The Tax Hike Non-Solution

Contrary to the prevailing media narrative, it appears budget negotiations have taken a positive turn. According to Jason Gottesman of The PLS Reporter (paywall), House Republicans—led by Speaker Mike Turzai—have offered a way to balance the budget without raising taxes:

By all indications, House Republican negotiations have been taken over by House Speaker Mike Turzai (R-Allegheny) who, on Tuesday, presented a plan to Senate Republicans that would not raise any taxes, but instead rely on gaming expansion, further liquor privatization, and fund transfers in addition to borrowing at least $1.5 billion to balance the recently concluded fiscal year’s budget.

Taxpayers should be encouraged by this latest development. Gov. Wolf and a select group of legislators have been advocating for higher taxes on everything from home heating bills to alcohol purchased at your local bar. They firmly believe state government isn’t taxing Pennsylvanians enough, despite evidence to the contrary. Fortunately for taxpayers, pro-growth legislators have opted for a different approach.

Nonethless, this principled stand has come under fire from advocates of big government.

But legislators defending working people from tax hikes should not be deterred. A lack of tax revenue is not the source of Pennsylvania's fiscal predicament. Nor can the state tax its way to fiscal stability. You might recall that last year's $650 million tax hike failed to bring promised stability. Now, a new report from the Mercatus Center should dispel this pervasive idea.

The report ranks the fiscal health of each state, based on indicators of short- and long-term solvency. An interesting pattern emerges when the states with the best and worst fiscal health are compared in the table below.

The states in the best fiscal health have a tax burden more than one percentage point lower than the states in the worst fiscal health. In fact, some of these states—New Jersey, Connecticut, Illinois—have some of the highest tax burdens in the country. Stated differently, higher taxes don’t guarantee a stable fiscal environment and likely undermine it. Why? Because taxes hinder job growth, which chases away residents looking for a better quality of life. The result is fewer people paying taxes. Couple this with a rapid rise in government spending and it creates a recipe for a fiscal crisis.

Still, some protest, claiming the state needs recurring sources of revenue to demonstrate to Standard & Poor’s—among other credit ratings agencies—that Pennsylvania is serious about fixing its finances. This is possible without exacerbating the state’s tax burden. In our analysis of the state’s shadow budget, CF identified more than $3 billion lawmakers could use to balance the General Fund budget.

Many of these programs—like the Keystone Recreation Park and Conservation Fund, the Agricultural Conservation Easement Purchase Fund and Pennsylvania’s two largest mass transit funds—are financed with dedicated sources of tax revenue. Lawmakers can permanently redirect this tax revenue to the General Fund budget. This would require a prioritization of government spending and would address concerns by those demanding permanent revenue sources to calm credit ratings agencies’ fears.

The only way to fix Pennsylvania’s budget difficulties and grow the economy is by reducing the burden of state government. House Speaker Mike Turzai, Majority Leader Dave Reed, and the House Republican Caucus have acknowledged this fact. The governor and Senate can end the current budget standoff by following suit.