Here’s a thought-provoking idea, suggested by Kirk Savage in the Post-Gazette’s feature Op-Ed piece yesterday: start taxing pensions so that Pennsylvania has the money to support things like public education. It turns out nearly every other state in the country does just that. What Pennsylvania does instead is to rely disproportionately on local property taxes: In Pennsylvania, schools receive almost half of their budgets – 43% on average – from local taxes (the national average is only 28%).[Data from Ron Cowell, EPLC]
Savage’s piece is being, well, savaged in the Post-Gazette’s on-line comments section. People are angry about any proposed tax hikes on retirees. But seniors are about to see huge increases in their property taxes, as the Governor’s massive budget cuts push responsibility for school funding down on local districts. School districts are already cutting educational programs to the bone, but have no revenue alternatives other than raising local property taxes – which will take a big bite out of all those home-owning retirees. At least Savage proposes “more generous tax forgiveness for those at the bottom of the income scale” in his pension-tax model, something that can’t be taken into account when raising old folks’ property taxes.
This is not a zero-sum game of pension taxes vs. property taxes. Both of these options hit seniors particularly hard and there are certainly other revenue sources the Governor has been so far unwilling to consider. It’s time to engage more of the A.A.R.P.-set in the movement for sustainable and equitable funding for public education – because without adequate resources from the state, those over 65 are going to see their homes taxed at an increasingly higher rate. And because seniors have a vested interest in a well-educated population: 85% of Pennsylvania’s students are educated in public schools. Those are the doctors, nurses, and others who will take care of all of us in our golden years.
Pennsylvania Should Tax Pensions
I recently learned a curious fact: Pennsylvania is one of only a small handful of states that does not tax any pension income. I discovered this by chance.
Last summer my wife and I moved her elderly mother into our own home. She brought with her a generous federal pension from her late husband’s long service as a diplomat. In Virginia — hardly a hotbed of tax-and-spend liberalism — most of her pension was fully taxed. In Pittsburgh, she happened to land in a state where all of a sudden her income tax bill dropped to zero.
Of course we benefit personally from this windfall. The tax savings give us more money to spend on her care or to set aside for a rainy day. But we already own a nice home, and our combined household income is certainly comfortable by most people’s standards.
Is this fair?
The simple answer is no, and for the same reason that it is unfair to give Mitt Romney a lower tax rate for “carried interest”: Income is income. There is no reason under the sun that working families struggling with multiple jobs to make ends meet should pay a 3 percent state tax on all their income while affluent pensioners pay none.
I know that most elderly people on pensions or Social Security are not affluent. Many are struggling terribly. But so are low-income wage earners who are fully taxed. The solution is not to favor one struggling group over another; this is both socially divisive and morally unjust.
The solution is to end the pension exemption and tax all income at the same rate, helping those who most need the help by expanding the state’s tax forgiveness provisions for low-income taxpayers. That way low-income households — whatever the source of their income — will get the relief they need, while more financially secure pensioners like my mother-in-law will pay a fair share, exactly the same as all other Pennsylvania residents.
We need to pursue this reform now because there is more than tax fairness at issue. We also face the problem of balancing Pennsylvania’s budget. Due to revenue shortfalls, Gov. Tom Corbett has proposed cuts that will devastate public education, public transit and the safety net for low-income families. Yet Pennsylvania’s pension exemption takes away more than $2 billion in tax revenue every single year, more than enough to cover the entire 2012 budget shortfall.
So far, the groups and programs most hurt by Gov. Corbett’s budget policies are fighting for their own individual interests, like dogs scrambling for scraps. Every dollar won for a worthy cause, such as public higher education (which includes my own employer), usually comes at the expense of something equally necessary, such as public transit or health care for the disabled.
It is high time for all these important constituencies to make common cause and find a solution that shares the burden equally while providing services that benefit everyone. Taxing pension income is exactly that sort of solution. It would provide significant funding for all these priorities, even when combined with more generous tax forgiveness for those at the bottom of the income scale.
Finally, taxing pensions would help solve a looming fiscal problem caused by pensions themselves. According to the governor’s own projections, public pension obligations will put more and more stress on state and local budgets, particularly on education budgets. Last year pension funding amounted to 3 percent of the state’s K-12 education budget; in just four years it will be 22 percent.
By law, the state’s obligation to fund these pensions must be matched dollar for dollar by local school districts, which means a lot less money to pay for teachers still working in classrooms. Though we can all agree that this is unsustainable, we are legally and morally obligated to pay these pensions.
Taxing pension income is a win-win-win solution. It would erase the budget deficit in the short term. In the long term it would fund much of our future pension liabilities. Again, though, this must be done fairly. It would be grossly unfair, as well as unconstitutional, to single out teacher pensions or state employee pensions and leave private pensions or federal pensions like my mother-in-law’s untouched.
All pension income is income, and should be taxed as such. If we couple the tax on pension income with expanded tax forgiveness for low-income households, then we can save public education and other worthy programs while honoring our commitments to public pensioners and creating a more equitable tax system in the process.
The solution to our budget woes is not to draw lines in the sand about taxing or spending. The solution starts with fairness — plain, ordinary, everyday fairness.