Back to the Future: Current PA budget crisis brings back memories of 1991

Eighteen years have passed since Pennsylvania last faced a major budget crisis, and the bad decisions made by Governor Casey and legislative leaders continue to haunt the commonwealth. The state’s business climate has yet to recover from the $2.85 billion in massive new taxes that were enacted in 1991. Pennsylvania is again confronted by a major budget deficit. The question is, will our leaders learn from past mistakes, or will they repeat them?

Legislative leaders were caught off guard by the 1991 budget crisis. Just months earlier Governor Robert P. Casey, who was seeking re-election, disputed claims by then state Auditor General Barbara Hafer (his opponent in the gubernatorial race) that a crisis loomed and claimed all was well on the fiscal front. It was not. Very soon after Casey took his second oath of office the financial house of cards collapsed and a budget crisis emerged.

Governor Casey decided the way to deal with the budget shortfall was to tax our way out of it. Bearing the brunt of the burden would be the business community, upon which he proposed imposing a wide range of substantial tax hikes. Although Republicans controlled the state Senate, they decided to be "responsible leaders" and went along with the governor’s plan to tax Pennsylvania back into prosperity.

It didn’t work out that way. Although the tax hikes closed the budget gap, they dramatically altered the state’s business climate, making the Keystone state one of the most expensive in the nation in which to operate a business. At the time, no less an authority than U.S. News & World Report labeled the tax hikes the "worse economic decision of the year."

Even more appalling than the outcome was the process by which state government arrived at the decision to raise taxes. Little or no consideration was given to alternatives, such as cutting spending. Mellissa Hart, who went on to serve in Congress, was a newly minted state Senator at the time. During a recent interview on Lincoln Radio Journal, Hart recalled the prevailing attitude at that time: "What I saw when I got there (the Senate) was a constant request for money. Not let’s find a way to bring the budget in line with what it should be."

The new taxes levied on business to sate the appetites of the spending interests had a dramatic and long lasting effect on the state’s business climate. Since 1991, Pennsylvania has wallowed at the bottom of every credible survey or analysis of state economic competitiveness. The commonwealth has hemorrhaged hundreds of thousands of jobs, particularly in the manufacturing sector. And the opportunity cost of those who might otherwise have located their business here but did not is incalculable.

During the intervening years every gubernatorial administration has sought to remedy the deleterious impact of the 1991 tax hikes by offering incentives to businesses to locate or expand in Pennsylvania. Almost uniformly, those efforts have either not succeeded, or at the very least cost more in tax dollars than in revenue they have generated. Thus, both the 1991 effort and subsequent policies based on the premise the state can tax and spend its way into prosperity have failed.

Now, in 2009, the Commonwealth of Pennsylvania faces a budget shortfall which could meet or exceed that faced back in 1991. And, once again, we have a Governor who has never met a tax he didn’t like. In fact, Governor Rendell has proposed multiple tax hikes over the years, most of which have died in the legislature. Therefore, it is reasonable to assume that Rendell will propose at least some tax increases as he grapples with the current budget deficit.

The only question left to resolve is will the legislature go along? Will there be a new round of hefty tax increases on businesses, as well as perhaps an increase in personal income taxes? Or, will the current leadership in the Senate, if not the House, remember the lessons and legacy from 1991 and work, as Senator Hart put it, to "bring the budget in line with what it should be" – which is to say balanced by spending within our means rather than raising taxes?

How the Senate leaders and legislators of both parties answer those questions will determine whether Pennsylvania can finally begin a true climb back to competitiveness, or whether we will be consigned to the basement of economic opportunity for decades to come.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal. His e-mail address is [email protected].)

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