The Taxpayers’ False Choice

JUNE 28, 2016  | by JAMES PAUL

Governor Wolf and legislative leaders present Pennsylvanians with two options. The first requires taxpayers to fork over hundreds of millions in higher taxes. The second calls for steep cuts to essential government programs. In the words of Wolf, “We’re going to have cuts the likes of which this Commonwealth has not seen in a generation, if ever.” Taxpayers, we are told, must choose between lousy outcomes: higher taxes or painful cuts.

Make no mistake—this is a false choice. A responsible appropriations bill can be crafted that controls spending and holds the line on tax hikes. New revenues are not necessary to balance the budget—especially not $1 billion worth.

Recall that just last year, Wolf claimed Pennsylvania’s $2.3 billion “structural deficit” mandated $4.6 billion in higher taxes. When the dust settled after a 9-month impasse, the legislature balanced the budget without taxes while also boosting funding for education ($250 million in non-pension spending) and human services ($83 million).

The 2015-16 General Fund spent roughly $30.0 billion. The final revenue projection from the Independent Fiscal Office projects 2016-17 revenues of $30.4 billion. If, in other words, lawmakers limit overall spending increases to $400 million, there would be no need for higher revenues. 

Some argue government programs must assume a “cost-to-carry”—baked-in spending increases from one year to the next. Surely, though, this does not apply to Community and Economic Development programs, which see a $10 million bump under the House budget plan. Or the Department of Conservation and Natural Resources, which would enjoy a $44 million boost. Is there a "cost-to-carry" for House Caucus Operations (R and D), which are set to increase by $16 million? 

The spending plan, as currently written, also assumes another $250 million in non-pension education spending, at a time when school district reserve funds are at all-time highs

Don’t fall victim to the taxpayers’ false choice. By limiting spending increases to $400 million worth of core government functions, lawmakers can protect working families from harmful tax increases. 

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What Is in the House Budget?


Last night, the Pennsylvania House Appropriations Committee advanced a $31.6 billion general fund budget. This budget is now lined up for a final vote in the House.

Here is what you need to know about the budget.

The Good

  • Spends less than Gov. Wolf proposed. The $33.3 billion budget Gov. Wolf outlined was never seriously considered, given how far it was outside the realm of political possibility. Still, this budget would spend $1.7 billion less than Gov. Wolf offered.
  • No income or sales tax increases. Last week, Gov. Wolf and legislative leaders declared that “broad-based tax increases”—which mean the state sales tax and personal income tax—were off the table for this budget.

The Bad

  • Spending growth 5 times the rate of inflation and population growth. The $1.5 billion increase represents a 5% increase in a year when inflation is less than 1%. This kind of spending growth is unsustainable.
  • Requires more than $1 billion in new revenue. To generate $31.6 billion in revenue, lawmakers are looking to tax amnesty, revenue from the wine reforms passed earlier this month, expanded gambling, and new and higher tobacco taxes. Revenues from sin taxes are unpredictable and decline over time, while tax amnesty and aspects of the gaming expansion and wine reform are one-time revenue streams. If these revenue estimates fall short or fail to grow, lawmakers may be looking at a personal income or sales tax increase next year to bridge the gap.
  • Raises taxes. The legislature has not yet agreed to a specific tax package. We know that it will include a $500-$600 million increase in the cigarette and other tobacco taxes. These taxes fall primarily on low-income households and result in increased smuggling across state lines. There have also been rumors of a tax increase on homeowners’ natural gas heating bills and a tax increase on bank savings accounts.
  • Biggest spending increase in a decade. The $1.52 billion increase in spending over the enacted budget represents the largest year-over-year increase since 2006-07. (The bill also includes $100 million in “supplemental appropriations” to be spent as part of the 2015-16 budget). Moreover, the $2.4 billion increase in Gov. Wolf’s first two years approaches the $2.85 billion general fund spending increase in the prior eight years combined.

Where is the new spending going?

  • $10 million more for Community and Economic Development, a 4.6% increase.
  • $44 million more for Conservation and Natural Resources, a 71% increase. This increase stems from Gov. Wolf’s decision to bar extracting gas under state lands, shorting the Oil & Gas Fund and leaving taxpayers to foot the bill.
  • $153 million more for Corrections, a 6.8% increase.
  • $665 million more for K-12 education, a 6% increase. This includes $345 million for school pensions, $200 million for basic education, $25 million for government-run preschool, and $20 million for special education.
  • $452 million more in Human Services (formerly Public Welfare), a 3.9% increase.
  • $18 million more for the General Assembly, a 6.3% increase.

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Which Taxes Might be Going Up?


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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According to a new 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


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


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.


Tax Hikes Coming Soon?


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


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)








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PA's Long Tradition of Faux Pension Reform


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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