The Case Against Tax Hikes

Pennsylvania’s financial condition is challenging policymakers to change how state government operates. For example, House Majority Leader Dave Reed recently called for a “restructuring” of government as an alternative to tax hikes. A leaner government would be a welcomed change from the decades-long rise in government spending.

Gov. Wolf’s initial response to the latest deficit projections is also promising. The governor has ruled out sales and income tax increases, and he has instituted a hiring freeze—with a few exceptions—to help control costs. CF recommended a hiring freeze back in October when it looked like the budget would remain unbalanced for the duration of the fiscal year.

Governor Wolf's willingness to reduce expenses and his reluctance to raise broad-based taxes are positive developments in Pennsylvania’s budget debate. And both are wholly defensible given the challenges facing the state—three of which stand out:

1. Pennsylvania’s tax burden is already set to rise in 2017. Act 89 of 2013 raised the Oil Company Franchise Tax (OCFT) to pay for $2.3 billion in additional transportation spending. The act phased-in the tax increase over five years, with the final increase scheduled for 2017. The tax is set to rise by 8 cents a gallon, the highest state gasoline tax rate in the nation.

2. The economy is struggling. The commonwealth’s unemployment figure—5.7 percent—is more than 1 percentage point above the national rate. According to the Associated Press, this is the largest disparity between the state and national rate since 1985. Overall, Pennsylvania’s rate ranked 6th worst in the nation as of November 2016. Common sense and scholarly research suggest taking more money out of the pockets of working people will only exacerbate this trend.

3. Problematic demographic trends can’t be reversed with higher taxes. For the first time since 1985, Pennsylvania’s total population declined, falling by more than 7,600 people. The decline is attributable to the 45,565 residents who moved to other states (known as domestic migration)—a rate of 1 person every 11.5 minutes. Out-migration isn’t our only demographic challenge. Pennsylvania is also getting older.

According to the Independent Fiscal Office, the number of people 60 and over will rise by 891,000 over the next 25 years. In contrast, the population of those 59 and younger will increase by just 241,000. A taxpayer exodus coupled with an increasingly older popular using more government services is a recipe for fiscal crisis.

Overcoming these fiscal, economic, and demographic challenges won’t be easy, but it is possible. And we identify how in our recently released policy brief, which proposes short- and long-term reforms Pennsylvania can pursue to transform itself into a place where people want to live and work.