Unlearned State Budget Lessons


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.  

Budget Process Continues from PMA Perspective on Vimeo.

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How the $650 Million Tax Increase Impacts You


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

Total Revenue


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
Severance Tax $217,800 $17.01 68.05
Personal Income Tax $1361,500 $106.35 425.39
Insurance Premium Tax $100,900 $7.88 31.53
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.

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State Spending Addiction Leads to Tax Hike

JULY 13, 2016  | by BOB DICK

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.

However, this seventh tax hike proposal does include eight different tax hikes to pay for massive spending increases agreed to last month. Here are the tax hikes up for consideration:

  • $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.

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PSERS Revokes Ghost Teachers’ Illegal Pension Credit


In a victory for taxpayers, the Public School Employees Retirement System (PSERS) has revoked pension credit illegally given to Allentown “ghost teachers” who were hired to teach but instead worked full-time for the local teachers’ union.

Even as the Allentown School District laid off 272 teachers in the past five years, the district used tax dollars to fund the salary and benefits of the full-time president of the Allentown Education Association.  

In response to a lawsuit filed by the Fairness Center, PSERS determined the tenures of the current and previous AEA presidents were “non-retirement-covered compensation and years of service credit were removed for the same number of years that each served as union president…”

With this announcement, reported by the Allentown Morning Call and the Easton Express-Times, PSERS declared more than $1 million in salary earned by these ghost teachers ineligible for pension credit.

But pensions aren’t the end of it. Allentown taxpayers have also funded the salaries and other benefits of the city’s ghost teachers—even while the cash-strapped district laid off hundreds.

Pennsylvanians expect their education tax dollars will actually fund education. The fact remains that taxpayers should not be on the hook for union work, and teachers should be paid to teach.

Members of the General Assembly agree. Last month legislation that would strictly limit ghost teaching (HB 2125) advanced in the House.

PSERS’ decision is an important first step toward protecting taxpayers from funding employees of a private organization and making sure teachers are actually in the classroom.

Click here to find out if there are ghost teachers in your school district, and watch and share this short video describing the problem:

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Gov. Wolf's Budget Reversal

JULY 11, 2016  | by BOB DICK

In his many press conferences about Pennsylvania's fiscal future, Gov. Wolf was adamant about one thing: the state budget must be truly balanced. He lambasted the General Assembly for its refusal—in his mind—to craft and pass fiscally responsible budget proposals.

The governor was not shy about expressing his displeasure with the legislature. Here are just a few examples—all with a common theme:

  • June 30, 2015: The governor criticized the Republican budget as “unbalanced and built on one-time revenues that lead to a $3 billion deficit.” He subsequently vetoed the entire budget, setting in motion a nine-month impasse.
  • December 31, 2015: Gov. Wolf partially vetoed another budget, stating it “does not balance” and would have put the commonwealth in a $500 million hole to end the year.
  • March 16, 2016: The governor threatened to veto a bipartisan supplemental appropriations bill, claiming, “This is the third time they [the General Assembly] have attempted to pass an unbalanced budget with no consultation with the administration. This is simply unproductive and a waste of taxpayer resources.” [emphasis mine]

Wolf eventually reneged on his veto threat and allowed the budget to become law without his signature. Still, he maintained it was not really balanced—though at the time it actually was. Unfortunately, the legislature added additional spending, throwing it out of balance by the end of the fiscal year.

More recently, a week before the legislature passed a fiscally imprudent budget, the Wolf Administration made one of its priorities crystal clear:

  • June 22, 2016: Jeffrey Sheridan, Gov. Wolf’s press secretary, published a blog titled “Budget Must Close Deficit to Avert Funding Crisis.” In it, he touted all of Wolf’s “compromises” with the legislature but made it clear he would not “compromise on the mathematical reality of Pennsylvania’s financial situation.”
  • July 7, 2016: The governor stated he would not sign the budget proposal because it did not have the necessary revenues to balance. In an online video, he said, “We cannot spend money we don’t have.”

After beating the balanced budget drum for more than a year, Gov. Wolf suddenly changed his mind, opting to let the latest budget become law. This despite the commonwealth having no way to pay for the more than $1.6 billion in new spending.

But it gets worse. The governor actually has a legal obligation to ensure the commonwealth's budget is balanced. Yet, he is declining to meet this legal responsibility.

This raises an obvious question: Why the change of heart? 


Lower State Spending Could Improve Bond Rating


Last week Moody’s warned an out-of-balance state budget could result in another credit downgrading. By not acting to balance the budget, Governor Wolf is aiding in the devaluation of the commonwealth's credit, something he's been quick to decry in the past.

That’s a big deal since Pennsylvania’s credit-rating is already the third worst in the country, behind Illinois and New Jersey. Philadelphia Inquirer columnist Joseph DiStefano points out that the Commonwealth pays around half a percentage point extra to borrow, compared to AAA-rated, states like Delaware and Maryland.

Moody’s writes,

While the rating recognizes the fundamental economic capacity Pennsylvania has to resolve its structural budget gap and fully fund its pension liabilities . . . [it] also recognizes the hurdles it faces to do so in practice.

The coming months will be crucial. If the Commonwealth is able to balance the budget, either through revenue increases or expenditure decreases [emphasis added] or a blend of each, its credit could stabilize at the current level.

The rating agency also cites pension reform as a critical factor in an upgrade of the state’s bond rating or removal of its negative outlook.

What the rating agency doesn’t say is that higher taxes or revenue increases will slow an already sluggish economy, making it increasingly unlikely that Pennsylvania will improve its long-term fiscal situation any time soon.

The declining credit of the commonwealth is proof that we can’t sustain Harrisburg’s spending addiction.

Update: On Monday July 11th, S&P announced Pennsylvania is on its CreditWatch list. Pennlive has the story: "The CreditWatch action reflects recent developments that indicate that Pennsylvania will likely proceed into fiscal 2017 with a spending plan that is not supported by a revenue package or offsetting spending cuts to bring the budget into alignment," said S&P Global Ratings credit analyst Carol Spain in a news release, "but if lawmakers continue to negotiate and reach a balanced budget within a 90 day timeframe, we could remove the ratings from CreditWatch."

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Wolf Legally Required to Reduce Spending


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's Cigarette Tax Falls Short

JULY 8, 2016  | by BOB DICK

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."

Plenty of states have better tax climates, but lawmakers can keep jobs here if they hold the line on taxes, control spending, and work toward reducing the overall tax burden.

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Back to the Future: Budget Edition


Back to the Budget Future

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.”

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One of These Things Is Not Like the Others . . .


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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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.