Ending Pennsylvanias Business as Usual Budget

The General Assembly’s post-primary return to Harrisburg signals the start of budget season in Pennsylvania—and taxpayers all across the Commonwealth should be clutching their wallets a little tighter in nervous anticipation.

However, there are several factors at work that promise to make this year’s budget deliberations different than those of the past three years. The results of last month’s primary election, which saw 17 incumbent lawmakers defeated—including the Senate President Pro Tempore and Senate Majority Leader—are likely to alter the dynamics of the negotiations because many of the defeated incumbents were criticized by challengers for their support of Gov. Ed Rendell’s tax increases and bloated budgets. At the same time, recent news from the Pennsylvania Department of Revenue indicates that as of May, FY 2005-06 General Fund Revenues are running nearly $723 million ahead of estimate—an amount nearly double the year-end surplus predicted by the Rendell Administration in February.

Pennsylvania’s projected revenue surplus is consistent with nationwide trends. According to published reports, 42 of the 50 states were expecting cumulative surpluses of nearly $30 billion for the current fiscal year. But instead of returning those surpluses to taxpayers, many governors—including Mr. Rendell—intend to keep these “windfall profits” and spend them.

In a May 30 letter to legislators, Gov. Rendell outlined his plans for spending the taxes that Pennsylvanians overpaid. The first $363 million will be used to pay for additional expenditures not included in the original FY 2005-06 budget passed in July. The remaining portion of the expected surplus would be spent on several new spending initiatives, as well as accelerating the phase-out of the Capital Stock and Franchise Tax.

Gov. Rendell’s new spending plans are a problem, according to House Appropriations Committee Chairman Brett Feese, because they fail to account for three important factors. First, there are already supplemental appropriations needed to cover “expanded welfare costs.” Second, the state owes the federal government $171 million for welfare spending due to a failure to submit required paperwork. Finally, the governor has deferred $300 million in expenditures to FY 2007-08. In other words, the governor—despite his proclaimed commitment to “pay as you go”—wants to spend today but pay next year.

Indeed, it was this sort of budgetary sleight-of-hand on Gov. Rendell’s part that led House leadership to take the unprecedented step of discarding his budget blueprint for next year and substituting the current year’s numbers as the starting point for negotiations—essentially, a modified zero-based budgeting process. The debate over what to do with the anticipated surplus cannot be allowed to overshadow what must be the focus of all Pennsylvania policymakers: getting the growth of state government spending under control.

Pennsylvania’s experience of the latter half of the 1990s—during which the state consistently ran large budget surpluses but failed to restrain spending—illustrates that the presence of “windfall profits” for government does not guarantee lasting fiscal stability for the state. Those surpluses allowed for small, incremental tax cuts and replenishment of the Rainy Day Fund—but they also allowed for spending increases that became unsustainable when Pennsylvania’s economy stalled. As a result, instead of reducing state government spending, the Rainy Day Fund was eventually depleted and major tax increases on working families were passed in both 2002 and 2003.

In order to make sure that history does not repeat itself, Pennsylvania lawmakers need to begin to pare the budget’s unnecessary and wasteful programs. The Commonwealth Foundation’s Pennsylvania Piglet Book 2006 has identified billions of dollars of “pork-barrel” spending in both the current year’s budget and the governor’s FY 2006-07 spending plan. Eliminating such spending would begin to return state government to its proper, constitutionally limited role while allowing for substantial tax reductions for families and job creators. This would free up more capital for desperately needed private-sector economic investment and growth. At the same time, state policymakers can help to minimize the likelihood of future fiscal crises by passing a constitutional amendment limiting the future growth of state spending.

No longer should the arrival of budget season mean lighter wallets for Pennsylvanians. State government must set priorities, make choices and limit spending—just as any family would with its own money.

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Grant R. Gulibon is a Fellow with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, non-profit public policy research and educational institute located in Harrisburg, PA.