Pennsylvania State Budget
In addition to general appropriations (SB 1073) and the fiscal code (SB 1320), lawmakers are finalizing language in the education code, HB 530. This legislation promises significant reforms to Pennsylvania’s charter school law.
Here’s the bottom line on HB 530: It is a sweeping bill that includes a number of positive provisions, but also imposes steep funding cuts on cyber charter schools.
Critically, an amendment by Speaker Mike Turzai increases the available tax credits for the Educational Improvement Tax Credit (EITC) program by $25 million. The EITC, which provides tens of thousands of private school scholarships to students in need, is a pillar of school choice in Pennsylvania. Thanks to the Turzai amendment, $75 million in tax credits would be available for K-12 scholarships, $37.5 million for educational improvement organizations, and $12.5 million for pre-K scholarships.
A large EITC increase would be welcome news, and it is one of the best aspects of HB 530.
On the other hand, the bill increases payment deductions that districts may claim when sending funds to cyber charters. The exact magnitude of this funding cut is unclear, but some cyber school administrators suggest it could reach as high as $27 million per year. These cuts, while less severe than earlier versions of HB 530, are particularly punitive given that spending for traditional public school continues to grow on autopilot.
Additionally, previous iterations of HB 530 included direct pay language for cyber charters, which would ensure cybers receive funding from the state—rather than being stuck in limbo waiting for overdue funds from districts. The direct pay provision was amended out of the bill, in another setback for cyber schools.
What else is included in HB 530? Here are some of the notable provisions and regulations:
- A statewide funding commission, composed of lawmakers and school administrators, tasked with making recommendations about how charter schools are funded.
- Clarification that cyber schools may utilize in-person instruction for students with special needs.
- Increased financial disclosure regulations for charter school administrators.
- Increased regulations on charter school debt payment.
- A standardized application will be created by the Department of Education for charter applicants and charters requesting renewal.
- Expanded initial charter terms from three to five years, and renewal terms from five to ten years.
- School districts, intermediate units, and public universities must provide cyber charters with reasonable access to facilities for the purpose of administering standardized tests.
- Clarifies that charter schools are not subject to caps on enrollment.
- Charter schools are granted the right of first refusal to purchase or lease unused public school buildings.
- Allows two or more charter schools to consolidate into a “multiple charter school organization.”
- Expands the size of the Charter School Appeal Board.
- Limits the amount of funding charter schools may hold in unassigned reserve funds, and requires that funds in excess of these limits be refunded to school districts. This provision is notable, given the massive reserve funds that many school districts have accumulated.
Although aspects of the law will be welcome news for charter schools, such sweeping reforms may have been better considered in smaller pieces of legislation, rather than one comprehensive bill. The EITC increase, however, is unquestionably a terrific development.
HB 530 is expected to be voted in the House later today, at which point it will still need to pass the Senate.
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.|
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.
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.
- 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.
- 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.
- Doesn’t include needed spending reforms. The new budget doesn’t address the $700 million in corporate welfare the Commonwealth Foundation has identified. Nor does it tackle reforms to slow the unsustainable growth of human services spending. There is much more the legislature and Gov. Wolf can do to prioritize the use of taxpayers’ dollars before calling for more taxes on families.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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.
Government spending has gradually risen for decades, until it suddenly exploded during Gov. Ed Rendell’s tenure. After the profligacy of the Rendell years, spending growth stabilized, but it’s still on an unsustainable upward trend.
To help control the growth of spending, lawmakers can adopt annual spending caps consistent with the principles of the Taxpayer Protection Act (TPA). The TPA limits spending increases to inflation plus population growth to achieve four goals: limiting the future growth of state government spending, forcing state government to prioritize spending, helping to balance the budget during economic recessions, and providing tax relief for working families.
If lawmakers limited spending increases to the TPA index over the last 26 years, they would have saved taxpayers more than $3.58 billion or $1,119 per family of four.
The most recent budget came in under the TPA limit after adjusting spending to reflect transfers and payment delays. This represents an improvement over prior proposals, but the underlying causes of rising state spending remain.
|2015-16 Budget vs TPA (Amounts in Millions)|
|Inflation + Population Growth (TPA Index)||1.71%|
|Amount Over TPA||$486|
|Amount Over TPA + Adjusted Baseline||($239)|
The Independent Fiscal Office estimates the Department of Human Services (DHS) alone will grow its budget by $835 million in 2016-17. In contrast, the TPA index would allow for a $306 million spending increase. It's clear state spending is on a dangerous trajectory when just one department's budget threatens to push spending over the TPA limit.
The surge in spending isn’t limited to DHS. Pension costs are inflating agency budgets across state government. If we fail to enact structural spending reforms, Pennsylvanians can expect to see higher taxes and slower economic growth for years to come.
To stave off a debilitating fiscal crisis, CF has proposed a variety of reforms to stem the tide of government spending. Here are just five:
1. Eliminate corporate welfare.
2. Improve the state’s welfare system.
3. Reduce public employee compensation inequality.
4. Reform pensions by moving new employees to a defined contribution plan.
5. Eliminate costly state mandates like prevailing wage.
These ideas would save hundreds of millions of dollars and slow spending to prevent harmful tax increases on working people.
The Independent Fiscal Office (IFO) released a sober analysis of Gov. Wolf’s 2016-17 budget proposal. It examines the consequences of eight separate tax increases as well as a minimum wage hike. The 35-page analysis can be summarized in four major points.
1. Higher middle class taxes than New Jersey. The IFO produced hypothetical scenarios for families in 12 states to demonstrate the impact of the governor's 11 percent personal income tax (PIT) hike. A Pennsylvania family making $50,000 will pay higher taxes than the same family living in New Jersey and five neighboring states.
Proponents of a PIT hike emphasize the current rate is one of the lowest in the country. While true, it does not account for the fact that Pennsylvania's rate is among the highest for low-income families, and that the PIT does not exist in seven states.
2. The highest severance tax rate among major gas-producing states. If the governor gets his way, Pennsylvania’s gas industry would pay a 5.6 percent severance tax. The tax would be imposed in addition to the taxes gas companies already pay.
Supporters of a severance tax insist wealthy gas companies need to pay their “fair share.” But this punitive tax will also fall on people who depend on the natural gas industry for their livelihoods. A slew of jobs have already been lost as natural gas prices remain at 20 year lows.
3. The 10th highest state cigarette tax rate in the country. Philadelphia’s tax rate would be 2nd only to New York. Cigarette taxes affect a narrow population and garner more support than broad based taxes. However, cigarette taxes disproportionately affect the poor and encourage violence stemming from smuggling. In 2014, Philadelphia implemented a $2 tax on cigarettes. The tax drove Philadelphia residents to purchase cigarettes in nearby counties, which hurt small businesses in the city.
4. A minimum wage hike would erase nearly 30,000 job opportunities. The IFO predicts raising the minimum wage from $7.25 to $10.10 an hour would boost the incomes of some workers. However, the new mandated minimum wage would also force layoffs and slow hiring.
Everyone wants to reduce poverty, but forcing businesses to increase wages will harm the very people the policy is intended to help. Those with little work experience or education will find it more difficult to land that first job. For example, teenage unemployment rates are consistently higher in states with higher minimum wages.
All of Governor Wolf's proposals have one thing in common: They concentrate more money and power in Harrisburg. Yet, job growth and economic prosperity come from innovative people in the private sector, not from a large and removed state government.
Late on Friday afternoon, Gov. Tom Wolf quietly announced the fiscal code will become law without his signature. This significant development closes the door on a tumultuous year of state budget politics—and represents an important victory for public and private school children.
Just last month Wolf opted to veto the fiscal code, which included a fair funding formula for education spending, language authorizing businesses to receive tax credits for their donations to private school scholarship organizations, and state funding reimbursing school districts for construction and renovation costs.
Lawmakers responded to the governor's veto by passing a stripped-down version of the fiscal code—this time with strong bipartisan support and veto-proof majorities. Apparently Wolf saw the writing on the wall and decided to refrain from yet another veto.
Thanks to passage of the fiscal code, education spending above 2014-15 levels will be distributed through a rational formula that accounts for student enrollment. This formula includes recommendations presented by CF in testimony to the Basic Education Funding Commission.
Ideally, the formula would apply to the entire Basic Education line item—not only the new education spending—but the fiscal code remains a step in the right direction. Certainly, the formula is an improvement over Wolf’s preferred funding scheme which funneled millions to Philadelphia, Chester-Upland, and Wilkinsburg at the expense of 423 other districts.
Further, the finalized fiscal code allows businesses that made donations to the state’s popular scholarship tax credit programs to utilize their tax credits in either 2015 or 2016. Recall that last year the Wolf administration put a freeze on the scholarship programs—claiming student hostages and causing confusion for participating businesses. The technical amendment in the code will reduce administrative headaches for businesses and allow more students to receive scholarships.
A no-tax increase state budget, combined with a fiscal code that protects students, is a crucial victory for families and businesses in the commonwealth.
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