Earlier this year, state Senate Republicans drew a line in the sand, stating they would not support a budget that: 1) spends more than last fiscal year; 2) includes broad-based tax increases; or 3) puts Pennsylvania on an unsustainable spending path.
So how does their promise square with the $27.95 billion budget deal brokered with House and Senate Democrat leaders?
In July 2008, the General Assembly and Governor Rendell enacted a $28.3 billion budget for fiscal year 2008-09, despite clear warnings that such a level of spending would lead to a multi-billion dollar revenue shortfall. And even when the warnings quickly became reality, the state continued spending at virtually the same pace. In other words, while state tax revenues fell under $25 billion, Harrisburg still spent more than $28.2 billion in fiscal year 2008-09.
Thus, the over-spending of $3.2 billion in the last fiscal year is the only way the Senate GOP can claim that a $27.95 billion budget deal for fiscal year 2009-10 meets its first objective. Regardless, what is more troubling is the plan to continue spending far more revenue than what the state expects to receive in fiscal year 2009-10, hence the myriad of tax increases needed to generate even more spending money for Harrisburg.
Do the tax increases agreed to by the Senate GOP leaders violate their second objective of “no broad-based tax increases”? Not according to how they’ve chosen to define “broad-based” taxes. Apparently, the definition somehow excludes the hundreds of millions of dollars in higher taxes that will be paid through a retroactive increase of the Capital Stock and Franchise Tax (CSFT).
In 2006, even tax-happy Gov. Rendell admitted the CSFT “hits Pennsylvania businesses-particularly manufacturers-hard. I am convinced that accelerating the phase out of this tax will do more to help Pennsylvania workers than any other business tax change we can afford to make at this time.” Now he and legislative leaders want to raise it?
The reality, of course, is that higher businesses taxes are not paid by businesses at all. This multi-billion dollar tax increase will be passed on and paid by consumers in the form of higher prices for goods and services, and by employees in form of reduced wages and benefits. If this is not “broad- based” then what is?
The CSFT isn’t the only tax being raised by the Senate GOP. But since smokers are only 20 percent of the population, raising taxes on them could technically meet their “no broad-based tax increases” objective. However, research shows that the cigarette tax hits low-income and minority Pennsylvanians the hardest, and Pennsylvania’s own experience demonstrates it is an unreliable and declining revenue source (as the tax increases, smoking declines-and revenue with it). So while non-smokers believe this tax will not affect them, the reality is that shortfalls in cigarette tax revenue will eventually be filled with higher broad-based taxes in the near future.
Economic modeling projections from the Pennsylvania State Tax Analysis Modeling Program (PA-STAMP), developed by the Beacon Hill Institute at Suffolk University, suggest the retroactive increase of the CSFT and the 25-cent per-pack increase in the cigarette tax will cost Pennsylvanians more than 7,800 jobs by 2012.
Although increasing taxes during a recession is bad enough, it is the increased level of spending to $27.95 billion that puts Pennsylvania on a rickety bridge to the future. Spending at this level requires draining the Rainy Day Fund, using up one-time revenue sources, and cashing in on federal stimulus dollars that will vanish in 2011. Thus, in a few years, when the multi-billion dollar increase in payments for state and teacher retirees’ pensions comes due, Pennsylvania will be faced with another multi-billion dollar budget gap. Filling that gap would require utterly unrealistic economic growth, deep spending cuts, or-the most likely outcome-even higher taxes on workers and job creators.
Lt. Governor and Senate President Pro Tempore Joe Scarnati got it right on June 17, 2009, when he said, “The last thing we can afford to do is raise taxes on working people and job creators who are already struggling to make ends meet.” Unfortunately, while Pennsylvanians are losing their pay, health care benefits, and even their jobs, the budget he-along with the House and Senate Democrat leaders-now supports will take even more.
By even the Senate GOP’s own standards, this $27.95 billion budget deal falls short. It will continue to move Pennsylvania down an unsustainable path by further perpetuating Harrisburg’s over-taxing and over-spending. The good news, however, is that the budget deal is not finalized, leaving the Senate GOP another opportunity to craft a spending plan that protects taxpayers and strengthens our economy.
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Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.