Spending Restraint Needed

Good afternoon. My name is Nathan Benefield, I am the Director of Policy Research for the Commonwealth Foundation.

I would like to thank Chairman Armstrong and the members of the committee for this opportunity to share our thoughts and recommendations. While this committee has already heard numerous testimonies, we will offer a unique perspective. Unlike previous presenters, the Commonwealth Foundation does not receive any taxpayer support. Thus, I may be the first person to come before this committee and not ask for more money.

In fact, our perspective is that state government spending has been growing at an excessive, unaffordable, and unsustainable rate. We feel it is imperative that, at the very least, the overall growth of state spending be reigned in.

State government spending has been growing much faster than citizens’ ability to pay. From 1990 through 2006, the General Fund Budget grew 40% in inflation-adjusted dollars—while the personal income earned by Pennsylvanians grew only 25%. The Governor’s proposed budget would increase spending from state funds by almost 37% since 2002, during which time the average weekly wage for Pennsylvania workers grew only 14%.

This unrestrained growth in state spending has led to higher tax burdens for Pennsylvania’s workers and businesses who are trying to make ends meet. The Tax Foundation reports that Pennsylvania’s state and local taxes as a percentage of income grew by 13% since 1990; and Pennsylvania went from having the 9th lowest tax burden to ranking among the top half of states in 2006. Today, Pennsylvanians pay more in taxes than they spend on housing, food, and clothing combined.

Increased state government spending and a higher tax burden have hampered Pennsylvania’s economic growth. Pennsylvania ranks 43rd in population growth, 43rd in personal income growth, and 36th in job growth since 2002. This in spite of increased “economic development” spending by the state. A recent analysis of job data by the Commonwealth Foundation shows that the ten states reducing tax burdens most since 1970 had job growth four times the rate of the ten states, including Pennsylvania, with the highest increases in tax burdens. Pennsylvania has demonstrated the axiom that we can grow our government or grow our economy, but we can’t do both.

The Commonwealth Foundation supports limiting the growth of state spending to inflation and population growth. We applaud the work of many state senators who introduced a Taxpayer Protection Act that would apply reasonable limits to the state budget. While the Taxpayer Protection Act would limit state spending to a 3.2% increase next fiscal year, Governor Rendell proposed an increase in spending from state funds of 9.8%. We feel constitutional limits on state spending—only to be exceeded by a super-majority vote or by voter referendum—are necessary to prevent the burden of government from growing faster than taxpayers’ ability to pay. But it is not too late for lawmakers to practice fiscal restraint and hold the line on spending, beginning with this budget.

I won’t take time to examine all of the line items in this budget or all Governor Rendell’s new proposals, but I would like touch on a few areas where state government has exceeded the core functions of government.

Last year, the Commonwealth Foundation released the Pennsylvania Piglet Book, which identified items in the budget that should be eliminated. The sum of these programs was over $800 million in the General Fund Budget, and over $2 billion in the operating budget.

These programs fell under four basic categories: corporate welfare to politically selected businesses; programs which should be left to private enterprise; programs that reduce personal responsibility; and programs which encourage agencies and local governments to spend more money than they otherwise would. In sum, we believe that the state budget ought to build on principles that promote limited government, economic freedom, and personal responsibility.

The Commonwealth Foundation supports free-market alternatives to public policy issues. Instead of programs that encourage greater dependence on government, we need to encourage personal responsibility, and free families, private associations, and businesses to address problems. Let me explore three examples of how these principles can be incorporated in this budget.

First, we support Governor Rendell’s proposal to lease the Pennsylvania Turnpike. A potential lease would generate funds for use on other projects, and reduce the need for higher taxes on our residents. We would encourage the Governor and legislators to look beyond the Turnpike and consider privatization or public-private partnerships for entities such as the Liquor Control Board, mass transit agencies, and PHEAA.

These services are provided by the private sector in many other states, and there is little rationale to justify public agency monopolies in these services. While privatizing or leasing these assets would provide a windfall for the state and alleviate the need for higher taxes and fees, there are more than monetary issues to consider.

These privatization efforts would also reduce the graft and abuse in public agencies. As chronicled almost daily in media reports of fraud and excesses, these agencies seem to provide more benefits to elected and appointed officials than to the public. These quasi-private entities offer too great a temptation to misuse public monies.

Furthermore, privatization would unleash the innovation and efficiency of the private sector in providing these services. Private liquor stores and college loan lenders are common across the nation, often providing better services, lower prices to consumers, and higher revenues to the state’s treasury. And public-private partnerships in transportation—both roads and mass transit—have been highly successful in other states and internationally, and Pennsylvania must look to a similar approach here.

We also support expanding Pennsylvania’s Educational Improvement Tax Credit, or EITC. This program gives business tax credits for donations to approved scholarship organizations and education improvement organizations. Last year, the cap on the scholarship portion of the EITC was expanded to $36 million, which provides an estimated 33,000 students with scholarships to the school of their choice this year.

This program is immensely popular among parents, but supply is not meeting demand. Businesses willing to donate are denied a tax credit under the cap on the program, while hundreds of low-income families are denied a scholarship to send their children to a better or safer school.

In his budget, Governor Rendell proposes a $539 million increase in funding for public schools, but an increase in the EITC of only $1.4 million. Yet over 14% of students attend non-public schools, and many more would if they had the means to do so. Governor Rendell also proposes increasing funding to school districts for preschool programs by over $130 million, ignoring private-sector preschool providers which enroll a majority of preschool students, by keeping the EITC cap on preschool scholarships at a mere $5 million.

If we applied the Governor’s proposed increase proportionately by enrollment, we would increase funding to school districts by $465 million while expanding the EITC by $74 million. An EITC expansion would encourage the private sector to continue providing educational services while offering low-income families greater choices in education.

Finally, the Commonwealth Foundation wants to encourage lawmakers to seek free-market solutions in healthcare. Rather than create a government insurance program funded by higher taxes, lawmakers should look to reduce the rising costs of healthcare and make it easier for individuals and businesses to afford private coverage.

We need to make health insurance more affordable for those currently uninsured and for those already buying coverage. This requires greater choice and competition in health insurance and in the provision of healthcare itself. Instead of a taxpayer financed program to “Cover All Pennsylvanians,” we need to look to private-sector health care reforms.

Some free-market reforms should include:

• Expanding insurance pools for small businesses and individuals
• Extending tax benefits to include those who purchase health insurance as individuals and for those who pay cash for healthcare
• Allowing people to purchase insurance from out-of-state insurers
• Making healthcare prices more transparent for consumers
• Reducing insurance coverage mandates
• Allowing individuals to purchase high-deductible insurance plans and expanding incentives for Health Savings Accounts
• Enacting tort reforms, including reasonable limits on non-economic damage lawsuit awards

These are just some of the ways we can enable the private sector to provide solutions to these policy problems, rather than depend on higher taxes and spending.

I thank you for the opportunity to share our thoughts with you, and would entertain any questions you may have.

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Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation(www.CommonwealthFoundation.org), an independent, non-profit public policy research and educational institute located in Harrisburg, PA.