Progress and Setbacks in the 2017-18 Budget

Pennsylvania’s four-month budget battle is just about over, thanks to an assortment of targeted tax hikes and fee increases along with borrowing and one-time transfers.

However, lawmakers and the governor failed to address the source of Pennsylvania’s persistent fiscal challenges: overspending. In the last three years, state spending has risen by more than $2.8 billion—an amount exceeding all spending increases in the prior 8 years combined.

Just last year, Gov. Wolf spent $400 million more than the budget passed in June, despite a looming deficit. This year’s budget shortfall was largely due to the prior year’s bills, as the 2016-17 fiscal year ended with a nearly $1.6 billion deficit.

Adoption of the Taxpayer Protection Act, which limits spending increases to the rate of inflation and population growth, would prevent the legislature’s spending binge. Controlling spending should be a top priority moving forward along with ending “backwards budgeting.”

For the second year in a row, lawmakers passed a spending plan before authorizing the revenues to pay for it. As Senate Majority Leader Jake Corman acknowledged, this cannot happen again. Lawmakers should ensure all revenues are in place before authorizing a spending plan.

In addition to overspending and backwards budgeting, here’s what you need to know about the 2017-18 budget agreement.

The Funding Plan

Borrowing: The legislature authorized the monetization of the Tobacco Settlement Fund to the tune of $1.5 billion. The terms of this arrangement will determine the ultimate price tag for taxpayers. If the Commonwealth Financing Authority decides to approve a traditional borrowing plan, it could cost taxpayers potentially $2 billion over 20 years. Securitizing the revenue, or selling the asset, would allow an entity (like the state pension funds) to receive a portion of that annual revenue.

Either way, next year, lawmakers will have to decide whether to reduce program funds or find alternative funding sources.

Shadow budget surplus transfers: In a significant win for taxpayers, the General Assembly instructed Gov. Wolf to use $300 million in shadow budget funds to balance the state budget. CF has consistently supported this idea. The state should not be holding billions in unspent tax dollars while at the same time proposing devastating tax hikes on working Pennsylvanians.

Lawmakers should continue to examine shadow budget programs and fund reserves to ensure each tax dollar is being used efficiently.

Targeted tax hikes: The final revenue package does include some smaller tax code changes, including a 12 percent fireworks tax, enforcing the state sales tax on out-of-state internet marketplace sellers, and other attempts to maximize revenue collections. This is not the way to improve Pennsylvania’s poor business tax climate.

With the 15th highest tax burden in the nation, incremental tax reform could go a long way to make Pennsylvania a better place to live and work.

Joint Underwriting Association (JUA) fund transfer: The budget includes taking $200 million from this fund, which supplies medical malpractice insurance to health care providers. Administrators of the fund challenged last year’s plan (to borrow money from the fund), but the fiscal code instructs elimination of the JUA if transfers are not made.

Gambling expansion: A long-awaited compromise on expanded gaming proved the final hurdle for this year’s revenue package. The combination of mini-casinos, internet gaming, and video gaming terminals at truck stops is estimated to raise $238.5 million this year and $90- $100 million in subsequent years. Gambling, like other sin taxes, are not a long-term budget solution.

Failed tax hikes: At least twelve different tax hikes were proposed and defeated during budget negotiations.

  1. Personal income tax hike
  2. Additional severance tax on natural gas
  3. A drink tax on alcohol consumed in restaurants
  4. A gross receipts tax on natural gas heating bills
  5. A tax increase on electricity bills
  6. A tax increase on cell phone and home phone bills
  7. An additional 5% hotel tax, which would have given Philadelphia the highest hotel tax in the nation
  8. Expanding the sales tax to business warehousing and logistic companies
  9. Expanding the sales tax to IT services
  10. Expanding the sales tax to airline food
  11. Expanding the sales tax to aircraft sales
  12. Expansion of the insurance premiums tax

Along with a funding plan, lawmakers did include several positive policy reforms in budget-related legislation to save students from struggling schools and free people from the burdens of poverty.

The Policy Reforms

Education reform: More kids will have access to a quality education thanks to a $10 million expansion of the Educational Improvement Tax Credit, which provides scholarships to students of families with low-and middle-incomes.

The Public School Code bill also protects successful teachers by prioritizing performance over seniority in the event of furloughs, and reducing administrative burdens on good charter schools by allowing them to consolidate under one organization.

Attempted welfare reform: The vetoed Human Services Code bill included several meaningful reforms to help the Department of Human Services move more people out of poverty and slow the surge in state spending. A waiver to request Medicaid work requirements for healthy adults and requiring DHS to submit a waiver for efficiency improvements before requesting supplemental tax dollars are good policies.

Work requirements particularly must be a part of the solution. Prioritizing work is the best way to combat poverty and grow the economy simultaneously.

In total, the legislature’s changes would raise more than $2.3 billion to pay for bills incurred in the 2016-17 and 2017-18 fiscal year.

This year’s dysfunctional budget process highlights the need to redesign government—a sentiment lawmakers and the governor expressed last winter. Only systematic reforms like eliminating corporate welfare (including the annual $250 million subsidy for horseracing), privatizing liquor, restoring the dignity of work in welfare programs, and reforming the budget process can solve our seemingly perpetual budget crisis.