The Truth About Pennsylvania Business Taxes Part 1: Are Business Taxes Really High in Pennsylvania?

Eileen McNulty
Stephen Herzenberg
Publication Date: 
June 1, 2002

Contrary to conventional wisdom, the tax burden that Pennsylvania state and local government impose on business is not high when compared with other states.

A KRC review of recent research and data finds that:

• Even before the most recent spate of tax cutting, in only 23 states did business pay a smaller share of all taxes than in Pennsylvania.

• Taking into account recent tax cuts, we estimate that businesses pay a lower share of state and local taxes in Pennsylvania than they do in 31 other states.

• On a per capita basis, business taxes in Pennsylvania are now in the middle of the pack, with business paying more in 23 states and less in 26 states.

• A 1999 study found that, for typical manufacturing firms, Pennsylvania had the second lowest business taxes in a group of 10 states including nine other mid-Atlantic and southeastern states.

The impression that Pennsylvania has high business taxes has been created, in part, by recent studies sponsored by business organizations. When making comparisons between business tax burdens in Pennsylvania and other states, these studies have failed to consider all taxes businesses pay. Specifically, the studies have ignored property and sales taxes. Table S1 provides a point-by-point discussion of the claims in the most recent business-sponsored study.

Whatever the level of Pennsylvania business taxes, research shows that low business taxes are not the key to rapid job growth. One reason is that lower taxes can deprive states of revenues necessary to invest in educational and infrastructural services that help attract or expand businesses.

Pennsylvania does need tax reform, but the reforms the state needs must be consistent with a 21st century economic development strategy. Such a strategy must be friendly to business but also expand economic opportunity for workers and support strong communities. Tax reform must not be informed simply by the special interest pleading of business associations.

The Keystone Research Center recommends that the General Assembly in cooperation with the next governor establish a 21st Century Pennsylvania Tax Commission to develop recommendations for a much-needed comprehensive overhaul of the Pennsylvania tax system focused on:

  • Eliminating inequities in business taxes;

  • Shifting educational funding to the state level, so that all communities have adequate resources for a high quality education and to help stabilize communities that now face the double whammy of high local taxes but insufficient school funding;

  • Cutting tax and other subsidies to individual businesses in favor of investments in early childhood education, higher education, and lifelong career learning, public goods that benefit firms in general as well as workers;

  • Using green taxes to create incentives for environmentally sustainable development; and

  • Exploring other ways to make Pennsylvania’s tax system more progressive at both an individual and community level.

While it takes a different position than this paper on the current reality of Pennsylvania business taxation, a recent Pennsylvania Economy League (PEL) study also recommends a systemic updating of the Pennsylvania tax system to fit the today’s economic realities.

This document is an on-line summary of a Keystone Research Center report. The entire report is available for download as a PDF file at the KRC Web site © 2001 Keystone Research Center