Federal Tax Complexity Makes Pennsylvania’s Flat Rate Income Tax Look More Appealing


Complaining about taxes is part of our birthright and DNA.  What is subject to taxation, what the tax rates are set at, and what the money is supposedly squandered on are all matters of considerable contention through the years.  Pennsylvanians were prominent in the protests that sparked the American Revolution.  Independence did not quell the anti-tax mood, for the federal government was barely operational when the Whiskey Rebellion flared in western Pennsylvania.  Several years later, Fries Rebellion against a federal tax on dwelling places and land broke out in southeastern Pennsylvania and the Lehigh Valley.  Subsequent experience underscored that taxes will always attract public thunderbolts.

Through much of 2017, headlines were dominated by the push for federal tax reform.  Strongly divergent views on direction and particulars meant the necessity of change seemed the sole point of agreement.  Advocates believe any revisions constitute improvement over the current structure.  Skeptics are equally convinced that under the fiscally conservative approach substantial tax relief for families is about as likely to arrive as Santa Claus actually coming down the chimney on Christmas Eve.

Whether one approves or disapproves of the package hammered out, several points are inarguable.  The federal tax code is complicated, severely politically-tinged, and a mixed bag economically in practical effect.  Tax reform involves winners and losers.  Arguments rage as to whether the new rules amount to tax equity or tax indignity.  The perceived worth of retaining or jettisoning various credits and deductions depends mainly on who has access to them.  No one beyond political officeholders seems willing to say for sure how the race for economic growth sufficient to compensate for the expansion of the national debt will finish.

Even if federal tax reform hews closely to the promises of economic boost and tax savings, it will still be nearly impossible for the average person to understand and capably comply with the code.  Significant adjustments do not bring us within the zipcode of simplicity.

During the debate, a few groups and individuals attempted to resurrect the old push for a national flat tax, advertised as being so basic it can be filed on a postcard.  Nice thought, but next to no apparent attention garnered.

This discussion is pertinent to our Commonwealth, where a flat income tax has been in place since 1971.  The advantages of a flat tax seem manifold – simple, predictable, easy to collect and to enforce, politically difficult to raise, absent sneak tax hikes through bracket creep.

So what is there to dislike about it?  Fairness is a differently defined concept.  Those clamoring for change yearn for a graduated income tax because they want to hit the rich harder, to support more generously-funded state programs and services.  This supposedly progressive notion is highly ironic because the chief criticism of the federal system is that it favors the wealthy.  How that defect can be avoided in a trade here is unexplained.  And a distinguishing characteristic of our system is the generous exemptions provided for families on the low end of the income scale mitigate concerns about a flat tax hitting the poor disproportionately hard.

How did Pennsylvania end up in an enviable position?  Turns out a flat tax was not the original aim.  When Pennsylvania’s economics and politics would no longer tolerate resisting an income tax, the first plan adopted under Governor Milton Shapp instituted a graduated income tax.  Promptly challenged, it was struck down by the state Supreme Court for violating the crucial uniformity clause in the state Constitution.  The flat tax became the fallback.

This federal tax overhaul provides a valuable reminder of the significant shortcomings of a graduated income tax, which is immensely costly to comply with, to administer, and to enforce.  Quite unintentionally, the attention given to the arcane aspects of the federal tax code drove home the relative virtues of a flat tax.  Nevertheless, interest groups who want to see increased state spending on causes ranging from education to health care to the environment will continue to press for ways to pull in more revenue.  Frustrated by majority legislative opposition to increasing the income tax or expanding the sales tax, they see a graduated income tax as their best shot for plumping up the state budget.

Again, disagreement over tax structure is natural and unavoidable, because there has never been a flawless tax created, or one that produced as much revenue as decisionmakers would like to dispense.  At the same time, there is clearly no guarantee that reform or substitution will produce something more productive and more popular.

Obviously, a lot of taxpayers would prefer Pennsylvania to join the small number of states who do not have any income tax.  But it is hard to imagine a consensus forming around the alternative taxes or the massive spending cuts that would make junking the income tax possible.  By no means does this preclude conservatives from pushing for a lower rate and attendant cuts in spending.

The virtues of a flat tax should not be devalued.  A primary lesson drawn from the federal tax overhaul of 2017 is Pennsylvania should stick with a system that works administratively and economically.  As the old sports adage has it, sometimes the best trade is the one you never make.

Plus, energy and advocacy can always be poured into replacing the tax most citizens have loved to hate for more than forty years now – the property tax to support education.


David A. Atkinson is an Associate with The Susquehanna Valley Center for Public Policy.

The views expressed here are those of the author and not necessarily those of The Susquehanna Valley Center.

Nothing contained here should be considered as an attempt to aid or hinder the passage of any Legislation before the General Assembly or Congress.