Governor Wolf’s Sales Tax Proposal
When Governor Wolf presented his budget for the upcoming fiscal year it included the proposal to increase the personal income tax to fund property tax relief. The plan calls for increasing the personal income tax (PIT) rate from 3.07% to 3.7%, effective July 1, 2015. This increase would largely be used to fund property tax/rent relief – with payments going to eligible homeowners and renters in October 2016. The increase is expected to raise $2.376 billion in 2015-16, with $2.14 billion being transferred to an account to be used for making payments to homeowners. In 2016-17, the administration expects to transfer $4.596 billion in revenue from this rate increase to fund property tax relief.
Wolf’s budget also proposes to increase the sales tax rate and expanding its base to fund, in part, state school employees’ retirement payments. The sales tax base would be expanded to include more than 40 additional products and services (but maintaining the current exemption for groceries and clothing), and the overall sales tax rate would be increased from 6% to 6.6%, effective Jan. 1, 2016. This change is projected to generate $1.554 billion in 2015-16.
Services such as legal services, building inspection, surveying and mapping, architecture design, and consulting engineering are just a few of the many services that will be affected by this proposal.
The budget would redirect $1.75 billion of sales tax receipts into a restricted account to pay the state’s share of the “employer costs” of the school employees’ pension system in 2015-16, and would continue to make the pension payments in a similar manner in future fiscal years.
The Department of Transportation pays approximately $420 million in engineering services on an annual basis. Subjecting this expenditure to a sales tax of 6.6 percent would equate to an additional $28 million being removed from the motor license fund (one state-funded account) and directly deposited into the General Fund (another state-funded account). The loss of this approximate $28 million annually prevents additional infrastructure projects from being designed and constructed to improve the safety of our state highways. This effect would have a greater impact on local municipalities where funding for roadway projects is already scarce.
Through the use of technology, engineering services may be performed from any office and any location. However, it is typically preferred that these services be performed within the boundaries of the state to put more Pennsylvanians to work. Subjecting a sales tax for engineering services performed within the Commonwealth, provides a direct competitive disadvantage to our Pennsylvania firms when competing with firms in states where these services are not subject to tax. This opens the door for out-of-state firms to perform the same work without this additional fiscal burden. Additionally, this would negatively affect smaller and minority-owned/diverse businesses that are based in Pennsylvania as they would have even greater difficulty competing against other firms that are not subject to the tax.
Nationally, the vast majority of states do not subject engineering services to a sales tax. Pennsylvania would be an outlier in the negative sense. When engineers are looking for a location to start a new business or expand their existing workforce, having a sales tax immediately makes Pennsylvania a non-business friendly environment for these services. Business leaders and corporate site locators will simply choose other states.
ACEC/PA has joined a small coalition with other industries affected by the proposed increase in the Pennsylvania sales tax to determine what ramifications our members will be subjected to and to discuss other ideas to alleviate this issue within the Commonwealth.