Pennsylvania Needs (Tax) Climate Change

What does it take to be #26? The Tax Foundation has the answer. The independent tax policy group released its latest State Business Climate Tax Index, which ranks each state based on its tax system. Pennsylvania ranked 26th overall, falling three spots from the previous year.

The index uses more than 100 variables in five major areas of taxation to produce a ranking for each state. The five areas include the individual income tax, sales tax, corporate tax, property tax, and unemployment insurance tax. The foundation also weighs each area of taxation differently (see page 17 of the index for the methodology) to provide meaningful distinctions among the various tax climates. Here’s how Pennsylvania ranks on each component:

• Individual Income Tax – 17th
• Sales Tax – 21st
• Corporate Tax – 44th
• Property Tax – 33rd
• Unemployment Insurance Tax – 50th

The rankings—ranging from mediocre to poor—must be improved if Pennsylvania is to turn around its disappointing economic record. The state has consistently placed near the bottom in income growth, job growth, and population growth over the last four decades. Reversing this trend is possible, however, if lawmakers embrace tax reform that puts families and businesses first.

Some may criticize the notion that tax climates affect economic growth, but a literature review included in the Tax Foundation’s index negates this criticism. Taxes do affect behavior. This is the consensus among scholars and is just plain common sense. Government cannot impose costs—via the tax code—without causing economic harm to working people.

Lawmakers must keep this in mind when forging a budget solution. Higher taxes are not the path to prosperity or even fiscal stability. Pennsylvania needs to model itself less like Connecticut and more like North Carolina. Since making transformative changes to its tax code, the Tar Heel State has experienced a precipitous drop in unemployment and enjoyed a  median income growth rate that has exceeded all but three states.

There’s no reason Pennsylvania can’t follow suit if lawmakers reduce state government’s costs and the tax burden it requires.The commonwealth’s problems are not insurmountable, but lasting climate change will require rejecting the entrenched status quo.