As a seasoned tax attorney, I’ve been closely following the recent developments in Pennsylvania’s tax legislation. A pair of bills, SB 269 and HB 2388, are currently moving through the state legislature, promising significant tax cuts for Pennsylvania residents. However, these proposed cuts stand in stark contrast to the governor’s proposed spending increases, creating a complex financial landscape.
The PA Senate recently passed SB 269, which reduces the Pennsylvania individual income tax and eliminates the locally assessed gross receipts tax for electricity producers. Its companion bill, HB 2388, is currently awaiting a hearing in the Pennsylvania House Finance Committee. These reforms could result in significant savings for Pennsylvania residents, but the economic implications of these changes need to be carefully considered.
The plan, sponsored by Senator Gebhard (R) and Representative O’Neal (R), is a response to Governor Josh Shapiro’s (D) 2024 state budget, which spends $3 billion more than revenues this year and creates a structural deficit of more than $6 billion by 2028, according to a Commonwealth Foundation analysis. This reform proposal could parallel Pennsylvania HB 1342 passed in 2022 to incrementally reduce the Commonwealth’s corporate income tax from 9.99 percent to 4.99 percent as of January 1, 2031.
SB 269 is projected to save Pennsylvania taxpayers approximately $1.27 billion between the individual rate reduction and the elimination of the gross receipts tax on electricity generation in FY 2025 alone. The total savings associated with SB 269 over the next three years actually exceed the $6 billion structural deficit under the governor’s spending proposal by over $1 billion. Most of these changes are associated with the reduction in the individual income tax rate in the second and third years. The Commonwealth Foundation estimated that the tax cuts would save $400 per family of four in FY 2024-25 and $900 per family of four in FY 2025-26.
These rate reductions would reduce the individual income tax rate to its pre-2003 levels. After adjusting for inflation between 2003 and 2024, Pennsylvanians paid $913 per capita in state-level individual income taxes in 2003. Residents now pay $1,340 in FY 2024. That’s a difference of $427 per capita in real terms, since the passage of Governor Ed Rendell’s (D) initial tax increase.
These reforms would also make Pennsylvania more competitive with the other 16 states that reduced their individual income tax rates this year, or the 27 that cut such taxes since 2021. However, the economic literature cautions that reductions in state-level individual income tax rates must be funded by concomitant reductions in state-level expenditures or come out of projected growth. While a more competitive tax code can help generate economic growth and reduce the cost of tax cuts, they do not come close to eliminating the cost, which must be paid for in some way.
As such, the details of HB 2388 may work better as a preliminary negotiating position than a final plan. The governor has offered large spending increases. Legislative Republicans have offered a large tax cut. This lays the groundwork for a valuable debate about priorities, with the likelihood that anything enacted would have to be negotiated.
Overall, the tax reform proposal is a good example of what can be done to reduce tax burdens on residents if spending is constrained. There are real, tangible benefits associated with enacting this pro-growth reform that should not be discounted. Pennsylvania legislators should seek to simplify gross receipts tax filing procedures and reduce the individual tax burden for the broadest swath of households and businesses as possible.