Pennsylvania State Budget
The 2016-17 General Fund budget added to Pennsylvania’s fiscal challenges. Lawmakers approved the $31.6 billion budget without implementing meaningful reforms or authorizing enough revenue to balance the budget. Despite lacking solid revenue sources, the legislature increased spending by $1.6 billion—a sum vastly exceeding the combined growth rate of inflation and population.
In 2013, I opened my first business. I’d overcome many challenges and assumed some gut-wrenching risks to get there, but I did it—and I was proud. But less than three years later, my business—my dream—is on the brink of shutting down because state government is taxing it to death.
The 2016-17 budget remains unbalanced. Without serious efforts to reduce spending or reform major cost drivers, like public pensions and the sprawling human services system, taxpayers should expect a push for tax hikes in 2017.
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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 Deparment 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.
Pennsylvania’s primary tool for grading schools –the School Performance Profile (SPP)—is being overhauled. The current SPP is not particularly straightforward, but it’s based mainly on test scores and academic growth. At the direction of Gov. Tom Wolf, the revised SPP will become ...