Are Pennsylvanians’ tax bills growing faster than their incomes?

During the 1990s, Pennsylvania ranked among the worst states in the nation in terms of controlling the growth of taxes relative to the growth of taxpayers’ income.   That failure, in turn, allowed state lawmakers to spend at rates far in excess of the combined rates of inflation and population growth, thus squandering the opportunity to save Keystone State taxpayers billions of dollars.

 The Washington, D.C.-based Tax Foundation recently published state-by-state data detailing the real average annual growth of tax revenue compared to the real average annual growth of personal income for the 1990-2000 period.   On average, tax revenue in all 50 states grew at an annual rate of 3.83 percent, while personal income grew by only 2.95 percent.   In other words, among all 50 states the tax revenue growth rate was 29.8 percent higher than the personal income growth rate.   Only eight states exhibited enough fiscal discipline to keep tax revenue growth below personal income growth during this time period.

The citizens of Pennsylvania were among the hardest hit by the growth of taxes to income in the last decade.   Table 1 shows how state policymakers’ failure to adhere to key “budget basics” principles resulted in state tax growth that was more than 66 percent higher than income growth.

Table 2, next page, shows the eight states that were successful in keeping tax revenue growth below personal income growth.

Pennsylvania’s current economic woes are due in no small part to the fact that the commonwealth ranks among the 10 worst states in the nation in which the tax growth rate exceeded the rate of personal income growth.   This means that even as Pennsylvanians’ paychecks grow, state government’s claim on those paychecks has grown even faster.  This uncontrolled government taxing and spending creates powerful economic disincentives on individuals and businesses to work, invest, or create jobs in Pennsylvania’s economy.

It is an economic axiom that states ultimately suffer when government’s coffers are filled at a more rapid rate than workers’ wallets.   As Table 2 demonstrates, high tax-to-income growth ratio states—like Pennsylvania—began the decade of the 1990s with more people, more workers, and more productive economies than the lower tax-to-income growth ratio states.   But by 2000, the economic picture changed entirely, as Table 3 demonstrates.

The low tax-to-income ratio states realized population, employment and real gross state product (GSP) growth rates significantly greater than the high tax-to-income growth ratio states between 1990 and 2000.   Specifically, population, employment, and real GSP growth rates in low tax-to-income states were a respective 87.6, 45.8, and 72.1 percent higher than those in high tax-to-income states.   In fact, the success of the low tax-to-income states was so dramatic that by 2000, they had erased the advantages held by the high tax-to-income states in population, employment, and real GSP in 1990.   Over the past decade, people clearly “voted with their feet,” and businesses and investors with their dollars, against the high-tax Keystone State.