Rendell wants temporary income tax hike

June 16, 2009 8:20:01 PM PDT
Gov. Ed Rendell on Tuesday said Pennsylvania should temporarily increase its personal income tax rate to generate $1.5 billion a year to deal with a severe downturn in state revenues. He wants to raise the rate to 3.57 percent from 3.07 percent to help close a $3.2 billion revenue gap.

The Democratic governor said the hike is necessary because, even with severe cuts, the state still has a budget deficit.

"The simple truth is we have no good choices," Rendell said. "There are no shortcuts out of this crisis, no magic bullets, no painless path out of this morass."

Rendell made the announcement at the Westinghouse complex in Cranberry, two weeks before the state's budget year ends. It is the first time he has advocated increasing a broad-based tax to cope with the financial crisis.

The governor said he also continues to favor new taxes on tobacco and natural gas extraction, dipping into the state's "rainy day" contingency fund, and postponing a planned phase out of the state's corporate stock and franchise tax.

An income tax increase will face a tough fight in the Legislature, where Republicans who control the state Senate have offered a state budget that relies on cuts rather than additional taxes.

In 2003, Rendell's first year in office, he and lawmakers increased the personal income tax rate from 2.8 percent to its current level. It was also increased in the difficult budget year of 1991 from 2.1 percent to 3.1 percent for one year, then reduced back to 2.8 percent.

"We don't need a permanent tax increase," Rendell said. "We can make these temporary for the next three years."

Senate Majority Leader Dominic Pileggi, R-Delaware, said there is no Republican support for increasing the personal income tax. Pileggi said he wants Rendell's administration to provide details, including multiyear projections about how the tax increase would affect spending, and was doubtful about the temporary nature of the proposal.

"Many taxes that we currently have on the books, when they were first proposed, were proposed as temporary taxes," Pileggi said.

He said a personal income tax will, over time, make Pennsylvania less competitive and cost the state jobs.

Rendell said the Republican plan cuts the kind of programs that have helped the state keep Westinghouse's headquarters from moving out of state.

"There is talk in Harrisburg that we can cut our way out of this problem. I'm sad to tell you today that we simply can't."

That said, Rendell plans to meet with his top aides on Wednesday to find another $500 million to cut from his budget plan, on top of $1.5 billion in cuts he's already proposed. He wouldn't say where the additional cuts would be made.

Rendell said he hopes the economy will recover and get back to a 6 percent growth rate by 2012, compared with the flat or negative growth in recent months. That will enable the tax increase to be temporary, he said.

Rendell said he settled on a three-year increase to cope with projected deficits while revenues recover in the first two years, and then to make up for federal stimulus money that runs out in the third year.

The governor claimed that, after the increase, Pennsylvania's rate would still be the third-lowest among 40 states that also have a personal income tax, citing information compiled by the Federation of Tax Administrators.

However, a report on the group's Web site detailing 2008 personal income tax rates shows that Pennsylvania was one of just seven states with a flat income tax, and the rate under Rendell's plan would be the third-lowest only when compared with the highest tax rates in all states.

There are 29 states whose minimum income tax rate was lower than the 3.57 percent Rendell proposes, according to the group's report.

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