Budget: Starting from Scratch

Member Group : PA Manufacturers' Assn.

Concluding that Governor Tom Wolf’s budget plan is "not based in reality," Senate Majority Leader Jake Corman (R-Centre) said the General Assembly is "going to have to start from scratch" in developing a General Fund Budget for Fiscal Year 2015-2016.

House Speaker Mike Turzai (R-Allegheny) questioned how many votes the governor could muster for his plan. The Speaker’s answer: none in the Republican caucus and possibly not even a majority in the other.

Their opinions matter. The Republicans hold strong majorities in the House (119-84) and Senate (30-19). Appropriations committees in both chambers will hold a month’s worth of budget hearings prior to negotiations, which will intensify with the approach of the end of the fiscal year on June 30.

Under the Wolf plan, spending would jump an estimated $5 billion the first year alone. Taxes would increase $2.5 billion. Following this trend, the General Fund budget would balloon to $95 billion in eight years from $29 billion today.

Some particulars: The personal income tax (PIT) would jump 21 percent from 3.07 percent to 3.77 percent. This affects the average taxpayer, of course, but also tens of thousands of pass-through companies that pay their business taxes at the PIT rate. More than 80 percent of businesses in the commonwealth are small businesses. According to a National Federation of Independent Business press release, "A 21-percent increase in the Personal Income Tax hits small-business families right in their pocketbooks. Taxing professional services like accounting, legal services and payroll services specifically hurts small businesses that often are too small to have people in-house do those functions."

The state sales tax would increase over 10 percent from 6.0 percent to 6.6 percent, and sweep in over 300 additional categories currently not taxed. These categories would include every day necessities such as childcare, diapers, and over-the-counter medications just to name a few.

It’s a plan the governor says will boost the middle class yet, House Appropriations Chairman Bill Adolph (R-Delaware) estimated that a family earning $52,000 a year would pay between a thousand to fourteen hundred dollars more a year in taxes. Moreover, property taxes slated to decrease under the guise of a trade-off for the wide-sweeping tax increases will inevitably rise again because the root cause of the rising costs, the single most important public policy issue facing our commonwealth, wasn’t even mentioned by Governor Wolf – Pennsylvania’s pension crisis.

"Pennsylvania’s public pension crisis is the most important issue facing the commonwealth, yet Governor Wolf failed to even mention it, much less propose structural reforms," said PMA Executive Director David N. Taylor. "How can he bemoan the downgrade to the state’s credit rating when he won’t admit what caused it?"

The unfunded liability of two immense public pension systems SERS (state employees) and PSERS (public school teachers) grows by $10 million a day, according to the Public Employee Retirement Commission. The overall debt now tops $50 billion and keeping up with payments requires more than 60 cents of every new dollar of state revenue. What this means to public spending, and ultimately to the taxpayer, is that next fiscal year the two systems will take a $2.4 billion chunk out of the General Fund budget. By 2016, that number is expected to reach $4 billion. Nearly all of it will go to cover unfunded liability, according to the Independent Fiscal Office. It is why Republican legislative leaders, business leaders and anyone else concerned about the state’s fiscal health call the pension crisis the number one, absolute top priority in this year’s budget process.

The governor plans to borrow $3 billion to reduce the unfunded liability in PSERS. There, he estimates a savings of $10 billion. Even if accurate, it still leaves $40 billion in unfunded liability. The governor also wants to eliminate what he calls excessive management fees for the plans. State Representative Glen Grell (R-Cumberland) predicted that when SERS and PSERS appear before the Appropriations Committees during budget hearings, they will be able to defend those fees as very competitive.

"I have looked into that. The savings just aren’t there," Grell said.

On taxes, we must remember that it is about the overall cost of creating and maintaining a job that is most important to business competitiveness. The budget, as proposed by Governor Tom Wolf, and the rhetoric of the current administration leaves much to be desired.

While "reduction of Corporate Net Income tax" sounds promising and is absolutely necessary, this plan is a total nonstarter as proposed. Instituting mandatory unitary combined reporting would undermine competitiveness, not necessarily in the amount of increased taxes, but in the loss of predictability in tax compliance and from copious amounts of litigation and accounting costs resulting from inherent commonwealth overreach.

"It’ll add great complexity to the system," PMA’s Taylor said. "It will cause businesses to have to pay a lot more in legal fees and accounting fees; but there’s going to be no windfall. There is no pot of leprechaun gold waiting to be found and claimed."

If mandatory unitary combined reporting were to be adopted, in order for a business to appeal, they essentially would have to pay the demanded amount by the Department of Revenue to even begin the appeal process; essentially making this a ransom payment. This will put Pennsylvania job creators out of business. Recent "add back" provisions passed two budget cycles ago address any illegitimate financial transactions that occur to simply shield revenue.

Also hidden in the proposal is the drastic reduction of Net Operating Loss (NOL); a standard reduction of business tax liability. Pennsylvania is only one of two states that does not have 100 percent NOL which already puts us at a competitive disadvantage. Rolling back the progress we have made on this issue over the past two years to a measly $3 million or 12.5 percent of losses sends a clear signal to job creators that Pennsylvania is not open for business and does not want your investment.

Another unsupported theme is in his "green energy" plan for job creation. The governor proposes increasing taxes on perhaps the greatest single job creating bonanza ever in this state—drilling for natural gas in the Marcellus Shale. All the while Wolf is proposing more than $100 million for a sector that has at best sputtered in creating jobs: alternative energy projects. "We have been neglecting using the green economy to create jobs," he said in his address. "Not long ago, we were one of the top wind and solar-producing states in the country, using the green economy to create jobs. But we took our eye off the ball and fell behind."

Given past investment that is north of $530 million, there have been 8,703 jobs, and 44,958 megawatts of power created; that’s more than $60,000 per job and $11,700 per megawatt hour. Look for more on this topic in an upcoming PMA Bulletin and PMA Perspective episode.

Meanwhile, the private sector kept focus on producing natural gas. In 2014 Pennsylvania was among the top two states in the nation for natural gas production with four trillion cubic feet of natural gas produced, a 30 percent increase over 2013’s record production numbers.

"More growth means more jobs and more revenue; higher taxes mean driving development away from Pennsylvania, costing jobs and the loss of revenue which can pay for education, transportation, healthcare, and other state programs," said API-PA Executive Director, Stephanie Catarino Wissman.

Finally, the plan includes over $4 billion in new borrowing, because to spend the kind of money being proposed, even with this being the highest proposed tax increase in Pennsylvania’s history, there still isn’t enough money to fund all that Governor Wolf wants.

"Spending that money today will only increase taxes in the future," Turzai said.

At the recent National Governors Association meeting in Washington, DC, Governor Wolf said, "I think the biggest problem in Pennsylvania is low self-esteem." Pennsylvania’s Senate President Pro-Tempore Joe Scarnati said it best, "If Governor Wolf thinks Pennsylvanian’s have low self esteem now, just wait until they get this tax bill."

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