Pennsylvania’s state budget is three months old and showing signs of a major budget deficit.
Actual revenue collections are already behind $218.5 million through the first quarter, according to the Pennsylvania Department of Revenue. In July, the legislature passed and Gov. Wolf signed a $1.3 billion revenue package, which includes $650 million in higher taxes, to help pay for a $1.6 billion increase in government spending.
The revenue assumptions built into the billion dollar package are now proving optimistic. The chart below shows revenue collections lagging official estimates in each of the first three months.
In August, the Independent Fiscal Office identified problems with certain revenue projections used to balance the budget—at least on paper. Here are their major assumptions:
- The IFO deducts $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have expressed an interest in passing gambling expansion to generate $100 million to cover CFA spending, but no enabling legislation exists.
- IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million—a $76 million difference.
- IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less than the official projections.
- $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate. They do not expect it will generate revenue for the current fiscal year.
Moreover, the budget was unbalanced from the start. The budget counts on $260 million in one-time revenue and transfers from other funds, and a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association.
Borrowing money to pay our bills is the very definition of unbalanced.
If current revenue trends continue, lawmakers and the governor will need to focus on reducing government spending to balance the budget. Such as,
- Cutting back on $800 million in arbitrary corporate welfare,
- Immediately imposing a (real) hiring freeze and travel ban, and
- Reviewing funds outside the General Fund budget for savings.
As the fiscal year progresses, and more revenue collections are announced, we will continue to update our Deficit Watch.
The House will return to session later today, with the Senate to follow early next week. The two chambers are in session for a total of nine days. This gives lawmakers a limited amount of time to address Pennsylvanians' priorities.
The repeal of the 40 percent vape tax is one such priority. The tax is scheduled to go into effect on October 1, but it has already inflicted immense harm on the business owners, employees, and customers in the vaping community. Approximately 50 shops have shut their doors, according to industry experts. More closures are inevitable if lawmakers fail to repeal this punishing tax.
The 40 percent tax is levied on products purchased and on shop owners’ existing inventory. If a shop holds $100,000 in inventory, the owner would be required to cut the state a check for $40,000. Is this a reasonable demand?
The answer is no. And that's why entrepreneurs like Dori Odosso and Amy Crivella are speaking out. It's why Scottie Freeman had to close down his business, and why Chris Hughes is planning to do the same. These people—and countless others—have been adversely affected by Gov. Wolf’s insistence on raising taxes.
Fortunately, lawmakers have introduced varying pieces of legislation to prevent further harm. Here are the legislative options offered thus far:
- HB 2339, which is sponsored by Rep. Joseph Petrarca, repeals the tax outright.
- HB 2342, sponsored by Rep. Jeff Wheeland, repeals the excise tax and replaces it with a 5 cent-per-milliliter tax. Sen. Camera Bartolotta has announced her intention to introduce similar legislation in the Senate.
- Sen. Thomas Killion has introduced SB 1362, which would delay the payment of the tax from 90 days after it takes effect to 180 days.
Complete repeal is preferable and practical. The tax itself is estimated to bring in just $13 million—a relatively small sum in the context of a $79 billion budget. Lawmakers could replace this revenue by cutting less than 2 percent of the current budget's $800 million in corporate welfare spending.
If lawmakers won't support spending reductions, creating an alternative tax structure that keeps vape shops open is the next best option. This solution was the subject of our Philadelphia Inquirer op-ed published just this morning. The issue is clearing gaining momentum. Now is the time to act.
Vape shop owners and their customers deserve a government than protects their right to do business—not one that tramples on it.
Buried in a little debated 267-page tax code bill is a provision emblematic of Pennsylvania’s corporate welfare culture.
The provision directs hotel tax revenue generated inside a Neighborhood Improvement Zone (NIZ) to hotel owners and developers. The revenue can be used to pay for hotel renovations or to finance entirely new hotels.
The hotel tax normally funds tourism promotion and economic development for the Lehigh Valley. But now, rather than using the revenue to promote the Lehigh Valley, it will be used to subsidize a small group of private enterprises.
“This is blatantly unfair competition,” said Bruce Haines, who is a managing partner of the Hotel Bethlehem, which competes directly with hotels inside the NIZ. “We worked hard to get where we are. We put our own capital on the line. We did it the old-fashioned way.”
The new rule governing the NIZ will make it harder for entrepreneurs like Bruce to compete. Businesses inside the NIZ already had access to tax dollars before the change. Now they’ll have an even larger pool of tax dollars to use for new projects.
This raises an obvious question: Are the subsidies necessary? Research and experience both say no.
According to scholars from the Cato Institute and the Lincoln Institute of Land Policy, NIZ-type programs generally don’t create new wealth; they just shift its location. These findings are consistent with Bruce’s experience: “The NIZ isn’t really creating new businesses. They’re just moving from the surrounding areas into the NIZ. The market works for hotels. It doesn’t need subsidies.”
Bruce understands that competition is a necessary part of any free market. “If more businesses open in the Lehigh Valley without subsidies, that’s okay because it’s fair. But I should not have to lose potential customers because of crony capitalism. Philosophically, that bothers me.”
Handing out tax dollars to businesses, carving out special exemptions, or creating new rules benefiting a select few dampens economic growth. To promote broad-based prosperity, government must refrain from tilting the playing-field in favor of any business.
Corporate welfare projects and celebratory press releases go together like peanut butter and jelly. For the most recent example in Pennsylvania, see the latest from the governor’s communications office:
Governor Tom Wolf announced today that Amazon will expand its presence in Pennsylvania and has committed to the creation of at least 5,000 new, full-time jobs statewide.
Wait for the kicker:
The company received a funding proposal from the Department of Community and Economic Development that includes a $5 million Pennsylvania First Program grant, $15 million in Job Creation Tax Credits to be distributed upon creation of the new jobs, and $2.25 million in WEDnetPA funding for employee training.
These stories, sadly, are commonplace in the commonwealth—the nation’s leader in corporate welfare. Rather than leveling the playing field for all businesses, Pennsylvania government picks winners and losers with a hodge-podge of grants, loans, and tax credits—often only available to well-connected firms with influential lobbyists.
Sure, 5,000 (promised) jobs will be terrific for Pennsylvanians lucky enough to land one. But what about the entrepreneurs competing with Amazon who won’t benefit from taxpayer-funded perks? Don’t hold your breath waiting for a follow-up press release.
See this CF Policy Brief for more on the costs of corporate welfare.
Relatedly, Amazon’s founder and CEO Jeff Bezos net worth was recently pegged at $65 billion. Whether they like it or not, Pennsylvania taxpayers are helping Bezos climb higher on the list of the richest people on Earth.
Bill Gates better not get comfortable at the top.
Earlier today the state Senate passed an amended version of a House budget proposal, which included the largest spending increase in a decade. The House must now agree to the Senate's changes before sending it to the governor.
So, what's in the new budget proposal? More spending.
The Senate added $74 million in new spending to the House's proposal. But the spending increase appears smaller because $95 million from the "Transfer to the Commonwealth Financing Authority" line item was shifted off the General Fund Budget. The Senate budget reduces that line item to $0, but taxpayers are still required to foot the bill for the payments, even if it comes out of a different pot of money.
Counting that expenditure, the Senate budget is $31.63 billion—$1.6 billion (5.3 percent) more than last year's enacted budget.
The biggest Senate increases were in the areas of higher education. They also added $9 million in DCED programs—that is, corporate welfare programs and "walking around money" (WAMs) used for local projects in their districts.
The table below summarizes the differences between the two budgets. One last point: The legislature has still not agreed to a plan to balance the budget. So we will continue to monitor what revenue sources will be used to pay for the additional spending.
|Executive Offices||$182,918||$184,068||$1,150||Increases to Human Relations Commission and Law Enforcement Activities|
|Treasury||$1,163,015||$1,163,265||$250||Increase to General Government Operations|
|Agriculture||$140,527||$143,658||$3,131||Increases to multiple programs, shows|
|Community and Economic Development||$231,851||$240,847||$8,996||Includes Commonwealth Financing Authority funding moved offline; Major Increases in Marketing to Attract Tourists and Keystone Communities|
|Conservation and Natural Resources||$106,336||$106,961||$625||Increase to Heritage and Other Parks|
|Drug and Alcohol Programs||$52,354||$47,604||-$4,750||Elimination of Emergency Addiction Treatment|
|Education||$11,770,661||$11,781,340||$10,679||Increases to Job Training Programs and Community Colleges|
|State System of Higher Education||$433,389||$444,224||$10,835|
|Thaddeus Stevens College||$12,949||$13,273||$324|
|PHEAA||$313,554||$321,289||$7,735||Increases to four programs|
|Environmental Protection||$147,808||$148,356||$548||Increases for Environment Program Management and Chesapeake Bay Commission|
|General Services||$114,886||$119,390||$4,504||Increase for Capitol Fire Protection|
|Health||$214,218||$215,493||$1,275||Increases for General Government Operations and Bio-Technology research|
|Human Services||$11,968,156||$11,982,401||$14,245||Increases in 11 programs|
|Judiciary||$354,503||$355,503||$1,000||Increases in all courts, reduction in Reimbursement of County Costs|
|Government Support Agencies||$51,665||$51,765||$100||Increase in Center for Rural Pennsylvania|
|General Fund Total||$31,554,717||$31,629,079||$74,362||Includes Commonwealth Financing Authority funding moved offline; The state must make this payment, even if it comes from another fund. It does not represent a reduction in spending.|
Gov. Wolf is withholding approval of corporate welfare projects until lawmakers agree to advance his legislative agenda.
According to a Pittsburgh Tribune-Review story, administration aides told Senate Republicans no economic development grants would be approved until lawmakers present Gov. Wolf with an acceptable budget.
The governor can offer this ultimatum because he must approve Redevelopment Assistance Capital Program (RACP) grants. RACP uses borrowed funds—with interest covered by taxpayers—to finance economic development projects.
The economic impact of RACP is questionable at best. Generally, states spending the most on economic development, AKA corporate welfare, see their economies grow at a slower rate than states spending the least.
Corporate welfare’s ineffectiveness is not the only strike against it. It also concentrates power in Harrisburg. The Tribune-Review story perfectly encapsulates why this is a problem. No one person should have the power to pressure legislators into voting for higher taxes by withholding approval of local projects.
Pennsylvania must move away from a system that relies—at least in part—on politics to drive economic decision-making. Two pieces of legislation awaiting action in the Senate, HB 928 and HB 930, move Pennsylvania in the right direction. The bills impose debt and spending limits on RACP and Public Improvement Projects.
Reducing government debt and restraining its ability to grant corporate handouts is the moral and practical way to grow our economy.
Workers hit by the natural gas slump in western PA received some much needed good news this week. Shell announced they will proceed with building a multibillion dollar chemical "cracker" plant in Beaver County.
Shell probably wouldn’t have picked Pennsylvania without millions in tax incentives, but that isn't proof that corporate welfare works. Rather, it shows business climate and tax rates matter.
As expected, a slew of press releases from Gov. Wolf and other elected officials took credit for the expected jobs, but did you know Pennsylvania lost 17,000 jobs last month? Doubtless no politician is sending out news releases accepting the blame.
Truth is: The majority of Pennsylvania jobs are created by thousands of small businesses that don’t get tax breaks or government subsidies. These businesses continue to suffer under the one of the most most oppressive tax burdens in the nation.
Despite our 9.99 percent corporate income tax, (second highest in the nation) Pennsylvania added 55,000 jobs over the past 12 months, and that was a bad year.
So while we can celebrate that Shell will employ thousands of workers in 18 months, and hundreds of permanent workers, it doesn’t change the fact that Pennsylvania's high taxes to are driving away jobs.
In fact from 2005-2015, states spending the most on corporate welfare saw slower economic growth than states spending the least.
Our state would be better off ending corporate welfare subsidies and using those dollars to lower the tax burden on all businesses. If lawmakers eliminated more than $700 million in corporate welfare (identified here), the corporate income tax could be lowered to 7.2 percent.
Pennsylvania should concentrate on creating a positive business climate for all businesses, not a select few.
Pennsylvania’s tradition of concentrating economic power in the hands of a few has proven to be inadequate at best, and harmful at worst.
Corporate welfare spending makes this concentration of economic power possible. Our state has the dubious distinction of ranking 1st in the nation in handouts to privileged interests since 2007. It's no surprise that growth in jobs, income, and population have been anemic during this time.
Supporters of corporate welfare, or government-led economic development, believe public officials can spend money more wisely than the people who earn it. But this couldn't be further from the truth.
From 2005-2015, states spending the most on corporate welfare saw slower economic growth than states spending the least. This lack of a correlation between government subsidies and economic growth is indicative of their ineffectiveness.
Failed corporate welfare programs impose real costs on working people. For instance, in 2014, the state doled out $200,000 to a Kraft Heinz plant in Lehigh Valley, but less than two years after receiving the grant, the plant announced it was closing. Now the Department of Community and Economic Development (DCED) is asking for a reimbursement from Kraft Heinz.
If DCED weren't in the grant making business to begin with, taxpayers would not be on the hook for “clawing back” ill-advised grants. And the time and money devoted to the grant process would not be wasted but rather used to create viable economic opportunities in the private sector.
Sure, private sector actors leading the way on economic development won’t always succeed. However, they're more likely to make better investment decisions than government actors, who are too often influenced by politics.
Put simply, entrepreneurs are best equipped to make rational economic decisions. This is why the private sector is the true engine of job growth. And it's why CF has suggested eliminating the more than $790 million in government grants, loans, and tax credits.
|Table 1. Corporate Welfare Grant & Loan Programs||2015-16 Budget (Thousands)|
|Agricultural Promotion, Education and Exports||$250|
|Alternative Fuels Funding||$7,091|
|Ben Franklin Tech Development Authority Transfer||$14,500|
|City Revitalization and Improvement Fund||$8,000|
|Commonwealth Financing Authority Transfer||$88,812|
|Council on the Arts||$892|
|Food Marketing Research||$494|
|Grants to the Arts||$9,590|
|Hardwoods Research and Promotion||$350|
|Infrastructure and Facilities Improvement Grants||$19,000|
|Life Sciences Greenhouses||$3,000|
|Machinery and Equipment Loan Fund||$45,568|
|Marketing to Attract Business||$2,005|
|Marketing to Attract Tourists||$7,014|
|Municipalities Financial Recovery Revolving Fund Transfer||$3,000|
|Neighborhood Improvement Zone Fund||$39,401|
|New Choices/New Options||$500|
|Open Dairy Show||$177|
|Partnerships for Regional Economic Performance||$11,880|
|Pennsylvania Race Horse Development Fund||$250,563|
|Transfer to the Nutrient Management Fund||$2,714|
|World Trade PA||$5,829|
|Film Tax Credit||$60,000|
|Job Creation Tax Credit||$10,100|
|Research and Development Tax Credit||$55,000|
|Keystone Opportunity Zone||$79,300|
|Keystone Innovation Zone||$25,000|
|Resource Enhancement and Protection Tax Credit||$10,000|
|Alternative Energy Production Tax Credit||$2,000|
The savings realized by eliminating these programs could be used to lower tax rates across the board, help bridge the budget gap, or a combination of the two. Taking economic power out of Harrisburg and putting it back into Pennsylvania's communities is what true economic justice looks like.
Pennsylvania’s economic performance wasn’t always subpar. In the first half of the twentieth century, the commonwealth’s personal income per capita exceeded the national average. It then descended into mediocrity. While Pennsylvania slid down the ranks, other states saw their incomes rise.
The graph above comes from Pennsylvania Illustrated: A Visual Guide to Taxes and the Economy. The guide contains a collection of interesting facts and figures, including the illustration below, which explains why Pennsylvania has been losing ground to its peer states:
The state’s poor tax climate has been choking off robust economic growth for decades. At a time when other states are implementing pro-growth reforms, Pennsylvania remains stuck in neutral. Though, if Gov. Wolf has his way, he will exacerbate the tax burden on working people. This is the last thing Pennsylvanians need.
Higher taxes and excessive government spending are not the solution. They’re the problem. If policymakers want to improve the lives of the people they represent, embracing lower taxes and restraining government spending is essential.
We have a great opportunity to make Pennsylvania the hub of the Northeast. The states on our borders are neither taxpayer nor business friendly, meaning our productive neighbors looking for a better place to live and work could move to Pennsylvania. But they need a reason to do so. Right now, there are too many reasons to leave.
If lawmakers don’t raise taxes, Pennsylvanians should brace for drastic cuts to education and human services. This myth is promoted endlessly by the Wolf Administration to justify taking more out of the pockets of working people.
The administration offers this false choice in the context of the state’s projected budget deficit, which admittedly has credit rating agencies worried. The agencies warnings shouldn't be ignored, but they also shouldn't serve as cover for increasing Pennsylvanians’ already high tax burden.
As Majority Leader Jake Corman pointed out last week, there are two ways to close a budget deficit: raise revenue or cut spending. The latter is preferable and possible without dramatically reducing funding for education and human services.
That’s not to say reforming the education and welfare systems is unnecessary. We need to rescue students from violent and failing schools. We need to fix a system that traps people in a cycle of poverty. However, these are not the only areas where reforms can help improve lives and save taxpayers' money.
Other areas ripe for reform include economic development or corporate welfare programs. CF has called for eliminating the almost $700 million in corporate welfare found in the operating budget. If a recent Independent Fiscal Office (IFO) report is any indication, the full cost of special subsidies is probably much higher.
The IFO's report on corporate welfare, or what they call economic development incentives, identified a number of programs not included in our corporate welfare tally. Here are just a few:
- Infrastructure Technology Assistance Program (Cost: $1,750,000) – Provides grants to Lehigh University to help the state and companies increase operating efficiency.
- Alternative Fuels Funding (Cost: $9,231,000) – Awards grants to cover the costs of installing, upgrading, retrofitting, or purchasing alternative fuel equipment, facilities or vehicles.
- Life Sciences Greenhouses (Cost: $3,000,000) – Funds biotech and medical device startups and helps connect them with investors and experts.
Should taxpayers continue to fund these programs when the state’s facing serious fiscal challenges? The governor believes so. And he is willing to break a major campaign promise to not only sustain corporate welfare spending but increase it.
Fortunately, the future isn't set in stone. We can change course and embrace an idea proven to raise the standard of living for billions of people. But it takes an act of will. Do we have it?
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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.