(The Center Square) – Pennsylvania is well-known for its high gas tax and high corporate net income tax until a recent change, but residents get a break compared to other states in one area: sales tax.
A new report from the Tax Foundation notes that Pennsylvania’s combined 6.34% sales tax rate is No. 34 in the nation. That’s lower than most of its border states, except for Maryland (6%) and Delaware’s non-existent sales tax.
The state sales tax rate of 6% is the 17th-lowest rate in the nation, but the average local tax rate pushes it up to 34th, the report notes.
What’s crucial may not be how a state does compared to the national average, but to nearby states. People take notice and adjust their spending habits accordingly.
“State and local governments should be cautious about raising rates too high relative to their neighbors because doing so will yield less revenue than expected or, in extreme cases, revenue losses despite the higher tax rate,” wrote Janelle Fritts, state policy analyst at the Tax Foundation.
Businesses will shift from a city to a suburb, or from one side of a state border to another, to avoid a higher sales tax. What’s convenient about a sales tax is its clarity and transparency. Consumers know how much they’re paying.
Though the below-average sales tax gives residents a break at the register compared to high-sales tax states like Louisiana, Tennessee and Arkansas, the exceptions and complexity involved in how Pennsylvania applies the sales tax creates an unnecessary burden.
“Many economists feel the sales tax is the ‘least bad tax’ in terms of economic harms, thus some of the fastest growth states (Texas, Florida, Tennessee) have higher sales tax rates, but no income tax,” said Nathan Benefield, senior vice president of the Commonwealth Foundation.
Benefield pointed out that Pennsylvania has a narrow tax base (40th in the nation) and 101 exclusionsfrom the sales tax, limiting its reach. He says “There is plenty of room to expand the base and lower the rate” and/or lower other taxes without increasing the burden on taxpayers.
Businesses, too, face complexity in collecting the tax. A broader and simpler structure could make it easier for small businesses to deal with the sales tax, along with reforming local tax structures to clean up the “patchwork of local taxes,” Benefield said.
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