Gov. Wolf has a legal responsibility to reduce spending and fix a legislative mistake. Unless the legislature passes a revenue bill today—which seems unlikely—the state budget is unbalanced.
Lawmakers sent Gov. Wolf a $31.6 billion budget (that’s what it will cost once they send him bills that fund Penn State, Pitt and Temple), without a plan to pay for it. Last night, Gov. Wolf indicated he will allow this budget to become law without his signature, even though it isn’t balanced.
Legally, Gov. Wolf must veto any spending above the official estimate of revenues. According to the Administrative Code:
The Governor shall item veto any part of any appropriation bill that causes total appropriations to exceed the official estimate plus any unappropriated surplus.
Additionally, Chapter 71, Section 4105 of the Pennsylvania Consolidated Statutes, which creates the Independent Fiscal Office, puts the onus on the governor to ensure the budget is balanced, even if the legislature passes an unbalanced budget.
The Governor shall certify that any appropriation bill does not cause total appropriations to exceed revenues plus any unappropriated surplus as provided in section 618 of the act of April 9, 1929 (P.L.177, No.175), known as The Administrative Code of 1929.
In the last two budgets, both Gov. Wolf and Gov. Corbett used not only the line-item veto to eliminate funding for certain programs, but the “item-reduction” veto. Using this, the governor can cross out an appropriation in the budget and write in a lower spending number.
Gov. Wolf could fix the budget by reducing the total spending. He can use the line-item veto to strike out unnecessary programs and the item-reduction veto to reduce some of the legislature’s funding increase. If he were to reduce overall spending by just 1 percent, taxpayers would save $316 million.
Gov. Wolf may not prefer to take this action and reduce spending, but he has the legal obligation and power to do so. The governor can fix the legislature’s unbalanced budget without creating another long impasse.
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."
RELATED : TAXES & SPENDING, PENNSYLVANIA STATE BUDGET, SPENDING LIMITS, TAXATION
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.”
RELATED : TAXES & SPENDING, PENNSYLVANIA STATE BUDGET
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.
RELATED : TAXES & SPENDING, PENNSYLVANIA STATE BUDGET
Pennsylvania is spending taxpayer money it doesn’t have.
Yesterday the Independent Fiscal Office (IFO) released its report on revenue collections for the past fiscal year. Total revenue came in approximately $98 million below expectations.
This failure to meet projections is important because spending decisions are based on revenue projections. If revenues don’t meet expectations, it can throw the budget out of balance. That’s exactly what happened in 2015-16.
The state ended the fiscal year more than $43 million in the red.
2015-16 Balance Sheet (in thousands)
Total Funds Available
One important point to note: If spending were kept at the $30.03 billion level passed back in March, the state would be running a surplus. But regrettably, the legislature added more than $98 million in new spending—defined as “supplementals”—to the 2015-16 spending total.
With the state starting the year in the red, the legislature won’t have access to the $55 million surplus it was counting on to balance the budget. Moreover, the 2016-17 revenue estimate may once again be lower due to underperforming revenue collections. Both dynamics will make balancing the budget more difficult.
Lower than anticipated revenues mean lawmakers will need to raise more than $1.3 billion to balance the state’s books—an inevitable consequence of agreeing to a spending plan before determining how to pay for it.
2016-17 Budget Deficit (in thousands)
2016-17 Proposed Budget*
*Includes Commonwealth Financing Authority line item
Some Republican lawmakers are offering a revenue package of $1.2 billion to pay for the current budget proposal. Democrats prefer a revenue package closer to $1.4 billion. Neither package would be necessary if spending were pared back to avoid raising taxes on working people.
And it can be done. As my colleague James has pointed out, dramatic cuts are not necessary to balance the budget without tax hikes. What’s needed is spending restraint. But the proposed budget represents the opposite of restraint.
If Harrisburg is going to break free from autopilot budgeting, a different mindset is a must. Rather than debating how much more taxpayers need to pay, policymakers should focus on how much government can spend.
RELATED : TAXES & SPENDING, PENNSYLVANIA STATE BUDGET, SPENDING LIMITS, TAXATION
As Harrisburg searches for politically acceptable tax hikes to fund a record-breaking budget, Pennsylvania’s attractiveness to manufacturers continues to decline. According to a study reported by the Central Pennsylvania Business Journal, local manufacturers operate under an already onerous tax load.
The report, prepared by Ball State University’s Center for Business and Economic Research in Indiana, graded states on a number of factors, including benefit costs and tax climate. Manufacturing in the commonwealth earned a grade of C- this year, down from a C in 2015.
The study examines factors most likely to be considered by site selection experts for manufacturing and logistics firms, and by the prevailing economic research on growth, according to the researchers.
Michael Hicks, director of the research center, says high taxes are particularly problematic for Pennsylvania manufacturing.
The Keystone State earned a D for worker benefit costs and a D- for tax climate in the study.
“I think it’s fair to state that in Pennsylvania the effective tax rate is rather burdensome,” Hicks said.
Pennsylvania, like many states, offers tax-abatement programs for business, but Hicks noted that they may not help.
“The problem is that most job growth in manufacturing comes from existing companies,” which may not have access to incentives aimed at startups, he said.
With Pennsylvania already bearing the 15th highest state and local tax burden in the nation and the state’s manufacturers withering under its weight, what good reason is there to increase taxes?
None is the answer.
RELATED : JOBS & ECONOMY, ECONOMY, STATE RANKINGS
Last week, lawmakers and the governor agreed to a $31.6 billion budget, a five percent increase in spending from last year and the largest one-year jump in spending since 2006.
To pay for this massive spending increase, lawmakers now say they must go beyond the taxes already on the table, like the tobacco tax. They’re considering resurrecting a tax eliminated 16 years ago—the natural gas gross receipts tax, or a tax on natural gas home-heating. They say this tax will bring in $350 million next year.
The plan under consideration would apparently extend its reach to natural gas users, which were specifically exempted from the gross receipts tax in 2000 as part of a larger, market deregulation move.
Gross receipts taxes appear to be a tax on large companies, but they are really a broad-based tax on consumers. Like sales taxes, they particularly target low-income earners. It’s little wonder economists agree they belong “in the dustbin of tax history.”
If lawmakers are serious about avoiding broad-based taxes, they should reject any tax that would increase heating costs for 2.7 million families, seniors, low-income households, and small businesses.
Resurrecting this harmful tax will not make large Marcellus Shale drilling companies pay their "fair share." Instead, it will unfairly hit Pennsylvanians’ heating bills, because tax is levied on natural gas distributors, not producers.
What’s more, the random list of the services and products subject to a gross receipts tax shows it’s nothing more than a revenue grab.
For example, the tax is levied on steamboat transportation companies, mobile telecommunications companies, electric companies and managed care companies.
Reviving the natural gas gross receipts tax has nothing to do with closing corporate loopholes, improving the health of the commonwealth, or simplifying taxes. It’s about scrambling to force Pennsylvanians to pay for unsustainable and unnecessary government spending growth.
Taxpayers deserve more from Harrisburg than a last minute ploy to impose broad-based tax hikes.
RELATED : TAXES & SPENDING, PENNSYLVANIA STATE BUDGET, TAXATION
One government union’s insatiable appetite for more tax dollars has hit a brick wall.
The Wolf Administration is in the process of negotiating a contract with the state’s largest union—the American Federation of County, State and Municipal Employees Council 13 (AFCSME). The current contract expires at midnight, and it’s highly unlikely a deal will be reached before then.
AFSCME agreed to postpone negotiations because the sides could not reach an agreement. According to AFSCME, the Wolf Administration would not sign off on proposed wage increase and wants members to contribute more to their health benefits. The administration is making these requests in light of the state’s precarious fiscal position.
The costs of public employee compensation is exploding. Benefits are particularly out of control. They’ve risen by more than 71 percent over the last 10 years. Benefits for AFSCME members make up about 44 percent of their total compensation (see page 21). In the private sector, the average is 34 percent.
The growing costs of pensions factor into the dramatic rise in compensation, but health care costs are part of the picture as well. According to the Office of Administration, public employees pay 11.7 percent for their healthcare. The private sector average is 20 percent. To their credit, the Wolf Administration wants to reduce this inequality by requiring employees to pay more for their coverage.
The governor should continue to stand firm and protect taxpayers—especially as the legislature debates a bloated budget that will probably require tax hikes. Capitulating to AFSCME now will only compound this problem.
Fortunately, the public will have an opportunity to review the labor contract before the deal is approved.
RELATED : TAXES & SPENDING, PUBLIC EMPLOYEE PENSIONS AND BENEFITS, UNIONS & LABOR POLICY
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. (Update: A reader informs us this was removed at the request of cyber schools, who may have changed their view on the subject after last year's budget impasse.)
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.
RELATED : EDUCATION, CYBER SCHOOLS, SCHOOL CHOICE, TAXES & SPENDING, PENNSYLVANIA STATE BUDGET
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.|
RELATED : TAXES & SPENDING, CORPORATE WELFARE, PENNSYLVANIA STATE BUDGET, TAXATION
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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.