Pennsylvania lawmakers today unveiled the next fiscal year’s state budget plan.
The Bad News: This budget represents excessive growth in government spending, increasing state spending by 10.7 percent over last year’s appropriations, and setting the state up for possible future tax hikes. This includes massively inflated funding for public schools that are already stockpiling record reserves. While the deal does stake out some wins for Pennsylvanians, it comes with a massive price tag to pay off Governor Wolf’s campaign donors.
The Bright Spot: The deal includes a significant win for students by expanding educational opportunity, with a $125 million increase in the Educational Improvement Tax Credit (EITC)—the biggest ever in the program’s history. This increase will provide an estimated 31,000 additional K-12 students with scholarships to the school of their choice, while raising average scholarship amounts. In addition, the deal expands access to dual enrollments for charter students, while repealing Governor Wolf’s charter regulations that impose onerous application requirements and costly mandates for small schools that do not have the bargaining power of their district counterparts.
The Outlook: There are many wins for taxpayers in this budget, including making Pennsylvania’s business tax structure more competitive and attractive to job creators. However, with ongoing spending that exceeds revenue by $3 billion, the budget sets the stage for future tax increases once one-time federal funds run out.
Below is an overview of what’s good for students, taxpayers, and businesses, and what isn’t…
Commonwealth Foundation’s Pennsylvania State Budget Analysis
Record inflation caused by federal overspending is hitting Pennsylvanians hard. Inflation is up 8.6 percent from last year, and real earnings are down. While states can’t raise interest rates or control federal spending, they can protect taxpayers by controlling state spending.
Based on the IFO’s official revenue estimates for next year, Governor Wolf’s proposed budget spends $2.7 billion more than revenue. The current budget deal spends $300 million more than Governor Wolf proposed.
This is not sustainable. Lawmakers should limit appropriations to match revenues and keep government spending in line with taxpayers’ ability to pay.
Overspending now leads to tax hikes later.
Excessive Growth in State Spending
In June 2021, lawmakers passed a $39.9 billion budget (an 8.8 percent increase, after excluding federal relief funds). The total General Fund spending increase for 2022 should not exceed the Taxpayer Protection Act (TPA) limit of 3.46 percent, or $41.15 billion.
Shockingly, the budget includes $44.0 billion in ongoing General Fund Appropriations. Of this, $1.2 billion will be paid through temporary federal Medicaid matching dollars. This represents a 10.7 percent increase over last year’s appropriation.
The Independent Fiscal Office’s (IFO) official revenue estimate for next year forecasts $42.3 billion in state revenue collections for fiscal year (FY) 2022–23. After tax refunds of approximately $1.2 billion, this results in net revenue of $41.09 billion.
The budget deal spends nearly $2 billion more than revenues—and is $3 billion out of balance when factoring in the one-time federal Medicaid funds. That is, ongoing General Fund programmatic spending is $3 billion more than state revenues.
This unbalanced approach will lead to massive deficits in just a couple years—requiring tax hikes or spending cuts.
Massively Inflated Public School Spending
The budget includes a whopping $1.5 billion increase in state support of public schools, an 11 percent increase over the $13 billion in last year’s budget. The amount for “Basic Education” alone (including “level up” funding) increased $775 million, more than double last year’s $300 million, which Governor Wolf celebrated as the largest increase in state history.
This increased despite the fact that Pennsylvania school districts collectively stockpiled $5.29 billion in reserve funds as of 2020-21, up from $4.8 billion the previous year. Pennsylvania school districts have, on average, reserve funds equaling 22.56 percent of their total spending. Per-student spending for district schools is $19,919 as of 2020–21, up from $19,224 the previous year. Nationally, Pennsylvania ranks 8th in total per-student funding.
Instead of more money to a school system that is hoarding taxpayer dollars, even as enrollment and test scores drop, lawmakers should give parents greater control over their children’s educations.
It is clear that Governor Wolf has prioritized special-interest school unions, among his largest campaign donors, over the needs of families, students, and taxpayers.
Increasing Rainy Day Fund
The budget includes a $2.1 billion deposit in the Rainy Day Fund. That will bring Pennsylvania closer to the national average and best practices, helping prepare for future recessions and revenue loss.
Currently, Pennsylvania ranks significantly below the national average in reserve funds. Pennsylvania’s $2.867 billion could fund the government for 30.8 days.
One Time Funds for One-Time Purposes
A sustainable budget uses one-time funds for one-time uses. Lawmakers transferred $3.84 billion of federal American Rescue Plan Act (ARPA) dollars to the General Fund in June 2021. This budget appropriates another $3.45 billion for a mix of one-time uses and ongoing payments.
On the positive side, ARPA funds are used to pay off the Unemployment Compensation Trust Fund debt protecting businesses from future tax hikes. It also pays for a one-time boost in property tax rebates and provides one-time long-term living, water and sewer infrastructure funds, and higher education funding.
On the negative side, the budget creates at least five new programs or funds that will create pressure for more spending in the future. These include the State Parks and Outdoor Recreation Program, Clean Streams Fund, Whole Home Repairs Program, Cultural and Museum Preservation Grant Program, the Development Cost Relief Program, and the Affordable Housing Construction grant program.
In total, the new budget moves some of these funds to the previous fiscal year for a total two-year ARPA spend of $7.291 billion.
Educational Opportunity for All Students
Tax Credit Scholarship Expansion
The budget includes a $125 million increase for the Educational Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC), $100 million of which is for an increase in scholarships for K-12 students.
This $100 million increase in tax credit scholarships would provide approximately 31,000 additional K–12 students with educational opportunity.
Tax credit scholarships have a proven track record, helping more than 60,000 parents improve their children’s education last year alone. Yet, donation limits on the EITC and OSTC programs resulted in over 75,000 applicants in 2020 being turned away.
This increase is the largest increase in tax credit scholarships in the program’s history. However, still not enough to cover the waiting list of more than 75,000 students.
No Lifeline Scholarship Program
The Lifeline Scholarship Program (House Bill 2169) would offer an Educational Opportunity Account (EOA) to any student assigned to the bottom 15 percent of lowest-performing district schools. EOAs are publicly funded restricted-use accounts that families can use for educational expenses such as tuition, curriculum, and tutoring.
HB 2169 is a revenue-neutral bill that gives students a modest portion of per-student education funding. Close to two-thirds of per-student funding would remain with the school district, even though districts won’t pay to educate students that leave a district school on a Lifeline Scholarship. The Pennsylvania House passed HB 2169 on April 27, 2022. However, the legislation remains in the Senate Appropriations Committee and was left out of a budget deal.
EOAs are available in ten states—including Arizona, which just passed a universal program open to all students in the state. Legislators’ inaction on HB 2169 means Pennsylvania will remain behind the curve in providing educational opportunities for all students.
Protecting Charter School Students
The Public School Code also repeals Governor Wolf’s new charter school regulations that were aimed at stifling charter school growth and limiting school choice. The regulations, for example, included onerous application requirements and required charter schools to offer the same healthcare options as their district school, a costly mandate for small schools that do not have the bargaining power of their district counterparts.
The code also allows charter school students to take advantage of dual enrollment programs. While students in school districts already have access to dual enrollment programs, charter school students do not.
Improving Pennsylvania’s Economic Competitiveness and Ensuring Prosperity for All Pennsylvanians
Pennsylvania lost 287,401 residents to domestic outmigration since 2010—many to lower-tax states. As of May, Pennsylvania’s unemployment rate was the nation’s fourth-highest. With inflation exceeding 8 percent—much of it driven by government spending—economic concerns are at the top of voters’ minds.
A good budget creates the conditions that attract new jobs and gives employers flexibility to raise wages and combat supply chain issues.
Cutting Corporate Tax Rate
The budget deal includes a plan to reduce Pennsylvania’s corporate tax rate from 9.99 percent (second highest rate to New Jersey’s) to 4.99 percent over 10 years. This 4.99 percent would rank as the 35th highest top rate in 2021, though this 4.99 rate won’t occur until 2032.
The governor and Democratic and Republican lawmakers all agree on the need for a reduction in our uncompetitive corporate taxes. A reduction in tax rates would boost Pennsylvania’s economy, as the 2017 federal tax reform illustrated. The Tax Cuts and Jobs Act yielded numerous benefits—including lower taxes for all income groups, increased employee benefits, lower utility bills for families, increased charitable contributions, and more jobs.
However, lawmakers should be wary of the extended, 10-year phase down of the tax rate. The “ten-year phaseout” of Capital Stock and Franchise Tax took 17 years, after being delayed many times. This creates continued unpredictability for businesses.
Small Business Tax Relief
Unfortunately, the budget did not include legislation to allow small business to deduct their losses, a provision corporations already enjoy. Small businesses with incomes losses cannot carry losses forward and deduct them in future years’ tax filings. This legislation was part of a Small Business Reform package but stalled legislatively.
The budget does hold a couple of minor changes that benefit small businesses. This includes allowing small businesses to make like-kind exchanges without acquiring tax liability, and raising the limit on tax deductions for equipment. These reforms give small business owners further flexibility to expand.
Paying off UC debt
ARPA funds are used to pay off the Unemployment Compensation (UC) Trust Fund debt. Paying off the UC debt will protect employers from payroll tax hikes usually used to pay down this liability.