How has the pandemic affected Pennsylvania’s fiscal situation? There are two ways to answer that question.
On the one hand, the economic downturn has depressed state-level revenues, with unemployment and underemployment likely contributing to reduced income tax debits. In 2020, the commonwealth received an estimated $68 million less in taxes than in 2019.
But over roughly the same year, the state has received over $17 billion in federal support, first from the March 2020 CARES Act ($7 billion); then from the December 2020 relief package ($3 billion); and then from the March 2021 American Rescue Plan, or ARP ($7 billion). Harrisburg has gained much more due to COVID ($17 billion) than it has lost ($0.07 billion).
How should the commonwealth use this massive surplus of federal dollars? The temptation might be to simply pay off our budget deficit. The IFO projects that over the next five years, Pennsylvania will run annual deficits of $2.0-2.7 billion. The pandemic did not create the deficit, though Gov. Wolf’s emergency spending did make it worse. But, in fact, Pennsylvania has long had a structural deficit—spending far exceeds revenue no matter how well the economy performs. Recent tax increases over the past decade have done little to close the gap.
Last year, lawmakers used a significant portion of federal COVID relief to cover structural overspending. That was a mistake, and now we must not repeat it. Instead of using ARP funds as a temporary budget patch, the Legislature should take this opportunity to tackle structural reforms and strengthen the economy.
WHAT LAWMAKERS SHOULD DO
- Tackle the structural deficit by passing HB71/SB286: Taxpayer Protection Act (TPA)
— TPA provides a long-term solution to the deficit problem by controlling spending overruns with a constitutional amendment. Instead of mandating cuts, it limits spending growth by tying it to income growth or inflation. The bill moved out of committee last week, and lawmakers should take this opportunity to pass common-sense budget control.
- Use federal funds to pay down unemployment compensation trust fund debt.
— During the 2008-09 recession, unemployment claims skyrocketed, and the commonwealth borrowed nearly $3 billion from the federal government. It only repaid this loan in January 2020. Weeks later, the pandemic hit, unemployment claims skyrocketed, and the commonwealth had to borrow from the federal fund again. Existing debt stands at $1.4 billion. Paying it off would directly decrease the deficit.
- Fund education scholarship accounts (ESAs) to get kids “back on track” after the school closures.
— Virtual learning has driven up expenses for Pennsylvania families (e.g., on technology and extra childcare). According to a December 2020 report by McKinsey and Company, children across the country have lost more than half a year of learning on average. “Back on Track” ESAs will allow parents to pay for the specific help that their children need to recover. All parents should have multiple options for educating their children, and ESAs (overwhelmingly supported by Pennsylvanians) provide this freedom of choice.
WHAT LAWMAKERS SHOULD NOT DO
- Cover ongoing spending.
— Year after year, the state’s two largest costs, by far, are public schools and Medicaid. Last year, lawmakers used $120 million in federal supplementals to cover expenditures in the Department of Human Services. If they do the same with ARP funds, they will perpetuate the deficit and make future tax hikes more likely. They also should not use ARP funds to cover recurring transportation expenditures. The Pennsylvania Turnpike’s mandate to fund PennDOT will end in July of next year. Using one-time federal funds to cover the shortfall will perpetuate the deficit and delay a needed reevaluation of the transportation budget.
- Increase ongoing spending.
— Using one-time funds to increase ongoing spending is a particularly bad idea. During the 2009-10 and 2010-11 fiscal years, the state government, under Democrat Ed Rendell, spent billions of federal stimulus dollars on public education, significantly increasing education spending from previous years. In 2011, Republicans took over both branches, and the stimulus ended. Republicans increased state-level spending on education by nearly half a billion dollars, but with the stimulus over, education spending fell from the previous two years (while remaining well above pre-stimulus levels). Gubernatorial candidate Tom Wolf, teachers’ unions, and even Washington Post op-ed writers accused Pennsylvania Republicans of “cutting” billions in education spending, and Gov. Corbett lost his reelection bid to Wolf in 2014. The lesson here is that once federal stimulus dollars are used to increase spending on existing programs, the state government will face intense political pressure to make those spending increases permanent.
 Tax Foundation, “State Aid in American Rescue Plan Act is 116 Times States’ Revenue Losses,” by Jared Walczak, March 3, 2021. taxfoundation.org/state-and-local-aid-american-rescue-plan/
 Commonwealth Foundation, “Pa. Has $1 Billion in CARES Aid Left, Where Should it Go,” by Elizabeth Stelle, August 14, 2020. commonwealthfoundation.org/policyblog/detail/pa-has-1-billion-in-cares-aid-left-where-should-it-go
 Tax Foundation, “Details and Analysis of State and Local Aid Under the Bipartisan State and Local Support and Small Business Protection Act of 2020,” by Jared Walczak, December 14, 2020. taxfoundation.org/bipartisan-state-and-local-support-and-small-business-protection-act-of-2020/
 Tax Foundation, “State Aid”
 Independent Fiscal Office, Economic and Budget Outlook, Fiscal Years 2020-21 to 2025-26, January 2021. ifo.state.pa.us/download.cfm?file=Resources/Documents/Five_Year_Outlook_2020.pdf
 Commonwealth Foundation, “The Taxpayer Protection Act,” by Tirzah Duren, January 21, 2021. commonwealthfoundation.org/policyblog/detail/the-taxpayer-protection-act
 TreasuryDirect, “Title XII Advance Activities Schedule,” updated regularly. treasurydirect.gov/govt/reports/tfmp/tfmp_advactivitiessched.htm?fbclid=IwAR0LKQCWEO4QdE3dawzEY4x1qFY2oVUlf92fhUyzv2luKMO57X2pAJS0Xzo
 McKinsey & Company, “COVID-19 and learning loss—disparities grow and students need help,” by Emma Dorn, Bryan Hancock, Jimmy Sarakatsannis, and Ellen Viruleg, December 8, 2020. mckinsey.com/industries/public-and-social-sector/our-insights/covid-19-and-learning-loss-disparities-grow-and-students-need-help
 Commonwealth Foundation, “Understanding Back on Track ESAs,” by Colleen Hroncich, June 12, 2020. commonwealthfoundation.org/policyblog/detail/understanding-back-on-track-esas
 Commonwealth Foundation, “ESAs: The Future of Education,” by Colleen Hroncich, July 19, 2018. commonwealthfoundation.org/policyblog/detail/esas-the-future-of-education
 Commonwealth of Pennsylvania, The Governor, Governor Tom Wolf, Executive Budget, 2021-22. https://www.budget.pa.gov/PublicationsAndReports/CommonwealthBudget/Documents/2021-2022%20Executive%20Budget%20Book.Web%20Version.UPDATED.030421.pdf