Which Taxes Might be Going Up?

JUNE 24, 2016  | by ELIZABETH STELLE, NATHAN BENEFIELD

Less than one week remains before the state budget deadline, and details are slowly emerging about a $31.5 billion spending plan.

This $1.5 billion spending increase would be the largest spending hike in a decade. Moreover, this increase is more than 5 times the rate of inflation plus population growth, and is about $1.1 billion more than net revenues for the year.

So where do Gov. Wolf and some legislators propose coming up with the additional money? Here is some of what we know or have heard so far:

  1. Gov. Wolf and legislative leaders have said sales and income tax increases are off the table—but he, along with some lawmakers, are looking at many others ways to extract more in taxes from families and businesses.  
     
  2. Approximately $150 million of this additional revenue will come from tax amnesty. Rep. Marguerite Quinn’s tax amnesty bill passed the House this week. Another $100 million would come from lapsed funds (unspent tax dollars). These represent one-time revenue sources that don’t take more from working families.  
     
  3. The state House is positioning a gambling expansion for final passage. The bill would allow casinos to run internet gambling and allow slot machines in international airports and off-track betting facilities. The estimated state revenue from this expansion is $200 million. That’s significantly smaller than the $300 to $450 million projected from a previous gambling expansion proposal that included video gaming terminals in bars and fraternal organizations.
     
  4. Tobacco taxes remain “on the table.” Gov. Wolf’s proposal for a $1.00 per pack tax hike on cigarettes and a 40 percent tax on tobacco products (excluding cigars) are part of budget discussions. As noted by Elizabeth, this $500 million tax hike would hit poor households hardest, is an unreliable revenue source, and results in greater cigarette smuggling.
     
  5. A new tax on energy has been rumored. This proposal would impose the gross receipts tax on natural gas sold to homes and businesses. One estimate suggests this proposal would generate $500 million in new taxes. That means more than 2.7 million homeowners (and thousands of businesses) will pay more for their home-heating bill next year.
     
  6. Gov. Wolf’s proposal to increase taxes on savings accounts held at banks, and a new tax on Uber and other ridesharing services has also been rumored.

Instead of focusing on a halfway point between the governor’s unreasonable $33 billion proposal and the current $30 billion budget, lawmakers should focus on what taxpayers can afford.

If we learned anything from last year’s nine-month long budget marathon, it’s that Pennsylvanians have no appetite for tax hikes.


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Sin-sylvania?

JUNE 22, 2016  | by NATHAN BENEFIELD

According to a new Watchdog.org analysis, Pennsylvania leads in the nation in collections from “sin taxes.” The commonwealth collects more than $2.7 billion annually in taxes on tobacco, alcohol or gambling.

While Gov. Wolf and legislative leaders have declared that sales and income tax increases are off the table for this year's budget, a significant increase in tobacco taxes remains part of the mix.

These taxes have proven to be unreliable and declining sources of revenue.

Current rumors suggest a $500 million tobacco tax increase would be included to support the largest state budget increase in a decade.

Rather than look to more sin taxes, lawmakers should work to control spending growth before asking for more from Pennsylvania families. 
 


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Pennsylvania's Economy is Falling Further Behind

JUNE 21, 2016  | by NATHAN BENEFIELD

Pennsylvania's economy isn't looking so hot this summer. The Bureau of Labor Statistics reports:

  • Pennsylvania lost 23,600 jobs in the last two months (nonfarm, payroll jobs).
  • Over the same time frame, the unemployment rate climbed 0.6 percent with 43,900 more individuals officially counted as unemployed. Over a three month span, the unemployment rate rose 0.9 percent, and 60,500 more individuals were unemployed.
  • Pennsylvania now exceeds the national unemployment rate.

Here’s some worse news: Our poor economic performance is part of a long-term trend.

  • Pennsylvania lost 41,600 residents in net moves to other states last yearone person every 12.5 minutes.The Keystone State has lost 295,000 residents with $11.6 billion in annual income since 1992.
  • From 1991 to 2015, Pennsylvania ranked a dismal 46th in job growth, 45th in personal income growth, and 46th in population growth.
  • Pennsylvania currently has the 15th highest state and local tax burden.

This bad news comes at a critical juncture in state budget negotiations. The question for lawmakers: Will raising taxes on families offer good news?

History indicates it won't.


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Three Reasons to Avoid Tobacco Taxes

JUNE 20, 2016  | by ELIZABETH STELLE

Media reports indicate the state House is formulating a tobacco tax package to raise an estimated $500 million. The proposal reflects Wolf’s original plan to raise cigarette taxes by $1.00 a pack. But higher taxes are the wrong prescription for Pennsylvania, and tobacco taxes are especially harmful for at least three reasons:

They hit the poor the hardest. Proponents of higher taxes often describe spending reductions as "balancing the budget on the backs of poor people." Yet, that's exactly what cigarette tax hikes will do.

As professors Kevin Callison and Robert Kaestner make clear in a Cato Journal article, a tax increase will hurt the poor most of all, as a large percentage of their household income is spent on cigarettes:

From 2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.

When two Cornell University economists studied the effects of this "sin" tax, they discovered an unintended consequence: larger food stamp rolls. This should not come as a surprise. Cigarette taxes are regressive and may very well push those around the poverty line into government programs.

Tobacco taxes are an unstable source of a revenue. The IFO predicts revenue from the current cigarette tax will fall by 3.6 percent in fiscal year 2017.

New York, which has the highest cigarette taxes in the country, saw revenue drop by $400 million over the past four years. While smoking did decline, it cannot account for the dramatic decrease in revenue. Smokers simply turned to the black market or neighboring states for cigarettes.

Higher taxes incentivize smuggling. Under the Republican proposal the state’s tax rate will be higher than four of our six bordering states, spiking cross-border shopping and cigarette smuggling.

According to the Mackinac Center, a 62.4 percent tax hike on cigarettes would spike smuggling rates from zero to 20.3 percent. To put it another way, approximately one of every five cigarettes consumed in the commonwealth would be illicit. Not surprisingly, the overwhelming majority of these cigarettes would come from distant, low-tax states like Virginia or the Carolinas.

The commonwealth already imposes a heavy tax burden on Pennsylvanians. Adding to it will only compound the state’s economic challenges without addressing the source of its fiscal woes.

Lawmakers can protect taxpayers by focusing on addressing cost drivers in the budget and putting together a spending plan based on available revenue.


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Tax Hikes Coming Soon?

JUNE 20, 2016  | by NATHAN BENEFIELD

The latest budget rumors indicate legislative leadership and Gov. Wolf are negotiating a budget that would spend at least $31.5 billion and upwards of $32 billion. To put these spending numbers in perspective:

  • $31.5 billion is $1.1 billion more than net revenue.
  • An increase of $1.5 billion would be more than five times the rate of inflation and population growth.
  • In the eight years before Gov. Wolf took office, General Fund spending grew by $2.85 billion. If the legislature passes a $32 billion budget, that would equal a $2.85 billion increase in just two years.

Last year, legislative leaders demanded we determine how much is available to spend first, and then to spend within our means. This year’s negotiations are beginning with how much Gov. Wolf wants to spend and then cobbling together the taxes to pay for it.

So-called “sin taxes” may not be as destructive as broad based sales or income tax increases, but they burden low-income households, result in greater smuggling, and extract more money from families who are already overtaxed.

Rather than take more from taxpayers, lawmakers should prioritize spending, cut corporate welfare, address human services spending growth, and enact meaningful reforms for cost drivers such as pensions.


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Don't Balance the Budget on the Backs of Working People

JUNE 17, 2016  | by BOB DICK

With little time left until the new fiscal year and fewer than two weeks to avoid another budget impasse, informal budget proposals are floating throughout the state Capitol.

One proposal would authorize large spending increases and tax hikes on tobacco products—neither of which should be acceptable to taxpayers.

Growing government is what Pennsylvania has always done, with state spending rising consistently for the last 46 years. Unsurprisingly, this has put a strain on working people, who shoulder the 15th highest tax burden in the country.

Raising tobacco taxes only adds to this burden, balancing the budget the on the backs of the poor while relying on an unsustainable revenue source to meet spending projections. This is neither necessary nor fair.

Pennsylvania’s fiscal struggles don’t stem from state government taking too little out of taxpayers’ pockets but from the excessive growth of government spending. Unaddressed, this spending penchant will exacerbate the state’s fiscal, demographic, and economic troubles

Lawmakers can balance the budget by keeping spending within the parameters of the Taxpayer Protection Act index—based on inflation plus population growth. This year, the index is 1.02 percent, which would allow for a $300 million increase in government spending.

To keep spending in check, CF has proposed a litany of reforms, including:

  • Eliminating corporate welfare,
  • Reducing public employee compensation inequality,
  • Reforming welfare, and
  • Reprioritizing non-General Fund spending.

These and other measures would avoid doubling-down on the same old formula of higher taxes and unsustainable spending increases.

Pennsylvania’s job, income, and population growth has been near the bottom in the nation over the last four decades, while the costs of government have gone largely unchecked. That’s not a coincidence.

If we’re going to change Pennsylvania for the better, business as usual is not good enough.  


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Energy Mandates a Double Whammy

JUNE 17, 2016  | by ELIZABETH STELLE

Alternative energy mandates raise the cost of living and make it harder for people to find work. These are the findings of a new paper on the government's futile efforts to manage the energy sector.

According to the paper's author, Dr. Timothy J. Considine, the mandates will adversely affect Pennsylvania, raising energy costs by $700 million and eliminating 11,400 jobs by 2025.

In 2004, Pennsylvania enacted the Alternative Energy Portfolio Standards (AEPS). These mandates require 18 percent of all electricity to be generated from renewable sources by 2021.

More than 98 percent of the new renewable energy capacity for Pennsylvania is supplied by wind power. This means electricity production at coal and natural gas plants fluctuates (or cycles) to accommodate times when the wind does not blow. But cycling reduces efficiency and raises costs.

In 2013, coal remained the largest source of Pennsylvania power, followed by nuclear power at 34 percent and natural gas at 22 percent. In comparison, wind power accounts for only 1.5 percent of total generation.

The high cost of renewable energy mandates isn't unique to Pennsylvania. By 2025, the mandates will destroy more than 150,000 jobs and increase electricity costs by $23.1 billion in 12 states.

If lawmakers want to shield Pennsylvanians from this economic damage, repealing the AEPS and/or refusing to extend the program should be a top priority. Rep. Sankey offered the lastest repeal bill back in 2013. 

Costs of Pennsylvania RPS in 2013 dollars (millions)

 

 2016 

 2020 

 2025 

 2030 

 2035 

 2040 

RPS Legacy Costs

 

 

 

 

 

 

Direct

$210

$206

$201

$196

$192

$187

Cycling Costs

$20

$28

$31

$32

$33

$35

less Fuel Costs

$57

$60

$64

$66

$68

$71

Net RPS Legacy Costs

$173

$174

$168

$162

$156

$150

New RPS Costs

 

 

 

 

 

 

Direct

$324

$544

$622

$651

$680

$710

Cycling Costs

$21

$29

$32

$33

$34

$36

less Fuel Costs

$216

$384

$437

$463

$490

$523

less NGCC Costs

$3

$0

$12

$12

$12

$13

Net New RPS Costs

$125

$189

$206

$209

$212

$210

RPS Tax Subsidies

$203

$291

$326

$343

$361

$379

Total RPS Cost

$502

$654

$701

$715

$729

$741

 


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PA's Long Tradition of Faux Pension Reform

JUNE 16, 2016  | by ELIZABETH STELLE

Pennsylvania's pension problem is nothing new. Over the years, lawmakers have tried to salvage the fundamentally broken system instead of creating a system that works. The latest attempt, SB 1071, passed the state House this week.

Like Act 120 of 2010 and Act 40 of 2003, this legislation makes cosmetic changes and promises modest savings that will never materialize.

Pennsylvania's pension plan for teachers and state workers is failing because defined benefit pension plans are vulnerable to swings in the stock market and political whims, leaving taxpayers with a huge bill. In the past six years, our unfunded pension liability has grown from less than $30 billion to $63 billion.

Instead of addressing the retirement systems' exposure to politics and stock market swings, SB 1071 leaves a defined benefit plan in place until a worker reaches $50,000 in salary or 25 years of service. Stacked on top of the defined benefit plan is a defined contribution plan (similar to a 401k), but the $50,000 threshold increases by three percent each year.

Public labor unions could easily accelerate this threshold in the future, lobby to defer payments or increase the multiplier. After all, the original proposal called for a 1% yearly increase.

If that's not a red flag, the cost of the plan should have you scratching your head. The PERC actuarial note claims $5 billion in savings over 30 years, but the savings amounts to just $1 billion in present value terms. A drop in the bucket.

In fact, SB 1071's insignificant savings were wiped out after PSERS announced they are reducing their assumed investment rate of return from 7.5% to 7.25%. This change instantly adds upwards of $2.5 billion to taxpayers' tab.

It's clear SB 1071 is not a step in the right direction. Rather, it's the latest in a long line of pension reform efforts that sweep Pennsylvania's pension problems under the rug.

The next step for SB 1071 is consideration in the state Senate. However, the Senate seems less than keen to advance the bill in its current form. Senate Majority Leader Jake Corman noted, "I'm not going to pat myself on the back and say, 'I did pension reform' and end up accomplishing nothing."

Senator Camera Bartolotta expressed her reservations as well, saying, “We need to put some more teeth into it, we really do.”

There's no easy way to fix our pension system, but going back on our promises to state workers or saddling future generations with debt isn't an option.


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School Districts Amass Record Reserve Funds

JUNE 15, 2016  | by JAMES PAUL

Is your local school board planning to raise property taxes despite holding millions in reserve funds? For many Pennsylvania school districts, the answer may be “yes.”  

Check out CF's sortable, searchable database of fund balances for Pennsylvania’s 500 school districts in the 2014-15 school year. It is important to note these figures predate the 9 month budget impasse, during which Gov. Wolf held school districts hostage in an attempt to extract record-high tax hikes from families and businesses.

Many districts were forced to dip into their reserves last year, as a result of Gov. Wolf's actions. (Next summer's financial reports will reveal how much districts were forced to "spend down"). But the sheer size of reserve funding in certain school districts is staggering—especially given the constant drumbeat that Pennslyvania schools are "underfunded." 

A district’s fund balance—what it owns minus it what it owes—is comprised of assigned, committed, and unassigned funds. Assigned and committed reserves are available funds designated for a specific purpose, while unassigned funds are available for any purpose.

State law requires that districts seeking tax hikes limit their unassigned fund balances to 8 to 12 percent of total spending. Our sortable database includes the total fund balance for each district, as well as each district’s total expenditures in 2014-15. It also includes each district’s fund balance as a percentage of total expenditures.

Auditor General Eugene DePasquale, speaking to Jan Murphy of Pennlive, says it is excessive to maintain a fund balance greater than 20 percent of total expenditures:

More than 300 of the 747 districts, charter schools and career and technical centers included in the department's data had fund balances topping 20 percent of their total expenditures, which is where state Auditor General Eugene DePasquale said he believes the line should be drawn.

"It is a judgment call as to what is too high," DePasquale said. "Certainly anything that is above 20 percent, clearly that's where you start to question it."

In fact, there are 21 districts who have socked away over 50 percent (!) of their total expenditures in reserve. When looking only at unassigned fund balances, 36 districts have over 20 percent of total expenditures squirreled away.

These figures should be eye-opening to anyone who believes Pennsylvania schools are unfunded—and they should be a wakeup call for school board officials who instinctively seek higher taxes from state or local taxpayers.

Check out CF's sortable, searchable database.

 

 

 

Largest Fund Balances
As % of Expenditures

District

County

%

Southern Fulton

Fulton

84.93%

Northwestern

Erie

78.07%

Union

Clarion

76.26%

Brockway Area

Jefferson

75.64%

Salisbury-Elk Lick

Somerset

73.26%

West Jefferson Hills

Allegheny

71.67%

Commodore Perry

Mercer

70.94%

Forbes Road

Fulton

65.60%

Iroquois

Erie

63.70%

Central Cambria

Cambria

60.61%

 

Largest Fund Balances

District

County

$

Pittsburgh

Allegheny

 $   198,989,522

Lower Merion

Montgomery

 $      55,974,232

Altoona Area

Blair

 $      53,772,084

East Stroudsburg Area

Monroe

 $      47,573,171

Pocono Mountain

Monroe

 $      45,944,586

Neshaminy

Bucks

 $      41,351,622

Abington

Montgomery

 $      39,627,474

Reading

Berks

 $      36,985,138

Allentown City

Lehigh

 $      36,444,773

North Penn

Montgomery 

 $      36,343,484

 
 

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Local School District Leads the Way on Transparency

JUNE 14, 2016  | by BOB DICK

The Quakertown Community School Board (QCSB) is scrapping a conventional collective bargaining practice.

Normally, unions and public employers don’t reveal the details of a collective bargaining agreement (CBA) until after the final vote. The QCSB decided to do things differently. The board published an online summary of its agreement with the district’s union weeks before the final ratification vote.

The Pittsburgh School Board made a similar decision last month. Both instances prove to be the exception rather than the rule. In case after case, labor pacts are usually ratified without any public debate.

Lack of transparency was also a staple of collective bargaining at the state level. That’s about to change. With the passage of SB 644—now Act 15—state contracts cannot be ratified until the Independent Fiscal Office (IFO) assesses their costs. The new law represents a welcome change for taxpayers who have been kept in the dark about the components of state contracts for far too long.

Act 15 takes effect today and the timing could not be better as the Wolf administration is currently negotiating labor contracts. An IFO assessment of these contracts is especially important as state government’s costs continue to balloon. While public employee pay has risen by 5.6% since 2006, average benefits per employee have increased by an astonishing 71.2%, bringing the total average compensation to nearly $93,000 per employee. Transparency can help control these costs.

These recent developments are encouraging, but further reforms are needed. SB 645—requiring the public posting of school district CBAs before they’re ratified—is once such reform.

Quakertown and Pittsburgh schools show local officials don’t have to seek permission from state lawmakers for this commonsense reform.


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The Commonwealth Foundation is Pennsylvania's free-market think tank.  The Commonwealth Foundation transforms free-market ideas into public policies so all Pennsylvanians can flourish.