Pennsylvania State Budget
In the past six years, Pennsylvania taxpayers’ unfunded pension liability has more than doubled from less than $30 billion to $63 billion.
While the legislative debate over reform continues, Pennsylvania taxpayers and state workers are sinking deeper into the pension crisis. A recent Moody’s report on state pension liabilities concludes states with large gaps, like Pennsylvania, will be forced to direct more money toward their pension systems just to keep unfunded liabilities from growing. That means fewer dollars for schools, roads, and other basic services.
A big reason for the growing funding gap is lower than expected investment returns.
The State Employee Retirement System (SERS) assumes a 7.5 percent rate of return for investments, but the actual rate of return was only 0.4 percent in 2015. In the first half of 2016, SERS reported a 2 percent investment return.
The much larger Pennsylvania State Education Retirement System (PSERS) isn’t fairing much better. The fund earned just 1.29 percent for the fiscal year, ending June 30th. Recognizing the reality of today’s economy, the system reduced their assumed rate of return from 7.5 percent to 7.25 percent starting July 2016.
Unfortunately, Governor Wolf vetoed reform back in June 2015 which included a defined contribution, alongside a “cash-balance plan”, for new employees only. This legislation was itself a compromise from a straight 401k-style plan that would provide adequate retirement benefits while being, by definition, fully funded.
By December, the Senate crafted a side-by-side hybrid pension model. The hybrid model allowed new employees have both a (smaller) defined benefit pension and a defined contribution plan from dollar one. While less than ideal, the plan would significantly reduce taxpayer risk, a step in the right direction.
In June, a different reform proposal passed the state house. This stacked-hybrid plan includes a defined benefit plan for workers until they reach $50,000 in salary (or 25 years of service), followed by a defined contribution plan. However, the $50,000 threshold would increase by 3 percent annually--greatly limits the number and extent of employees participating in the defined contribution plan.
There’s no question pension reform is urgent. Lawmakers must prioritize proposals with a stronger defined contribution component while preventing political manipulation of pension payments. Anything less will keep government budgets squeezed and taxpayers exposed to tremendous risk.
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.
Gov. Wolf is embracing a government that works for the wealthy and well-connected. Yesterday, his administration announced its intention to commit more than $20.5 million to Aramark just to keep the corporation located in Philadelphia.
The governor’s preferential treatment of Aramark stands in stark contrast to his treatment of the state’s 300 vape shops. In short, he's putting shop owners out of business for $13 million in revenue, while handing over $20 million to a multi-billion-dollar corporation.
In each of Wolf's first two years in office, his budget included a 40 percent excise tax on the vaping industry. It failed the first year. Unfortunately, lawmakers relented and passed the tax in July as part of a larger $650 million tax increase.
The results have been disastrous. Dozens of shops—like Scottie Freeman’s— have closed their doors and many more are on the verge of closing if the tax is not repealed. Despite the devastation sweeping through the industry, Gov. Wolf hasn’t demonstrated any urgency to undo the damage he’s responsible for.
Maybe the most exasperating aspect of the tax is how much pain its causing for a relatively insignificant impact on the state’s budget picture. The tax is projected to raise about $13 million in total revenue—representing only 2 percent of the $650 million tax increase package. This figure is also $7 million less than what the state just committed to Aramark. Is there a better example of government playing favorites?
Gov. Wolf has made a conscious choice to treat some businesses and people better than others. Aramark and Amazon—they get subsidies. Vape shop owners—they get a platitude-filled press statement about their concerns. Talk about inequality.
Pennsylvania has a history of handing out corporate welfare. It’s hasn’t worked. And it creates a system people grow to resent—one where government picks winners and losers without worrying about the economic consequences. It needs to end.
If Gov. Wolf and lawmakers want to make things right, they can start by repealing the excise tax and reducing corporate welfare. This will help bridge the inevitable budget deficit, but more importantly, prevent further harm to Pennsylvanians.
Fiscal responsibility is at a premium across the country, and Pennsylvania is no exception.
In June, lawmakers passed a budget that increased spending by $1.6 billion. Weeks later, they passed a revenue package, which included a $650 million tax increase to pay for more spending.
Yet, the budget still remains unbalanced. We have already mentioned how how the fiscal plan relies on a $200 million loan and other questionable revenue assumptions.
Now, a new analysis from the Independent Fiscal Office (IFO) explains that some of the revenue Gov. Wolf and lawmakers are counting on to balance the budget may not materialize.
Below is a look at the projected deficit using the IFO’s numbers, contrasted with the General Assembly’s estimates.
|2016-17 Budget Picture (in thousands)|
|Official Estimates (July 2016)||IFO Estimates (August 2016)|
|Total Base Revenue||$31,559,653||$31,553,400|
|Less Tax Refunds||($1,300,000)||($1,300,000)|
|Prior Year Lapses||$57,400||$57,400|
|Sources: Independent Fiscal Office; Senate 2016-17 General Fund Financial Statement|
The table contains various assumptions, which explain the differences among estimates:
- The legislature’s base revenue figure (the amount of revenue expected before any policy changes & based on economic growth) is $6 million higher than the IFO’s estimate.
- The most significant difference is between the "One-time/New Revenue" estimates. Lawmakers estimate policy changes will raise approximately $1.2 billion. The IFO, using more reasonable assumptions, projects the changes will raise just $957 million. Here are the major assumptions explaining the disparity:
- 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 said they want to pass a gambling expansion to generate $100 million to cover CFA spending, but this is far from certain.
- 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 that to occur during the current fiscal year.
So what’s the major takeaway from the IFO’s estimates? Lawmakers must figure out how to eliminate a $264 million deficit this year. Liquor modernization, tobacco taxes, and gaming may bring in enough revenue to balance the budget, but in the likelihood it doesn’t, lawmakers should be ready to reduce spending to match revenues.
Last year, nearly 42,000 Pennsylvanians left the state to pursue their dreams elsewhere—that's one person every 12 and a half minutes. Why is money walking out of Pennsylvania?
That’s the topic of the second episode of Commonwealth Insight, our new, bi-weekly podcast featuring state and national entrepreneurs, policy makers, and thought leaders tackling issues critical to Pennsylvania's economic future.
First, we talk with Travis Brown, Forbes contributor and author of How Money Walks, who says Pennsylvanians are “voting with their feet and taking their wallets” to states like Florida, North Carolina, and Arizona because of our state’s tax burden.
He explains that states compete with each other to attract investment and residents:
Just like the Steeler Nation would look competitively across state lines and do the scouting and reporting to see how we can be better and better next year against the New England Patriots, every competitor would look to the North and say: How can we attract these residents and how do we keep the residents we have?
Travis says there are three major policy areas Pennsylvania can change to be more competitive: regulation, taxation, and litigation.
To reverse out-migration and make Pennsylvania attractive to families and businesses, we must avoid higher taxes, more government spending, and greater regulation.
We also talk with Bob Dick, senior policy analyst for the Commonwealth Foundation, about how the Pennsylvania state budget works—and doesn’t work. Bob says state spending is growing beyond its citizens' ability to fund it, resulting in tax hikes that kill jobs and slow private sector growth. The politically unpopular, but fiscally responsible, solution is to control spending.
posted by DOUGLAS BAKER | 01:57 PM | Comments
Amy Crivella was addicted to cigarettes. She tried everything—gum, patches, going cold turkey—but nothing worked. Then, she tried e-cigarettes, or vaping, and she didn’t need a cigarette for the first time in 17 years.
The mom of two closed her bakery and took out a loan to open East Coast Vapes in Cranberry Township near Pittsburgh. Amy estimates her business has helped about 700 people reduce smoking or quit cigarettes altogether since she opened her doors almost a year ago.
“I didn’t choose to do this to make a buck,” she says. “If I can pay my bills, I’m happy. We’re helping the grandmas and the grandpas quit smoking. We’re not looking for a handout.”
But Amy’s business and her family’s livelihood are in danger. Tucked away in this year’s budget is a retroactive 40 percent wholesale tax on e-cigarettes that goes into effect on October 1. This means Amy will have to send Harrisburg a check for 40 percent of the wholesale value of her entire inventory—including the inventory she purchased well before this tax was even considered.
Not only will the tax force Amy to lay off all three of her employees, but it may financially ruin her.
I don’t know if I’m going to make it. I don’t even have the option to close. I signed a five-year lease, and I’m personally responsible for those payments. I’m going to lose everything. My parents helped me take out that loan. The bank will go after their house if I don’t make my payments. I don’t know what I’m going to do.
Unfortunately, Amy has learned how dangerous big government can be:
I didn’t know too much before, and the more I learn the more scared I get. I didn’t even know what a lobbyist was until about four months ago. I should never fear my government, and I fear them right now. We hired them to stand up for the little people, and I feel like a punching bag. They don’t care that we pay $16 million in other taxes every year.
This fall, lawmakers have a choice: They can shut down businesses across the state for a mere (in relation to the rest of the budget) $13 million in projected revenue from the tax, or they can spare people like Amy from losing their livelihoods.
For starters, lawmakers should support a move spearheaded by Rep. Jeff Wheeland (R- Williamsport) to replace the 40 percent tax with a 5-cents-per-milliliter tax, similar to what exists in North Carolina and Louisiana.
If additional savings are needed, lawmakers should cut hundreds of millions in corporate welfare tax credits and optimize state health care spending. Pennsylvania could save $153 million a year if state workers contributed to their health care at the same rate as private sector workers. Common sense solutions to savings and revenue exist that don't unfairly punish businesses like Amy's.
Like other vape entrepreneurs, Amy plans to empty her inventory to avoid the 40 percent floor tax. In the meantime, she hopes lawmakers will act quickly to repeal or replace the tax instead of sending families like hers to financial ruin.
Stelle explained how this tax will put hundreds of small vape shops out of business for a minuscule amount of revenue to feed state government's spending addiction. Click below to listen:
The tax on vape shop owners sets a dangerous precedent. Without spending reforms, there's no telling which small businesses will be targeted next.
Scottie Freeman wants to serve his community. He opened a vapor shop in a depressed part of Erie and planned to use the shop’s proceeds to open up an ice cream store in the same part of town.
He had his sights set on creating a welcoming environment for the entire community, but the state’s uncontrollable spending addiction put a damper on his plans.
Elected officials decided to increase spending by more than $1.5 billion, leading to a slew of new tax increases on working people. The $650 million tax increase package includes a 40 percent excise tax on vape shops like Scottie’s.
“I’m truly having a hard time wrapping my head around this logic,” said Scottie. “It doesn’t make any sense unless the tax was designed to knock out the small guys so the bigger businesses can make money.”
Scottie decided to open up a vape business because he saw a trend in the industry. Only after his investment did he truly understand the health benefits of vaping. “People have come up to me to say I saved their life,” he said. Many see vaping as a better alternative to smoking, and numerous studies have suggested it is less harmful than cigarettes.
Scottie recently closed his Erie vape shop because he felt he would not be able to serve his customers well post-tax increase. “I can’t help people the way I want to because the product will be too expensive,” he said. “My customers still want me to stay open. And they’re angry I’m closing.”
Scottie doesn't give up easily. He's committed to continue serving his customers: “I still hope to provide people an opportunity to access vape products. I had to learn to cook when I was seven and wash my clothes at eight. I’ve learned to be creative.”
Still, Scottie can’t help but feel upset about the fate of his business. “They set out to destroy something I spent my time and money building. I can’t even go into my shop now without getting angry.”
Scottie isn’t alone. Vape shop owners from Erie to Philadelphia are closing because of the devastating excise tax on their industry.
As long as the tax remains in place, entrepreneurs like Scottie will be forced to abandon their dreams and close their doors.
The 2016-17 budget has passed, yet it remains unbalanced, relying on borrowing money and yet-to-be-passed legislation. Many revenue estimates are overly optimistic. Without efforts to reduce spending or reform cost drivers like pensions and human services, taxpayers should expect a push for tax hikes in 2017.
1. Tobacco taxes are an unstable revenue source, but they account for 75 percent of this year’s $650 million tax hike. Recently, Philadelphia reported cigarette tax revenue 25 percent below original estimates. Expect statewide tobacco taxes to fall short, and continue to decline as smokers give up or travel to other states for cheaper cigarettes.
2. New revenue from wine-expansion is questionable. The estimated $150 million in revenue for 2016-17 assumes all 12 casinos will seek $1 million permits for 24-hour alcohol sales. However, no casino has shown interest. The estimate also assumes expanded hours, coupons, and flexible pricing (read: higher prices) will boost revenues by $55 million.
3. Significant one-time revenue transfers, absent spending reforms, will increase pressure for broad-based tax hikes. The budget includes roughly $460 million in one-time revenue, including money from new gaming licenses, a $200 million loan from the medical malpractice fund, and several one-time transfers from other funds. While legislators are right to look to surpluses in other funds before raising taxes—though this year they did both—one-time shifts were needed only to cover the largest spending increase in a decade.
4. The budget depends on $100 million from a gambling expansion that doesn't exist. Lawmakers intend to pass a gaming expansion bill in the fall, but there is no guarantee they will. This additional $100 million is needed, as lawmakers moved $95 million in payments to the Commonwealth Financing Authority off budget. Balancing the budget also depends on $50 million from a casino license in Philadelphia; however, this license has been tied up in court for two years with no end in sight.
5. Optimistic General Fund revenue estimates. Independent rating agency S&P assigned Pennsylvania bonds a negative outlook due to the commonwealth’s dubious revenue estimates: “We view the fiscal 2017 budget as structurally imbalanced and believe that many of the revenue assumptions could prove optimistic.”
It's easy to overlook tax hikes that may not affect your daily life, but new taxes on smokers, vapors and Netflix users are just a prelude to the higher taxes in store for all Pennsylvanians unless legislators take action on long-term fiscal reforms.
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.
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