Pennsylvania State Budget
Earlier this month, House Majority Leader Dave Reed challenged his colleagues to change the way Harrisburg operates: “Now is the time to reimagine and redesign government, our state and our future.” A change in Harrisburg’s culture is surely needed. Decades of high taxes, wasteful spending, and poorly designed policies have sunk the commonwealth’s finances and stymied economic progress.
What's most devastating is when poor policies impact the future of our children—which is why reimagining our education system is so critical. Too often, Pennsylvania’s education model prioritizes systems over students. School officials—rather than parents—are given precedent to make consequential decisions affecting the education of more than 1.7 million students. This top-down management style has produced subpar outcomes in too many schools, forcing parents to seek alternatives to traditional public schools.
Unfortunately, not every family is lucky enough to send their son or daughter to a high-performing school. The education establishment will place the blame on funding shortages, but as my colleague James has noted, education spending is at its highest level ever. School districts spend, on average, $15,800 per student. This figure could always grow higher, but inflating school budgets will only add to Pennsylvania’s high tax burden, without guaranteeing any improvement in academic achievement.
The solution to the state’s educational woes doesn’t require more political control. It requires more parental control. To a limited extent, Pennsylvania encourages parental control with programs like the Educational Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC). But more needs to be done.
Every student deserves a quality education. And every family deserves to determine what a quality education looks like. Expanding school choice programs can help make these goals a reality. Putting parents firmly in control of educational decisions has led to improved student outcomes and savings for taxpayers. The latter is especially relevant in the context of the state’s fiscal outlook.
Pennsylvania is staring down a $600 million shortfall for the year, and will need to deal with a projected $1.7 billion projected shortfall in 2017-18. To address these challenges, CF released Embracing Innovation in State Government, detailing how policymakers can reduce state government’s cost to avoid another round of tax increases.
School choice is one of the cost-saving measures included in the report. The costs of the EITC and OSTC represent just a fraction of student funding in a traditional public school. For example, in 2013-2014, the average EITC scholarship was $1,587 per student, whereas funding in a traditional public school exceeded $15,000 per student. Moving students to the less expensive, more effective alternative nets taxpayers significant savings.
Taking a hard look at how Pennsylvania funds education will play a critical role in controlling spending and truly reimaging government.
The Department of Corrections (DOC) recently announced its intentions to close two state prisons and reduce capacity at community corrections facilities (halfway houses). These decisions will cut state incarceration costs—an amount now north of $2 billion—without jeopardizing public safety.
That's a big win for taxpayers and an important move towards redesigning state government to avoid new taxes.
Unsurprisingly, the Pennsylvania State Corrections Officers Association is highlighting the potential for job losses and overcrowding. But these concerns are weak justifications for saddling taxpayers with the costs of two unnecessary prison facilities
Why? The DOC has already promised to move all displaced employees to another position within the department. As for overcrowding, the changes will bring “emergency capacity” up to 92 percent, which isn’t ideal, according to Corrections Secretary John Wetzel, but it also doesn’t constitute a crisis.
Lawmakers can ensure the prison population continues to responsibly decline by adopting the reforms laid out in our policy brief, Embracing Innovation in State Government:
- Ensure individuals are released when they’re eligible for parole. Too often prisoners are kept beyond their minimum sentence without good reason. This additional time in prison costs taxpayers an estimated $69 million a year.
- Base sentences on cost-effective recidivism-reducing sanctions. Judges don’t have access to the pertinent information needed to impose sentences most likely to reduce recidivism. If lawmakers give judges the tools needed to hand down effective sentences, they will be in a better position to move less dangerous offenders out of prison.
- Avoid lengthy prison terms for minor probation and parole violations. According to the Independent Fiscal Office, housing an inmate costs $44,000 more than supervising the average parolee. Ensuring “swift and predictable” sanctions for probation and parole violators can keep people out of prison and drive down costs.
- Properly utilize community correction facilities. DOC is already pursuing this course of action. According to Sec. Wetzel, community correction facilities have not been “yielding satisfactory outcomes.” This is why DOC is cutting facility capacity. Under the department’s plan, people who would normally be sent to these facilities would be supervised by a parole agent at home.
These reforms stem from the Justice Reinvestment Initiative Working Group, which seeks to build on the landmark reforms passed in 2012. These reforms helped reduce the inmate population by 850 in 2015—the largest one-year decline in 40 years.
Reducing overtime pay and merging the Pennsylvania Board of Probation and Parole with the Department of Corrections are two additional ideas not included in our report but worth pursuing. DOC is in the process of addressing the former by filling vacant positions, conducting a staffing analysis to determine the optimal number of employees, and of course closing down two prison facilities.
Senator Stewart Greenleaf introduced the latter reform last session. It passed the Senate on a bipartisan basis, but it unfortunately died in the House. According to the Wolf Administration’s conservative estimate, the merger would save $10 million in the first year of implementation.
By adopting the reforms above, lawmakers can adequately keep Pennsylvanians safe, protect their wallets, and improve the state's unacceptable financial position.
A Philadelphia Inquirer editorial urges optimism about the forthcoming state budget debate. It’s certainly well-warranted. Gov. Wolf and legislative leaders have repeatedly expressed interest in redesigning state government to avoid broad-based tax increases. This is a welcomed departure from past proposals to enact large tax hikes on working Pennsylvanians.
However, the governor still won’t completely rule out tax hikes. He’s likely to propose an energy tax to the delight of the Inquirer’s editorial board, which supports the tax as a way to make natural gas companies pay their “fair share.” This political slogan ignores all of the taxes natural gas companies already pay, including an impact fee, which effectively operates as a 6.9% severance tax.
The board also criticizes the tax relief extended to businesses, asserting this policy failed to stimulate job growth. Sure, businesses did see some relief through the elimination of the capital stock and franchise tax, but Pennsylvania’s overall tax burden ranks 15th highest in the nation. Weak job growth should be seen in light of the commonwealth’s broader tax and regulatory climate. The implication here is that a lower tax burden doesn't grow the economy. The evidence suggests just the opposite.
The editorial's assault on the state's tax structure continues:
Instead, the [tax] cuts lowered the public's quality of life by reducing revenue needed to educate children, fix roads, and provide other services. Business tax cuts account for about half the state's $600 million deficit.
These two sentences are plagued with problems. First, as CF has demonstrated in the past, more education spending does not necessarily lead to improved academic achievement. As a matter of fact, policymakers could improve the educational system while spending less on education if they embraced school choice.
Secondly, the state already has a dedicated source of funding to fix roads. That’s why the state’s gas tax jumped 8 cents to kick off the new year. If more money is needed for transportation, why not embrace public-private partnerships or repeal the prevailing wage mandate?
And third, placing blame for the deficit on tax cuts implies state government hasn’t taken enough out of the pockets of taxpayers. This flatly ignores the state’s overspending problem.
State spending has risen 46 of the last 47 years—climbing by $4,010 per person over that time. Had the state kept spending increases in line with inflation and population since 2000, it would have produced a budget surplus during this fiscal year. With spending increases possible each year, is it really reasonable to say Pennsylvania has a revenue problem?
Finally, the editorial suggests raising the minimum wage to improve residents’ quality of life and make Pennsylvania a destination state. But mandated wage hikes haven’t stop residents from fleeing other states. In fact, of the ten states that saw the biggest declines in state-to-state migration, nine had minimum wages exceeding the federal level. The only exception was Pennsylvania.
In contrast, of the ten states experiencing the largest increases in state-to-state migration, only half mandated wages above the federal minimum. The editorial board correctly identifies the importance of higher wages for Pennsylvania, but their policy prescription will ultimately undermine employment opportunities for the people who need it most.
Thankfully, Pennsylvania's dismal economic rankings are reversible. But turning the tide requires rejecting attempts to solve every problem with more government spending. What's the alternative? Robust economic growth driven by entrepreneurs and consumers pursuing their happiness.
With the budget deficit casting a shadow over the current fiscal year, and deficits projected for at least the next five years, policymakers are acting to stem the tide of red ink.
The Wolf administration has adopted a hiring freeze—an idea CF proposed back in October. And just this week, the administration announced the consolidation of the state’s technology and human resource functions—a move aimed at achieving savings for taxpayers.
The governor has also ruled out broad-based tax increases this upcoming fiscal year, which were the central components of his two prior budget proposals. Instead, he—and legislative leaders—are putting greater emphasis on reducing the costs of a bloated state government. Taxpayers should be optimistic about these developments, which all point to a culture shift in Harrisburg. Instead of seeing large tax increases as a viable solution, the focus has shifted to the spending side of the ledger.
Beyond the promising cost-savings steps taken thus far, more must be done. State government needs a complete overhaul. In our latest policy brief, Embracing Innovation in State Government, CF outlines solutions to reduce government spending and improve the institutions and programs now failing too many Pennsylvanians.
Over the next month, we will highlight at least one budget solution per week. First up, a government efficiency review.
This review would identify ways government can make the best use of each tax dollar. The State of Louisiana conducted such a review in 2013 with the help of Alvarez & Marsal (A&M)—a business management firm specializing in performance improvement. The firm made 72 recommendations, which were estimated to save or raise $2.7 billion over five years.
According to state's final report on the recommendations, “efficiency reviews have generally identified savings of five to six percent of the general fund budget” in other states. For Pennsylvania, this would mean $1.5-$1.9 billion in savings. Such a significant sum would go a long way toward helping policymakers reduce government spending.
An efficiency review is just one of many ideas that can lead to savings for taxpayers. As we move closer to the governor’s budget address, we’ll be exploring other ideas to balance the budget without taking more out of the pockets of working people. Be sure to check back next week for the 2nd blog in our series.
Yesterday, Gov. Tom Wolf indicated he would not propose an income tax or a sales tax increase as part of his next budget. This comes as something of a surprise, given the past two budgets and the current state deficit.
To be clear, this doesn’t take other tax hikes off the table—last year the legislature passed $650 million in tax increases on cigarettes, tobacco, vaping products, and digital downloads and Gov. Wolf has continually supported an additional tax on natural gas. Nonetheless, sales and income taxes have been the 800-pound gorilla and the elephant in the room in the last two budget proposals, so taking them off the table at this stage should be considered a welcome relief to taxpayers who are already overburdened with taxes.
Gov. Wolf indicated he would try to balance next year’s budget by reducing spending and adopting innovative reforms.
Here’s some great news: Commonwealth Foundation just released a new brief outlining spending reforms—both short-term and long-term—that can help control state spending and deliver greater economic growth and prosperity to all Pennsylvanians.
A promise to avoid major tax increases—by reforming our state budget to control spending growth—is a nice stocking stuffer for Pennsylvania families this holiday season.
Pennsylvania must confront a $604 million deficit, according to Budget Secretary Randy Albright. This sober assessment was offered during the mid-year budget briefing earlier today.
The Independent Fiscal Office (IFO) offered a similar conclusion last month when it released a report projecting a $524 million deficit for the current year. The administration’s findings—along with the IFO report—reinforce the need to reverse the problematic budget trends afflicting Pennsylvania.
The present deficit is a combination of excessive spending growth—including $183 million in “supplemental appropriations” or spending above levels authorized in last June’s budget and poor revenue collections. The latter is a problem we’ve been documenting since the fiscal year began.
The good news is both the governor and lawmakers want to avoid broad-based tax increases to close the deficit. Secretary Albright says the governor is asking cabinet secretaries to find ways to cut back on expenses. And House Majority Leader Dave Reed wants to reevaluate the state budget’s structure:
Government has basically looked the same in Pennsylvania for the last 40, 50 years," said Reed. "We just go through the budget each year . . . We want the budget to look different this year.
The majority leader’s perspective is encouraging. As we’ve detailed in the past, Pennsylvania’s budget is set on autopilot, which means spending continuously grows without review or debate over the sustainability and effectiveness of state programs. A willingness to buck this trend could be a turning point in efforts to curtail spending growth and fix our broken corrections, education, and welfare systems.
Implementing real reforms and cutting back on unnecessary expenses can help the governor and General Assembly avoid tax increases that cost entrepreneurs their livelihoods and fail to solve Pennsylvania’s persistent fiscal predicaments.
State government is growing at a startling rate. Since 1970, spending has risen by $4,010 per person—an inflation-adjusted increase of 189 percent. This is one of many findings in our latest publication, Tracking State Budget Trends.
The explosion in spending may come as a surprise to some, given the repeated claims about austerity in government—particularly in education, where cuts to programs are purportedly the norm. The facts reveal just the opposite. Education spending is at its highest level ever. What have Pennsylvanians received in return? No noticeable improvement in academic achievement and higher property taxes.
Education is one of the four major spending categories making it increasingly difficult for the legislature to enact sound budgets. The other three—corrections, debt service, and human services—have all grown tremendously over the last decade. Spending in all four categories increased by $11.8 billion, while spending in the remaining categories declined by $512 million.
That’s not to say spending outside the “Big Four” should be ignored. On the contrary, Pennsylvania’s corporate welfare programs need to be done away with to create a fair economic playing field where hard work and entrepreneurship—not political savvy—determine the makeup of the marketplace.
Still, eliminating corporate welfare is not enough to fix what ails Pennsylvania’s fiscal health. Significant reforms to the Big Four are a financial and moral imperative. Left unchecked, these categories will not only drive up spending but will trap more Pennsylvanians in our broken education, corrections, and welfare systems.
Even the people living outside these systems have a stake in their improvement. Their costs have contributed to the state’s high tax burden, which reduces the take home pay of working people and diminishes their prospects for better economic opportunities. In 1991, Pennsylvania’s tax burden was the 24th highest in the country. Since then, the burden has risen to 15th highest—a direct result of spending left on autopilot.
Pennsylvania’s trends—whether they be economic or fiscal—are worrisome. But they are reversible. If policymakers adopt innovative approaches to complex policy problems, they can clear the way for people to achieve their potential, which is the key to unleashing prosperity in Pennsylvania.
In the coming weeks, we’ll be releasing a new report to unlock this potential and help put Pennsylvania back on solid fiscal ground. Stay tuned.
That's a wrap.
The 2015-16 legislative session is officially in the history books. Despite a $650 million tax hike, Pennsylvanians have a lot to celebrate from the past two years. From elimination of the Capital Stock and Franchise Tax to wine modernization, recent events signal Pennsylvania’s political leaders may be ready to start tackling the broken systems that are driving state spending far faster than Pennsylvania’s economy.
Here are the top seven taxpayer victories from the 2015-16 legislative session:
- Five tax hike proposals defeated in 2015. During his first year in office, Gov. Wolf proposed five different broad-based tax hike plans, including higher personal income, sales, and tobacco taxes; a natural gas severance tax; and more. The first proposal would have increased a family of four's tax burden by $1,450. Ultimately, the governor allowed a no-tax-hike 2015-16 budget to become law.
- Capital Stock and Franchise Tax elimination. Originally set to expire in 2011, this business tax, combined with the 2nd-highest corporate net income tax rate in the nation, discouraged job creation and contributed to PA’s poorly ranked business climate.
- No broad based tax hikes in 2016. The legislature refused to entertain sales or income tax increases. Unfortunately, lawmakers implemented $650 million in narrow-based tax hikes.
- Increased labor union accountability. Until last year, union leaders and members could legally stalk, harass, and threaten to use weapons of mass destruction when involved in a “labor dispute.” Act 59 of 2015 closed this loophole. In early 2016, Act 15 of 2016 gave taxpayers the ability to see the costs of government union contracts before they go into effect.
- Funding students, not systems. The 2016-17 budget increased the Educational Improvement Tax Credit by $25 million, giving more students the opportunity to escape violent and failing schools. The budget also includes a student-based funding formula, directing any funds above 2014-15 levels to schools based on current enrollment.
- Liquor modernization. In a small step forward, restaurants and grocery stores can now sell wine, and beer distributors gained additional freedoms, like the ability to sell six-packs.
- Honorary mention: Uber and Lyft legalization. Despite a contentious relationship with the Public Utility Commission, lawmakers finally made the ridesharing services Uber and Lyft permanently legal in Philadelphia and across the commonwealth.
The last two years also saw some missed opportunities:
- An unbalanced 2016-17 budget. Lawmakers passed—and Gov. Wolf let become law—a spending bill without revenue to pay for it. Despite $650 million in tax hikes, spending will still exceed revenue projections, according to the Independent Fiscal Office.
- Pension reform. In June 2015, lawmakers passed landmark legislation to place new state employees and public schoolteachers in a defined-contribution retirement plan, similar to a 401(k). Gov. Wolf vetoed the legislation.
- Liquor privatization. Both chambers passed complete liquor privatization, which Gov. Wolf promptly vetoed.
- Paycheck protection. In October of 2015, the state Senate passed SB 501 to ban the use of public resources to collect political union dues and campaign contributions. The legislation stalled in the House.
- Medicaid expansion. Despite opposition from the legislature in 2014, Gov. Wolf rewrote a federal waiver to expand Medicaid under the Affordable Care Act with little opposition in 2015. At the time, officials predicted about 500,000 new enrollees and an infusion of federal cash that would stimulate the economy. To date, rolls have grown by more than 670,000, while the commonwealth spent $500 million last year and $240 million this fiscal year.
- Seniority reform. Gov. Wolf vetoed legislation to protect great teachers by ensuring that during furloughs, teachers are retained based on effectiveness, not simply seniority.
- Corporate welfare reductions. Pennsylvania spends more than $800 million per year on myriad tax credits, grants, and special loans to private corporations. Yet, we continually rank near the bottom in economic growth. While a few bills to reduce these loans made progress, the legislature has, by and large, failed to recognize these programs don't work.
The commonwealth's financial troubles are serious and systematic. In the new year, lawmakers will have another chance to tackle the broken systems that harm Pennsylvanians by pursuing true pension reform, welfare reform and expanded educational choice for families.
State revenue collections came in at $79.5 million below the official estimate for November, according to the Pennsylvania Department of Revenue. Lackluster collections wiped away the little progress made during October when revenue collections slightly exceeded expectations.
Overall, Pennsylvania collected approximately $2 billion last month, which was 3.8 percent less than anticipated. To date, revenue collections are $261.8 million below estimate.
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 proving unrealistic.
The chart below shows revenue collections lagging official estimates in the first five months of the fiscal year.
Back in August, the Independent Fiscal Office (IFO) released a report identifying major problems with the revenue projections lawmakers used to create the appearance of a balanced budget. To present a more accurate picture of Pennsylvania's finances, the IFO made the following adjustments:
- 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.
In reality, the budget was unbalanced from the start, counting on $260 million in one-time revenue and transfers from other funds. It also includes 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. Ideas to consider include,
- Scaling back $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.
With seven months left in the fiscal year, revenue collections can improve. But lawmakers should start putting together a plan to balance the budget now in case revenues don't match expenditures come June. The last thing taxpayers need is another tax hike to cover last year's bills.
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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.