Pennsylvania Budget, visit CommonwealthFoundation.org/Budget