Tax credits for Pa. families worth billions of dollars are on the table this budget season

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HARRISBURG — Pennsylvania families across the income spectrum could receive more than $2.5 billion in tax breaks by 2028 under two bills that passed the state House last week.

The proposals passed with bipartisan support, but they might not survive the GOP-controlled state Senate, a fate that showcases the political tensions at play as new Democratic Gov. Josh Shapiro and the split legislature attempt to negotiate a spending plan by the June 30 deadline.

Pennsylvania’s coffers are full. The state has roughly $12 billion in cash reserves accumulated during the COVID-19 pandemic, mostly a result of income taxes on increased corporate profits and expanded federal spending that augmented state budgets and upped individual tax payments.

But the state’s Independent Fiscal Office, which analyzes Pennsylvania’s finances, predicts revenue shortfalls over the next five years will roughly equal the state’s current windfall.

State lawmakers constantly battle over whether to spend or to save. But Democrats now control a legislative chamber and are bringing their own priorities to the table, a shift from budget skirmishes under former Democratic Gov. Tom Wolf.

“My thing is, how do you defend keeping so much of the taxpayer dollars in Harrisburg and not making the investments that we know we need to make?” state House Appropriations Committee Chair Jordan Harris (D., Philadelphia) told Spotlight PA.

With that principle in mind, earlier this month state House Democrats advanced a budget based on Shapiro’s proposal that included hundreds of millions of additional dollars for education and housing, and are now pushing to create or expand two state tax programs that piggyback off federal policies.

One bill would expand a state tax credit created last year that allows parents to deduct child care costs from their state taxable income. The current credit is capped at 30% of child care expenses; the proposal would expand that to 50% by 2028 (or up to $5,000 for one child or $10,000 for multiple children, whichever is lower).

Child care costs vary by location and the child’s age, but according to federal Department of Labor data, amounts can range from $6,000 to $14,000 a year for Pennsylvania families.

“Child care is workforce development,” Harris said. “If parents don’t have responsible and reliable child care, you can’t go to work. And the economy shuts down when folks can’t go to work.”

The other proposal would create a state version of the earned income tax credit, a federal program that gives a tax break to individuals and families under certain income levels.

Eligibility for the federal credit varies depending on income, marital status, and number of dependents. Income caps range from $17,000 for single, childless taxpayers to $63,000 for married couples with three or more dependents. The benefit to taxpayers ranges from $600 for a childless individual to $7,400 for a family with three or more kids.

Pennsylvania Democrats’ proposed state credit would allow current recipients to claim 25% of their federal deduction off of their state taxes.

Marc Stier, a policy analyst with the left-leaning Pennsylvania Policy Center, said that the maximum credit under the federal earned income tax credit increases with income.

“There’s a tremendous incentive to work, which is why it was originally a Republican idea going back to Richard Nixon,” Stier told Spotlight PA.

A 2020 Pennsylvania Budget & Policy Center study co-authored by Stier found that almost 900,000 Pennsylvania taxpayers would benefit from such a policy.

A state-level earned income tax credit would cost $1.4 billion and the expanded child care tax credit would cost $1.1 billion over the next five years, according to fiscal analyses that the Pennsylvania Department of Revenue prepared for the legislature.

In public statements, Shapiro has welcomed state House Democrats’ contributions to the budget conversation and signaled support for similar priorities in his own budget pitch, albeit on a smaller scale.

For instance, rather than a billion-dollar tax break, Shapiro proposed investing $66.7 million into an existing state program that subsidizes child care for low-income families.

He also proposed a targeted tax credit to attract people to become certified nurses, teachers, and cops with a $2,500-a-year nonrefundable tax credit, maxing out at $7,500, until 2028. The state House passed Shapiro’s plan 137-66 on Tuesday.

According to state Department of Revenue projections, that credit would cost a total of $222 million over five years.

After a news conference last week, Shapiro declined to answer a specific question about an earned income tax credit, saying he was not going to “negotiate the particulars of the budget in public here.”

Instead, he said he would talk to all four caucuses, “but particularly Senate Republicans [and] House Democrats who command majorities in their chambers” about their priorities.

“And I’m confident at the end of the day, we’ll be able to come up with something that reflects our shared priorities,” he concluded.

While both of the Democrats’ proposed tax programs passed the state House last week with bipartisan support, the price tags and questions about who would benefit from the credits raised concerns with some Republicans.

State Rep. Seth Grove (R., York), state House Republicans’ chief budget negotiator, argued during a floor debate that the expanded child care tax credit would mostly benefit middle and upper-middle-class families.

According to IRS data on Pennsylvanians’ 2020 tax returns, a little less than 50% of the tax credit’s almost 190,000 claimants make more than $100,000 a year, receiving $50 million in tax breaks.

Grove also argued that the earned income tax credit would be an “expensive welfare program” riddled with mistakes and overpayments. According to the IRS, about one in four EITC payments is made in error, although policy analysts debate whether this reflects fraud or filing mistakes.

The child care and EITC tax credit bills now move to the state Senate, which also has state House Democrats’ budget proposal.

Speaking to reporters last week, state Senate Majority Leader Joe Pittman (R., Indiana) said Democrats’ spending proposal was an “impossible number” due to the state’s fiscal future. He also downplayed the odds of reducing any taxes, saying that he wasn’t sure if “our budget could handle such a cut.”

However, he voiced some support for issues Democrats are targeting, including child care and school construction.

“We have to, in my opinion, be honest with the taxpayers. And it might be good to spend money this year,” Pittman told reporters. “But I’m not interested in four years from now, having to explain to the taxpayers why all of a sudden we need to pick their pocket.”

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