For the second time in a little more than a decade, Pennsylvania politicians are poised to make sure that the Commonwealth misses out on a developing economic boom by passing another tax and spending increase just as the economy shows signs of recovery.
In 1991, Pennsylvania lawmakers, working past a budget deadline as a national recession was ending, approved a multi-billion dollar tax increase—including a hike in the personal income tax (PIT) and a slew of business tax increases. The “need” for more tax revenue was used to justify billions of new tax dollars to close a deficit (instead of reducing spending) and pay for new programs. Sound familiar?
But the story of the ‘91 tax hike didn’t end with the Legislature’s vote and the governor’s signature. Over the 12 years since, during a time that included a robust nationwide economic expansion, Pennsylvania’s economic performance consistently lagged behind. Today, some of those who voted for the ’91 tax increase now view that action as one of the major reasons for the state’s poor performance in the following years.
In terms of the major economic growth indicators, Pennsylvania underperformed relative to the national average, despite massive taxpayer-funded “investments” in state economic development subsidy programs and some halfhearted efforts to reverse some of the 1991tax increases.
Fast-forward to the present day. Less than two weeks after Democratic Gov. Rendell and Republican Speaker Perzel pushed a billion dollar tax and fee increase through the House, the U.S. Commerce Department announced that the national economy grew at an annual rate of 7.2 percent for the third quarter of 2003—the fastest growth rate since 1984. This robust increase comes hard on the heels of federal income tax cuts, enacted this year and made retroactive to January 1, that many economists argue have stimulated strong gains in consumer spending and business investment.
But the good news doesn’t end there. One day after the Commerce Department’s encouraging report, the Pennsylvania Department of Revenue released data on its October 2003 collections. It turns out that for the first four months of the 2003-04 fiscal year, General Fund revenues are nearly $240 million ahead of this year’s estimate. If revenue growth continues at its current pace, Pennsylvania state government will have approximately $720 million more than expected in its coffers by the end of this fiscal year. Such a sum would put a fairly large dent in any anticipated budget deficit and obviate the “need” for a tax increase of any size—and a state tax cut would likely replicate the economic success seen at the federal level, thus spurring even stronger tax revenue growth.
This news of economic expansion following tax cuts and better-than-expected state revenue growth undoubtedly comes as a surprise to Gov. Rendell, who dismissively claimed this past January that “There’s been no evidence in my lifetime that ‘trickle-down’ economics works”—ignoring the strong, sustained growth that followed the Kennedy tax cuts of the 1960s and the Reagan tax cuts of the 1980s. Meanwhile, the Governor’s budget director rushed to put a negative spin on the revenue numbers, saying that the strong recent nationwide growth may not be “sustainable.”
Of course, if Gov. Rendell and his top staffers get their way, their comments about a continued Pennsylvania economic slump will become a self-fulfilling prophecy. Those comments also illustrate their failure to understand the economic damage that tax increases caused in the 1990s and will likely cause in the years to come, if passed by the Senate.
A recent Commonwealth Foundation analysis illustrates just how much harm the Rendell-backed House tax hike vote would produce in Pennsylvania. The PA-STAMP “computable general equilibrium” economic model, developed by Ph. D. economists at the Boston-based Beacon Hill Institute at Suffolk University, estimates that raising the Pennsylvania PIT from 2.8 percent to 3.1 percent will destroy 35,892 jobs in the state and reduce investment, personal income, and disposable income by $77.38 million, $298 million, and $1.46 billion, respectively. These results are consistent with the bitter economic legacy of the 1991 tax hike.
A noted philosopher once said, “Those who do not learn from history are doomed to repeat it.” Yet while many Pennsylvania Senators appear to have learned from history, Gov. Rendell and his House accomplices have demonstrated they are determined to repeat it.
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Grant R. Gulibon is senior policy analyst at the Commonwealth Foundation, a free-market public policy research and educational institute based in Harrisburg.