Now is the Time to Practice Fiscal Restraint

Testimony of Mathew J. Brouillette President & CEO, Commonwealth Foundation, to the PA House Appropriations Committee

Thank you for the invitation to share the Commonwealth Foundation’s analysis and perspective on SB 850.  I’d like to make a few points that I hope you will consider when negotiating and voting on the state’s spending plan for fiscal year 2009-10.

First—and most of you know this but it needs to be repeated over and over again in this building—government has no money of its own to spend; it only has that which it first takes out of the pockets of working Pennsylvanians in the form of taxes or out of our children’s future paychecks in the form of debt.  Therefore, every dollar you tax, borrow and spend is a dollar that cannot be spent, saved, or invested by the people who earned it.

There are real and significant consequences when you choose to increase taxes, borrow more money, and spend those limited resources.  It means the people of Pennsylvania will have less in order for you to have more.  This point cannot be understated.  And it is critical that you recognize this fact as you consider how to address the more than $3 billion shortfall in tax revenues.

You really only have two choices: You can raise taxes or you can reduce spending.  You can do both, of course, but raising taxes during a recession for more government spending is precisely the wrong prescription for our current economic ills.  Even Keynesian economists recognize that raising taxes now would be harmful to our economy. 

Pennsylvanians already shoulder the 11th highest state and local tax burden in the nation (according to the Washington, D.C.-based Tax Foundation).  Adding even more weight would only hinder our ability to recover from the current recession.  It would also keep Pennsylvania at the bottom of the economic competitiveness barrel.

So, my first point is that if you are truly interested in creating jobs, stimulating our economy, and putting our state back on a path toward prosperity—which I believe you are—you must resist the temptation to raise taxes.  Instead, you need to pursue policies that reduce government spending and leave more capital in the private sector where real jobs are created.

SB 850 recognizes these economic realities.  Although we’ve identified additional spending that can and should be cut in the state’s spending plan, SB 850 represents a fiscally responsible step toward prosperity.

It does so in four ways.  First, SB 850 spends only that which the state will collect in revenues plus the federal stimulus money.  Second, it does not remove additional capital from the productive private sector that will stimulate our economy better than any government program.  Third, it includes Gov. Rendell’s budget reductions and it further reduces or eliminates other non-core government functions that are better performed by the private sector.  And fourth, SB 850 recognizes and takes into account that when the billions in federal stimulus money goes away in 2011, we could face an even larger budget deficit then if you fail to reduce spending now.  By preserving the Rainy Day Fund, SB 850 prudently prepares for this future reality.

The good news is that despite the spending reductions, the core functions of government remain well-funded in SB 850.  This bill that awaits your action in the House is hardly the “bare bones budget” derided by Gov. Rendell, his department secretaries, and members of this committee.  In fact, this budget bill, if enacted, would represent an increase in General Fund spending of more than double the rate of inflation since Gov. Rendell took office (36.2% versus 17.5%).   Indeed, SB 850 increases spending above fiscal year 2002-03 by inflation and population growth, plus an additional $2.8 billion.

Unfortunately, the rhetoric following the passage of SB 850 ignores the realities of this spending plan.  Many organizations lobbying for higher taxes and higher spending are comparing SB 850 to Gov. Rendell’s budget proposal from February.  However, not only does his proposal fail to balance without significant tax increases, it is also predicated on utterly unrealistic future revenue and spending increases. 

On the other hand, under SB 850 spending on total K-12 education reflects a total increase of 37.6% over the last seven years (an increase of 18.5% in inflation-adjusted dollars).  Public Welfare has received an even more dramatic increase in spending of 62.6% (39.9% in inflation-adjusted dollars) over the same period (see the accompanying chart).  To suggest that either of these budget priorities is being cut is disingenuous, and the attempts to separate state spending and the federal stimulus money only further misleads the taxpayers.  No matter how one tries to obfuscate SB 850, the reality is that even the year-over-year funding of Education and Public Welfare represents an increase in overall spending.

In K-12 Education, the Senate budget not only represents a massive increase over 2002-03, but it ensures school districts will receive substantially more support.  Under SB 850, school districts are getting the same $6.2 billion of basic and special education funding from the state as they did this fiscal year, plus over $700 million in direct aid from the federal stimulus package.  When including both state aid and stimulus funding—and remember, Pennsylvania taxpayers are paying for both sources—school districts will receive an average 12% increase in taxpayer subsidies.  Not one school district is getting less revenue under SB 850—funding increases across the state range from 3.1% to 32.8% per school district.  Only in a George Orwell novel would such an increase be labeled a cut.

One department that has been severely cut is Community and Economic Development, but deservedly so.  Despite all the good intentions and well-meaning economic development programs, Pennsylvania is Exhibit A that politicians cannot spend our state to prosperity.  Over the years—under both Democratic and Republican governors—Pennsylvania has spent more money on so-called economic development than most states.  Most recently, we were only second to Ohio in such spending, and in previous years we’ve been the biggest spender. 

Indeed, if spending taxpayer money was the path to economic success, we would be thriving today rather than just surviving.  Yet under Gov. Rendell (2003-2008), Pennsylvania ranks: 34th in job growth, 40th in personal income growth, and 43rd in population growth among the 50 states.

Many independent rankings of Pennsylvania’s business and economic climate also give the Commonwealth poor marks relative to other states.  There is evidence, however, that state economies can thrive when governments recognize they are incompetent to create jobs or stimulate the economy through spending taxpayer money.  Indeed, states do much better when they rely upon citizens in the private sector to make economic decisions rather than politicians in the state capitol.

For example, a Commonwealth Foundation analysis of the 50 states shows that those states spending the most on “economic development” had slower economic growth than states spending the least.  In contrast, states with the lowest tax burdens and those that cut taxes the most had much faster economic growth than states like Pennsylvania with high and rising tax burdens.

In other words, despite the billions of taxpayer dollars spent on so-called “economic development,” our economy has remained amongst the worst performing in the nation.

One such program that has been excised in SB 850 is the Opportunity Grant Program.  Certainly recipients of this corporate welfare are displeased, but a recent report from Auditor General Jack Wagner (a Democrat) illustrates the flaws in this program.  Despite pronouncements of thousands of jobs “created” the Auditor General found that only 60% of the promised jobs were accounted for, and even these numbers are suspect, as they are self-reported by grant recipients.  Furthermore, these jobs estimates consider neither what would have happened in the absence of grants, or if taxpayers had kept the money themselves and spent, saved or invested it elsewhere.

Take the case of Harley-Davidson in York.  They were given over $4 million dollars from state taxpayers since 2000, but are now threatening to leave the state, citing the cost of remaining in Pennsylvania.  Harley-Davidson and many others cases point to the failure of economic development spending to improve Pennsylvania’s economy.

The Department of Agriculture also has a few line items being cut, but these cuts hardly justify the rhetoric that Pennsylvanians will starve.  The largest line items being cut are “Payments to Pennsylvania Fairs,” “Agriculture Research,” “Crop Insurance,” and “Agricultural Promotion, Education, and Exports.”  Not only do these programs not put food on the table, they largely don’t even directly benefit farmers.  Even if they did, there is little justification for subsidizing agriculture at the expense of all other taxpayers. 

The average Pennsylvania farmer receives very little from agricultural subsidies; most money goes to corporate farms and land-owners.  Pennsylvania and the U.S. would be better off eliminating agriculture subsidies entirely, like New Zealand did in 1986—spurring dramatic growth in their farm production as the private allocation of money replaced the political redistribution of wealth.

More importantly than the specific cuts, SB 850 does a much better job of protecting taxpayers in the coming years.  The approach outlined by Gov. Rendell is fiscally irresponsible.  Rendell would consume the entire Rainy Day Fund, as well as other one-time revenue sources, in the next couple of years, even though new federal support is limited.

How will this approach deal with the budget gap created when the stimulus money disappears in two years?  For starters, Rendell’s budget estimates assume the rosiest possible scenario—a 10.1% revenue increase in 2010-11, followed by 6.3% in 2011-12.  Further failing the reality test, Gov. Rendell’s budget assumes fiscal restraint in the next two budget cycles—an increase in spending of only 1.9% in 2010 and a meager 0.6% in 2011.  Yet, facing a multi-billion dollar shortfall this year, he is unwilling to practice this type of spending restraint today.

Gov. Rendell’s budget also fails take into account the looming crisis in the state pension systems.  Taxpayer contributions are projected by SERS and PSERS officials to increase by about 600% beginning in 2012-13—an increase amounting to about $3.5 billion at the state level.  Where will the money come from to pay these bills?

One proposal that has been floated is increasing the state Personal Income Tax by 1%, and perhaps even 2%.  Yet, as noted earlier, raising taxes is the worst thing to do at a time when the economy is sputtering.  Our analysis, using a dynamic economic modeling program developed by the Beacon Hill Institute at Suffolk University, indicates that a 1% increase in the state PIT would result in a net loss of over 47,000 jobs—on top of the jobs Pennsylvania has already lost and is currently losing.  A 2% PIT increase would result in 94,000 fewer jobs next year.

So, with only two options to address our current budget problem—raising taxes or reducing spending—will you be able to look your constituents in the eye and justify another tax increase? 

Will you explain to them why you need more of their money while also giving tax credits to Hollywood film producers such as the $5.7 million given to the makers of Zack and Miri Make a Porno? 

Will you tell them why higher taxes are necessary to build a new soccer stadium in Chester or pay for a new minor league baseball scoreboard in Harrisburg?  And will you be able to justify raising their taxes while also spending hundreds of thousands of dollars on golf course renovations and ski resort improvements? 

Obviously, we believe now is the time to practice fiscal restraint and rein in wasteful spending.  And we believe SB 850 represents a significant step in the right direction that will put Pennsylvania on a path toward economic recovery and prosperity.