Pennsylvania State Budget
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.
The 2016-17 budget is in the books with a $650 million tax increase. That's a significant increase—but it could pale in comparison to future tax hikes if pension reform continues to fall by the wayside.
Meanwhile, there's a notion gaining traction that we don't need pension reform because our public pension crisis is at a climax. After all, the yearly spikes in pension contributions will moderate beginning in fiscal year 2018.
Nothing could be further from the truth.
Recent reports from the state's two pension systems (PSERS & SERS) show the crisis is far from over. In April, SERS reported an approximately $350 million jump in the system's unfunded liability, swelling to $18.79 billion in 2015. But according to their actuary, the unfunded liability is closer to $19.45 billion—a roughly $1 billion jump.
SERS assumes a 7.5 percent rate of return for investments, but the actual rate of return was only 0.4 percent in 2015. This year isn't looking any better. SERS reported a 0.7 percent investment return for the first quarter of 2016.
In June, PSERS reduced their assumed rate of return from 7.5 percent to 7.25 percent starting in fiscal year 2017. These changes will add to the unfunded liability by about $2 billion.
In the past 3 months alone, we've added at least $3 billion to the already enormous $63 billion pension liability. Now imagine the impact of a recession or another reduction in assumed investment returns.
It's clear our pension system's liabilities are still growing at a rapid pace with no protection for taxpayers. The only way to truly end the pension crisis is to change the fundamental structure of these plans from the antiquated defined benefit plan to a modern defined contribution plan.
Like the budget, small adjustments may ease tensions in the short-term, but systematic reforms are required to change our future. Right now all signs point to higher taxes for Pennsylvanians.
The dust has settled on the 2016-17 budget debate—at least for the moment.
Some people hail the agreement as an example of what Harrisburg can accomplish when two parties work together. Others defend it as an improvement over previous budgets and the least bad option under the circumstances.
These conclusions miss the mark. In the budget battles to come, taxpayers deserve better policies and a more deliberative process to govern how lawmakers collect and spend their hard-earned dollars.
Lawmakers drove up spending by $1.6 billion and raised taxes by $650 million to pay for a massive increase in the size and scope of government. Such a policy decision will have painful consequences for the Pennsylvanians working every day to make ends meet.
Part of the $650 million tax package includes a 40 percent excise tax on e-cigarettes. This punitive tax will force some small business owners to close their doors. Wallace McKelvey of PennLive featured one of those business owners, Chris Hughes, in his story about the costs of higher taxes:
Hughes, whose Lycoming County shop currently has three employees, said he plans to sell off his inventory and close the store before the end of September. Like many owners, he said, he doesn't have the cash reserves to make a lump-sum payment to the state.
While e-cigarette shops across the state prepare to close, and residents—especially low-and middle-income residents—prepare to pay more for cigarettes, select businesses will soon have a bigger pool of special subsidies to draw from. According to Eric Holmberg of PublicSource, lawmakers increased the number of available tax credit subsidies by more than $100 million starting next year.
With the stroke of a pen, government can put people out of business and lavish others with special privileges simultaneously. It's not fair and it's not effective. The ad hoc method of economic development employed by the state has not succeeded and will only further alienate those who feel government should not be picking winners and losers.
Lawmakers’ unwillingness to control spending and protect working people from tax increases wasn’t the only disappointing aspect of this budget cycle.
The process leading up to the passage of the $650 million tax increase was marred by a lack of transparency. Both the House and Senate suspended the rules that allow for adequate consideration of the legislation. Consequently, the 267-page tax bill passed less than three hours after it was introduced. There was little time to review and debate it.
Some of the tax bill’s provisions are just now coming to light, including a handout to Allentown businesses, a bailout of Philadelphia’s cigarette tax fund and a permanent extension of the tax itself. Again, no debate over the merits of these policies.
During the midst of the budget impasse, I made the point that it’s not enough to get the budget done. Lawmakers had to get it right. This year, too many lawmakers opted for the former, giving us a budget of convenience rather than one of principle.
On June 30, the legislature passed a $31.6 billion General Fund Budget. Gov. Wolf allowed this budget to become law without his signature on July 12. On July 13, the House and Senate passed a revenue package to pay for the spending plan.
Here is what you need to know about the budget.
- Spends less than Gov. Wolf's proposal. The governor's $33.3 billion budget was never seriously considered, but it's still worth noting that the final budget spends $1.7 billion less.
- No income or sales tax increases. The tax package does not include income or sales tax increases. The overall tax increase of $650 million is about one-fourth of the $2.7 billion tax hike Gov. Wolf proposed. The enacted tax increases amount to $203 per family of four, borne mostly by smokers.
- Expansion of school choice. The legislature increased the Educational Improvement Tax Credit (EITC) by $25 million. The EITC provides tens of thousands of private school scholarships to students in need. The state will now offer $75 million in tax credits for K-12 scholarships.
- Spending growth 5 times the rate of inflation and population growth. The $1.6 billion increase represents a 5 percent increase in a year when inflation is less than 1 percent. This represents the biggest spending increase in a decade. The General Fund has grown by $2.5 billion in Gov. Wolf’s first two years, approaching the $2.85 billion General Fund increase passed during the prior eight years.
- $650 million tax increase. The $1 per pack cigarette tax hike makes up the bulk of the new revenue. This tax is an unreliable revenue source, would disproportionately harm the poor and do little to dramatically reduce the number of smokers in Pennsylvania. The tax could potentially hit 2 million adults.
- The budget remains unbalanced. The budget counts on $200 million in loans from other funds and $100 million from expanding online gambling—legislation that hasn’t passed the legislature yet. Pennsylvania's Constitution does not say the legislature can pass something pretty close to a balanced budget or a promise to balance the budget in the near future. It requires a balanced budget. By not balancing the budget and depending heavily on unreliable revenues from sin taxes, the risks of a large budget deficit and a renewed push for broad-based tax hikes in 2017 is high.
- Does not include vital spending reforms. Lawmakers did not address the $800 million in corporate welfare identified in the budget. Nor did they 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 higher taxes on families.
For a more detailed version of our analysis, read our Policy Points on the 2016-17 budget.
Charles Mitchell, newly appointed President and CEO of the Commonwealth Foundation, appeared last week on PMA Perspective to discuss this year’s state budget process and the “unlearned lessons” of last year’s budget.
Charles explains how this year’s budget takes money from the poor and gives it to big corporations, and how the decision to pass a spending plan before a revenue plan led to higher taxes on Pennsylvanians. Charles also points out that no state has ever been successful in the long-term by expanding taxes on gambling and tobacco.
Watch the video below to learn more about the budget process and how we can reverse these patterns to make Pennsylvania the next success story.
posted by REBECCA MCCULLOUGH | 00:53 PM | Comments
The state budget is, for all intents and purposes, complete. While it remains unbalanced, we now know exactly which taxes are going up.
The $650 million tax hike passed by the legislature is less destructive than Governor Wolf's $2.7 billion proposal—which would have taken another $850 per family of four—but it still demands more of working Pennsylvanians in the midst of a struggling economy.
The chart below breaks down the additional $204 per family of four in new taxes. It also shows which Wolf tax hikes were not approved.
|Tax Hikes in the 2016-2017 Budget|
|State Tax Rate Changes||
|Per Capita||Per Family of Four|
|Income tax on lottery winnings||$15,800||$1.23||$4.94|
|Digital downloads sales tax||$46,900||$3.66||$14.65|
|Bank shares tax||$23,000||$1.80||$7.19|
|Cigarette tax hike||$431,100||$33.67||$134.69|
|Smokeless tobacco and e-cigarettes tax||$64,600||$5.05||$20.18|
|Limit on vendor sales tax discount||$55,500||$4.34||$17.34|
|Gambling tax on table games||$16,800||$1.31||$5.25|
|Total State Tax Increases||$653,700||$51.06||$204.24|
Low-income Pennsylvanians will feel the brunt of the tax increases, since the bulk of the new revenue comes from cigarettes and tobacco products. Those making less than $30,000 spend 14.2 percent of their income on tobacco, while those earning between $30,000 and $59,999 spend only 4.3 percent.
To add insult to injury, politically-favored corporations were awarded new forms of corporate welfare. The final budget increases the film tax credit for Hollywood film producers by $5 million, beginning next year, and adds at least $9 million in a variety of other corporate handouts.
To shield Pennsylvanians from higher taxes, elected officials must control spending. A great place to start is reducing corporate welfare by limiting borrowing and tax credits. Passing true pension reform will also go a long way in relieving the long-term budget squeeze on school funding.
Lawmakers are on the cusp of pushing through a $650 million tax increase on working Pennsylvanians.
Earlier this afternoon—without much warning or debate—a conference committee passed House Bill 1198, which purportedly raises $750 million (as part of a $1.3 billion revenue package) to balance the state’s presently illegal budget.
The bill does not raise sales or income taxes, and represents only a fraction of Gov. Wolf's original tax hike proposal.
- $1 per pack cigarette tax hike. This tax is an unreliable revenue source, would disproportionately harm the poor and do little to dramatically reduce the number of smokers in Pennsylvania. The tax could potentially hit 2 million adult smokers in the state.
- Other tobacco tax increase. House Bill 1198 would impose a 55-cents-per-ounce tax on roll-your-own-tobacco and smokeless tobacco, taking an estimated $50 million out of the pockets of small business owners and their customers.
- E-cigarettes tax. The proposal would slap a 40 percent excise tax on the wholesale price of electronic cigarettes.
- Entertainment tax. A 6 percent sales tax would be added to all purchases of downloaded digital videos, books, games, music, and applications.
- Bank savings tax. Raises the shares tax on bank and trust companies. According to testimony from the PA Bankers Association, the current bank shares tax is already higher than most other states, and raising it could hurt lending in the commonwealth.
- Business owner tax hike. The legislation reduces the “vendor discount” offered to retail stores who collect sales taxes for the state. As the Lancaster Chamber of Commerce has pointed out, the vendor discount is “justifiable compensation to recover a small portion of the actual costs incurred by acting as a tax collector…” Under this proposal, the price of acting as a collection agency for the state would rise.
- Another gambling tax. State law would require casinos to pay a new 2 percent tax on their gross revenue generated from table games.
- A luck tax. If you happen to win the lottery, state government will be skimming 3.07 percent off the top.
Despite 8 new tax increases raising an estimated $650 million, the budget is still not balanced. Why?
Lawmakers are relying on $100 million from online gambling—though the legislature has yet to pass the legislation to legalize it. The budget also relies on borrowing $200 million from a state medical malpractice insurance fund.
The state constitution doesn’t say the legislature can pass something pretty close to a balanced budget, or a promise to balance the budget in the near future. It requires a balanced budget, officially saying, “Operating budget appropriations made by the General Assembly shall not exceed the actual and estimated revenues and surplus available in the same fiscal year.”
Pension and charter school reform, two issues previously included as part of this budget negotiation, were not addressed. Lawmakers indicated they plan to address these issues this fall.
One positive reform to note: Lawmakers are advancing a school code bill that includes a $25 million increase in the Educational Improvement Tax Credit (EITC) program. The EITC, which provides tens of thousands of private school scholarships to students in need, is a pillar of school choice in Pennsylvania.
The EITC expansion is one bright spot in an otherwise dark set of tax hikes.
Philadelphia collected nearly $59 million in cigarette taxes between July 2015 and June 2016. Well below the $77.5 million originally anticipated by state lawmakers, according to Anna Orso of Billy Penn.
Not only did the tax underperform, but officials estimate revenue from the $2 per pack levy will continue to dwindle over the next three years before it’s phased out in 2019. The unreliability of cigarette tax revenue isn’t unique to Philadelphia.
When lawmakers hiked cigarette taxes in New York and Washington D.C., revenues declined shortly afterward. In fact, in 32 cases studied between 2009 and 2013, tax revenues met or exceeded expectations in only three instances.
Banking on a declining revenue source that targets the poor to fund a surge in state spending is a recipe for personal income or sales tax increases.
In addition to cigarette taxes, lawmakers are considering excise taxes on cigars, smokeless tobacco, and e-cigarettes. But slapping an excise tax on these products could drive jobs out of the state. One entrepreneur actually left New York to set up his cigar shop in Pennsylvania because the business climate was better:
Arthur Zaretsky, president of Famous Smoke Shop, said he moved his business from Manhattan to escape New York's cigar tax, which jumped from 15 percent to 75 percent.
Pennsylvania's business climate was more welcoming, he said, "but we could be anywhere."
Doc Brown showed up at Commonwealth Foundation headquarters in his DeLorean yesterday with a stern warning about the future.
“I just returned from 2017! You’ve got to come back with me, it concerns you all,” Doc warned.
“What happens to us in the future? Do we become jerks or something?,” I asked. After pausing and contemplating his answer, Doc said, “No you all turn out fine. It’s next year’s budget I’m worried about.”
Doc proceeded to tell us the revenue estimates used to balance this year’s budget—the result of passing a too-high spending plan with no plan to pay for it—were overly optimistic. Revenues from sin taxes—including wine reform, gambling, and cigarette taxes—didn’t come in as projected.
Moreover, cigarette taxes continued to decline, as more Pennsylvanians stopped smoking or started smuggling cigarettes from across state lines. The money from gambling expansion was also frontloaded.
To balance the budget—while not actually balancing it—lawmakers borrowed from the State Workers Insurance Fund. This is money Pennsylvania taxpayers had to pay back.
A budget provision allowing the administration to borrow from the Workmen’s Compensation Trust Fund to pay Medicaid bills was used to spend an extra $200 million in additional welfare costs. Taxpayers have to pay that back, too.
All of these mistakes led a budget deficit—where lawmakers spent more money that we had in revenue.
“Great Scott!” Doc Brown exclaimed. “Next year they are planning to raise the income and sales tax to pay for this fiasco.
“Get in the car, we’ve got to get back to the future and stop this broad-based tax hike!”
“Wait a minute, Doc,” I said. “None of these things has actually happened yet. Can’t we stop this nonsense now, if we simply lower the spending?”
“Great Scott! You’re right. If we reduce spending now, we create an alternate reality in which none of this disaster takes place.”
Remember this popular song from the children's show Sesame Street? It goes, "One of these things is not like the others, one of these things doesn't belong. . ."
In Pennsylvania's case, it's the $31.6 billion dollar budget spending plan that's completely out of place. A quick look at few key indicators like unemployment and inflation make it clear that our economy is, at best, stagnate. Yet government spending is surging, creating immense pressure for tax hikes.
The least elected officials can do is keep spending in-line with Pennsylvanians' ability to pay. Send a message to your lawmaker today and let them know it's time to cut wasteful spending.
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