Shifting the Budget Paradigm with Five Reforms

This article first appeared in the Philadelphia Inquirer.

Think about your monthly bills—mortgage or rent, utilities, insurance, etc. If you’re dishing out more and more each month on these expenses, wouldn’t you eventually ask, “Why?”

The prevailing paradigm over decades of state budgeting has held spending increases are a given, and revenue must keep pace.

As a result, every year state government spends more and more. This has driven Pennsylvania’s state and local tax burden to the 15th-highest in the nation, at $4,588 per person, or more than $18,000 per family of four.

But what if this paradigm were wrong?

What if, instead of viewing bills as non-negotiable, we actually asked “why” spending keeps rising?

The answer may be surprising.

From duplicate programs and handouts to politically favored businesses to antiquated regulations and operational redundancies, the cost-drivers in the state budget are ripe for reform.

Thankfully, Gov. Wolf and lawmakers have suggested they may be ready to take on these reforms.

For example, instead of pitching the largest tax increase in state history (2015) then requesting a retroactive income tax hike (2016), Wolf promised, “I’m not going to call for an increase in the personal-income tax or sales tax. “He further signaled his intent to “reimagine state government.”

Meanwhile Senate Majority Leader Jake Corman (R-Centre) noted, “The easiest thing to do in order to address budget deficits is to increase taxes. The hardest thing to do is to put in the work to reform these areas and slow the growth. … But until you put in the hard work and begin to make reforms, you are looking at a future of repeated and significant tax increases.”
 

By reimagining how government works, lawmakers and Wolf can close this year’s estimated $524 million budget deficit, tackle next year’s estimated $1.7 billion shortfall, and set Pennsylvania on stable financial footing. Here are five ways they can do it without tax increases.

Get Government Out of the Liquor Business

If Wolf and lawmakers want to reimagine state government, ending Prohibition-era laws is a no-brainer.

Just the border bleed from Pennsylvanians shopping for alcohol in other states costs the commonwealth at least $180 million in sales each year. While the state no longer holds a total monopoly on wine sales, it controls the wholesale and retail sides of most wine and all liquor sales. Only Utah matches the commonwealth’s grip on liquor.

Following up on last year’s wine expansion by auctioning off wholesale and liquor licenses could yield between $1.1 and $1.6 billion in up-front revenue, according to a 2011 Public Financial Management Group study. This almost equals next year’s estimated budget shortfall.

End Special Business Subsidies

As many Pennsylvanians work to make ends meet, this year state government will dole out more than $800 million to bolster billion-dollar corporations like Amazon and Netflix, subsidize sports stadiums, and prop up the horse-racing industry.

Billed as “economic development,” this corporate welfare rarely delivers on its advertising. In fact, despite funneling more than $6 billion to politically favored businesses since 2007, Pennsylvania trails the nation economically. Between 2005 and 2015, the state ranked 35th in job growth and 31st in personal income growth. Meanwhile, the 10 states spending the least on corporate welfare from 2007-2015 saw greater job growth than the top 10 spenders.

Eliminating these unfair subsidies altogether would erase this year’s projected budget shortfall.

Tackle the Shadow Budget

Last summer, the $31.6 billion state budget monopolized headlines, but this General Fund budget is just 40 percent of state government’s $78 billion cost. Hidden in the remaining 60 percent—essentially a “shadow” budget—are more than 150 “special funds” whose costs are largely unknown to the public.

These funds have bankrolled pool feasibility studies, subsidized well-paid farmers on the backs of the poor, and funneled additional tax dollars to initiatives already funded through other government means. Worse, these funds are often on auto-pilot, growing yearly without review or accountability.

Reducing or reprioritizing the shadow budget could free more than $1 billion for true public priorities.

Fix Pa.’s Flawed Sentencing System

Since 2005, corrections spending has spiked 55 percent and is now the third-largest General Fund expense. The Wolf administration recently announced the closing of two prisons, citing budget woes and a declining prison population. Despite this welcome population drop, Pennsylvania’s incarceration rate remains the highest among Northeast states. The culprit is not an abnormally high crime rate but a flawed sentencing system, according to the Council on State Governments.

This year, inmates will cost the state $48,200 each on average, nearly equaling Pennsylvania’s $53,599 median household income. Parolees cost about 90 percent less, averaging $4,200. Probation and parole violators account for nearly one-third of the inmate population, signaling a huge opportunity for cost savings. Swifter and more predictable sanctions can prevent parolees from becoming inmates, saving tax dollars without compromising public safety.

This is one of several corrections reforms ripe for implementation as a follow-up to 2012’s successful Justice Reinvestment Initiative.

Expand Educational Choice

Since 2001, more than 560,000 Pennsylvania students have benefited from the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC) programs, which offer options to families dissatisfied with their assigned public school. In 2013-14 in Philadelphia alone, nearly $16 million in EITC donations gave schoolchildren a chance at a better education. Guess who else benefitted: taxpayers.

While the average EITC scholarship that same year was $1,587, Pennsylvania’s funding per student reached $15,000. Because the EITC program educates students for significantly less per-pupil than traditional public schools, it’s little wonder the program saved Pennsylvania taxpayers roughly $1.3 billion from 2002-14, according to an EdChoice audit. In fact, of 28 studies analyzing the fiscal impact of school choice programs, 25 found they save taxpayers in costs both to local districts and to state government. 

House Speaker Mike Turzai (R-Allegheny) has called the EITC and OSTC “an important part of allowing school choice in the commonwealth of Pennsylvania.” He plans to introduce legislation increasing the EITC and OSTC by $50 million and $25 million, respectively.

Expanding school choice is a win for students, parents, and taxpayers and should be without argument this budget season.

These reforms share one commonality: Each is a stark departure from the paradigm that’s guided government for years.  

This budget season, Wolf and lawmakers will be tempted to rely on hidden, job-killing tax increases on working Pennsylvanians—like last year’s e-cigarette and digital download taxes—to balance the budget. Only by rejecting this temptation and embracing innovation in government can they deliver the budget Pennsylvanians need and deserve—this year and far into the future.