Prices on certain goods, services could rise as Pa. lawmakers consider axing some sales tax exemptions

With the budget overdue and facing significant deficits, one GOP leader says he’s willing to consider changes.

Spotlight PA is an independent, nonpartisan, and nonprofit newsroom producing investigative and public-service journalism that holds power to account and drives positive change in Pennsylvania.

By STEPHEN CARUSO
Spotlight PA

HARRISBURG — Sales tax exemptions for everything from newspapers to legal services to candy cost the commonwealth billions every year, and at least one top policymaker says he’s open to getting rid of some as members wrestle with a significant budget deficit.

Changes to the state’s tax code are rare. Any tax increase — or even a perceived one — can easily incite public outrage against state legislators who want to keep their seats. But as the General Assembly tries to resolve a late Pennsylvania budget, the only options are to raise more money or cut services, and the state’s financial position looks increasingly fragile.

A long-running structural deficit, looming federal cuts to entitlement programs like Medicaid and SNAP, and pressing funding needs in areas like transportation and education have led leadership in both parties to signal their willingness to expand the goods and services eligible for the state’s sales tax as a revenue option.

Despite Republicans’ longstanding reluctance to expand taxes, state Senate Majority Leader Joe Pittman (R., Indiana) has expressed openness to the idea.

“There are lots of oddities in the sales tax and all of the exemptions we have,” Pittman told reporters last month. “I think it behooves us to at least take a look at some of those exemptions and figure out whether or not those are really necessary.”

“There are some exemptions that are more geared toward life-sustaining needs. There are other exemptions that are more geared toward wants,” Pittman said. “The question is: Is there a balance there that we can find that maybe does generate some revenue to try to be helpful in figuring out how we reconcile this budgetary dynamic?”

It’s unclear how many lawmakers share Pittman’s opinion. Other top lawmakers were noncommittal, while a spokesperson for Democratic Gov. Josh Shapiro did not reply to a request for comment on whether the governor would support getting rid of some sales tax exemptions.

There also aren’t any specific proposals about which exemptions they’re considering cutting. But there are many to choose from.

Pennsylvania currently charges a 6% sales and use tax on purchases. In the most recent fiscal year, this levy generated nearly $15 billion for the General Fund, the state’s primary bank account. The fund covers many of the state’s largest expenses, including Medicaid coverage and K-12 education.

But almost double that total, roughly $27 billion, is projected to be left on the table in the 2025-2026 fiscal year thanks to the commonwealth’s 109 exemptions, according to Pennsylvania’s most recent executive budget.

The document itemizes every program that costs the state tax revenue. For the sales tax, this ranges from specific products, like airline food and stock trout, to entire industries, like parking and dry cleaning.

The single biggest category exempted is groceries, as the state doesn’t tax food and beverages “other than those sold by a caterer or establishments selling ready-toeat food and beverages.”

This will save consumers approximately $2 billion next fiscal year. The provision, budget documents say, “reduces the regressive nature of the tax, easing the tax burden on families who spend a disproportionate share of income on these products.”

The state also has exemptions for a handful of other consumer products, including candy (which is exempt at all locations), projected to cost $90 million next fiscal year; newspapers, projected to cost $23 million; helicopters and private plane parts, almost $12 million; and American and state flags, almost $2 million.

But the majority of the exempted dollars, projected to be $15.7 billion of the total forgone revenue in the upcoming fiscal year, stay out of state coffers because the sales tax does not apply to services. That means when consumers pay for a wide range of professional assistance, including from legal, medical, advertising, and accounting professionals, they do not pay a tax.

Manish Bhatt, a senior policy analyst with the Washington, D.C.based Tax Foundation, a nonpartisan think tank that studies taxation, told Spotlight PA that exemptions from the sales tax are common nationwide, particularly on staple goods like food and clothing.

A handful make sense, he argued. That includes no sales taxes on business-to-business transactions, such as the steel used by a car manufacturer. In those cases, the tax would likely just be passed along as higher prices for consumers. These exemptions are projected to total almost $2 billion next fiscal year in Pennsylvania.

But overall, Bhatt argued tax policy should be simple and transparent, with broad bases and limited exemptions. And if it turns out lawmakers end up with more revenue than is needed, he said, they could also cut the statewide rate, benefiting all consumers equally.

Bhatt acknowledged that what sounds like good policy on paper may be harder to get into law. Services are a particularly difficult lift politically, as many of the untaxed industries have influential trade associations that can bend lawmakers’ ears.

“When you’re suggesting that a small business like a landscaper or a barber or a veterinarian or a single- lawyer law firm needs to collect end-user taxes for the sale of their services,” Bhatt said, “it generates some strong sentiments, understandably.”

Mike Manzo, a Harrisburg lobbyist and former top state House Democratic staffer, agreed with Bhatt’s assessment of the opposition.

“Each one of these exemptions has a built-in universe of support around it,” Manzo told Spotlight PA. “And so the minute someone mentions closing loophole X, you get a flood of people rushing to the building to say ‘You can’t close this because it’s going to cost this many jobs.’” But with a long list of priorities and dwindling cash reserves, legislators aren’t taking anything off the table.

“We’re very open to a myriad of options,” state House Appropriations Committee Chair Jordan Harris (D., Philadelphia), a top budget negotiator, told Spotlight PA when asked about the exemptions.

Lawmakers in both parties have also made clear they want to find cost savings within the state government to ease spending growth, rather than only trying to bring in more tax revenue.

Despite long-running fiscal woes, state legislators haven’t managed to significantly cut costs or raise funds in recent years, beyond levying socalled sin taxes on gaming and cigarettes.

Pennsylvania last raised its sales tax rate in 1968, and its income tax rate in 2004. The latter is also flat; the Pennsylvania Constitution bars the state from implementing a graduated income tax that takes more from higher earners.

Lawmakers have discussed other options for building additional revenue this year to help balance the books.

Along with pitching the legalization of recreational marijuana and taxation of skill games, Shapiro proposed requiring combined reporting for corporate taxes in his budget address. Under current law, multistate corporations pay taxes only on revenues reported to their Pennsylvania subsidiaries. Combined reporting would require these firms to combine their income across all states, and then pay Pennsylvania taxes based on a percentage of that national income.

Last month, the state House passed a bill that would implement combined reporting and other tax tweaks, such as allowing workers to deduct their overtime and tips from their taxes, creating a state tax credit for low-income households, and accelerating the state’s ongoing reduction of its overall corporate tax rate. A state House Democratic analysis projects the bill would cost the state revenue next fiscal year, but bring in $320 million the following year.

“We cannot do the same thing and expect a vastly different result,” state House Majority Leader Matt Bradford (D., Montgomery) said during the floor debate over the legislation.

However, Republicans and their allies in the business community have opposed combined reporting, arguing it creates undue compliance burdens for businesses. Despite the inclusion of the exemptions for tips and overtime championed by President Donald Trump in the state House tax omnibus, the proposal passed along near party lines, with most Republicans opposed.

During the floor debate, state House Minority Leader Jesse Topper (R., Bedford) said the inclusion of combined reporting was a poison pill. And asked about his thoughts on sales tax exemptions last month, he was noncommittal.

“The number one revenue option,” Topper said, “is creating jobs in the Commonwealth and [getting] more people to come here.”