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Opinion: Return some of Pa’s surplus to the people — but not too much

A bid by Penn­syl­va­nia Senate Re­pub­li­cans - with the sup­port of sev­eral of their Demo­cratic col­leagues - to cut the state’s earned in­come and elec­tric­ity taxes is cer­tainly tan­ta­liz­ing: Tax cuts in the Key­stone State are few and far be­tween.

But they also un­der­cut Re­pub­li­cans’ own ar­gu­ments, which are largely sound, about the im­por­tance of fis­cal re­spon­si­bil­ity, even as Penn­syl­va­nia sits on record re­serves.

The state’s fi­nan­cial sta­bil­ity - much like Pitts­burgh’s - is more frag­ile than it ap­pears. Per­ma­nently cut­ting rev­e­nues by $3 bil­lion would de­plete the sur­pluses Penn­syl­va­nia has ac­cu­mu­lated, al­most en­tirely due to the fed­eral pan­demic stim­u­lus wind­fall, in only about three years.

The pro­posal is the mir­ror im­age of Gov. Josh Sha­piro’s pro­posed 2024-2025 bud­get, which would spend $3 bil­lion more than the com­mon­wealth ex­pects to bring in.

It sets up a clas­sic de­bate: Should the state re­turn $3 bil­lion to the peo­ple in the form of tax cuts or in the form of spend­ing on gov­ern­ment ser­vices?

Either way, it’s too much. Mak­ing per­ma­nent $3 bil­lion an­nual com­mit­ments, whether in tax cuts or in spend­ing, will quickly draw down the state’s his­toric re­serves. That will leav­e a deep­ened struc­tural def­i­cit that a fu­ture gov­er­nor or leg­is­la­ture will have to rem­edy.

The pru­dent ap­proach would be to drain less of the re­serves - say, un­der $2 bil­lion - and to split that be­tween new spend­ing and mod­est tax breaks.

The tax cuts passed the Senate, 36 to 14, in early May. They would cut Penn­syl­va­nia’s in­come tax by 9%, bring­ing it down from 3.07% to 2.8%. They would also elim­i­nate the gross re­ceipts tax as ap­plied to elec­tric­ity com­pa­nies - 5.9% on all funds com­ing into the firm - and re­quire that the sav­ings be passed on en­tirely to cus­tom­ers.

With a me­dian in­come of about $73,000, the in­come tax cut would save the av­er­age Penn­syl­va­nia house­hold about $200 per year. While es­ti­mates of av­er­age elec­tric­ity bills vary, get­ting rid of the gross re­ceipts tax would prob­a­bly save the av­er­age house­hold an­other $100 or so.

A fair com­pro­mise that would keep the best of the GOP pro­posal, while pre­serv­ing the state’s fis­cal sta­bil­ity and the pos­si­bil­ity for more spend­ing, would be to keep the in­come tax at 3.07% - or, at most, cut it to an even 3% - but ditch the gross re­ceipts tax.

Gross re­ceipts taxes, which tax all rev­e­nues re­gard­less of source, are no­to­ri­ously in­ef­fi­cient and pu­ni­tive. As ap­plied to util­i­ties, they are deeply re­gres­sive - even more than the state’s flat in­come tax - be­cause poorer house­holds pay a greater pro­por­tion of their in­come for elec­tric­ity.

While an in­come tax cut would be scaled based on in­come, end­ing the gross re­ceipts tax would be felt more equally by ev­ery­one.

It’s good pol­i­tics and good pol­icy to re­turn some of Penn­syl­va­nia’s wind­fall to the peo­ple. But it must be done right, or else fu­ture Penn­syl­va­nians will have to pay for it.