A study released two weeks ago by the Economic Policy Institute and The Center on Budget and Policy Priorities found the gap between the rich and poor in Pennsylvania increased between the early 1980s and early 2000s.

The growth in incomes of the poor and middle class have lagged behind that of the wealthy. This was not always the case, from the late 40s to the early 70s the incomes of the poor, middle class and the wealthy all doubled so as the economic pie grew larger everyone benefited in equal measure. In contrast since the early 80s the average income of the bottom fifth of families grew by just 22 percent while the average income of the richest fifth of families grew by 77 percent. In the past two decades while productivity has increased the benefits of that higher productivity have disproportionately accrued to the wealthiest families.

click read more for just how out how regressive Philly's tax system is, and who it hits hard.

The Tax Code and Inequality

The report adjusted incomes to reflect the impact of the earned income tax credit, the cash value of food stamps, subsidized school lunches and housing vouchers. Based on these adjustments in 2001-2003, the wealthiest fifth of Pennsylvania families earned seven times the incomes of the poorest fifth. Before making these adjustments the wealthiest fifth of families earned nearly 10 times the income of the poorest fifth of families. Although most inequality is born in the labor market there is a small but important role for the tax code to play in reducing inequality. Philadelphia’s low-income wage tax credit scheduled to take effect in 2010 is one example of local tax policy that strikes a small but important blow against rising inequality.

Philadelphia’s Tax Code

Absent the low-income wage tax credit how progressive is Philadelphia’s tax code? In 2004 according to an annual study of tax rates in the largest city of each state conducted by the District of Columbia, the state and local tax rate on a Philadelphia family of two adults and two school-age children with an income of $25,000 was estimated to be 11.4 percent – 1.6 times the average tax rate on low-income families in a sample of 51 major cities. In contrast, the tax rate on a similar family earning $150,000 was estimated at 12.7 percent – 1.4 times the average burden across the group of 51. Measured as the ratio of the tax rate on a family earning $25,000 and one earning $150,000, Philadelphia has the 14th most regressive state and local tax system. Given the poor relative performance of Philadelphia’s current tax code the news that Mayor Street has proposed repealing the low-income wage tax credit in Philadelphia while promising to continue to cut business taxes is quite troubling.

The Poor Pay Higher Prices for Basic Necessities

In the fall of 2005 the Brookings Institution released a report titled, The Price is Wrong, which summarizes current research and presents some original data on Philadelphia about the prices that low income households pay for necessities such as housing, transportation, and financial services. The study found:

Homes in Philadelphia’s low-income neighborhoods are much more likely than homes in high-income neighborhoods to be assessed at values higher than their worth.

Low-income families in Philadelphia can pay over $500 more for the same car bought by a higher-income household.

Low-income households can pay hundreds, even thousands, more every year for the same mortgage taken-out by a high-income household.

At current rates, it costs the typical family in Philadelphia about $300 more every year to use a typical amount of natural gas than households in the suburbs.

The higher prices that poor households pay result from a range of factors including market failure, exploitation facilitated by lax regulation and poor financial education (pay day lending and rent-to-own stores) and the risks and rewards of providing goods and services to low income households. It is costly to be poor in Philadelphia.

Breaking the Cycle of Poverty

All too often it is argued that poverty results from a lack of personal responsibility. The reality is that from time to time we all make bad decisions but if you are poor those decisions cost you more. And as the Brookings report makes clear low incomes translate into higher prices for basic necessities. Simply playing by the rules is not enough to break the cycle of poverty.

Meaningful reductions in the poverty rate require better basic education, effective job training, a higher minimum wage, more effective unions and a progressive tax code. In 37 major cities including New York, Jacksonville, Baltimore, Portland, Charlotte, Milwaukee, Wilmington, Phoenix, Boston and Los Angeles the tax code is more progressive than Philadelphia’s. The low-income wage tax credit is an important step towards improving the quality of life in Philadelphia and should not be repealed.

Mark Price in his day job is a Labor Economist at the Keystone Research Center (http://www.keystoneresearch.org) a research and policy development institute, which was created to broaden public discussion on strategies to achieve a more prosperous and equitable Pennsylvania economy. However the views expressed here are his alone.