Faulty Assumptions

Member Group : Lincoln Institute

There is a lot of truth to the old joke about assuming. You know the one: "What happens when you assume? You make an A– out of U and ME." That saying applies perfectly to the state budget. Budget makers make assumptions that frequently don’t materialize turning them into the aforesaid mentioned four legged creatures.

While legislators spend weeks sitting in hearings learning how various state agencies plan on spending your tax dollars the second half of the budgeting equation gets scant attention. The second half is the revenue component. Not which taxes will be levied and at what rate, but rather the assumptions that are made about how much revenue those taxes will generate.

Unfortunately, the current fiscal year provides us with many examples. This year’s budget assumed revenue from selling 24-hour liquor licenses to casinos, but not a single casino bought one. The current budget placed a 40% tax on vape supplies. Unable to pay the tax, vape shops closed and revenue actually declined. Revenue was budgeted from on-line gaming, but the legislature never got around to passing legislation to permit that activity.

According to the Pennsylvania Department of Revenue, the state collected $1.9 billion in February. That was $32.9 million less than expected. So far for the fiscal year, revenue collections are $450 million below expectations and the state is expected to end the fiscal year in June with revenue as much as $700 million below assumptions.

Cue the braying mule.

Governor Tom Wolf and many lawmakers have bought into the myth that there is a $1.4 billion "structural" budget deficit. What that means is nobody is willing to make the tough decisions to cut spending to match actual revenue. So the "structural" deficit is the difference between what we can actually afford and what they want to spend.

Add in the deficit from the current fiscal year, and the nearly $1 billion in additional spending the governor has proposed, and the state faces a $3 billion budget "challenge." To fill that gap the Wolf Administration is proposing a number of tax hikes, notably their annual demand for an extraction tax on Marcellus shale gas.

They also make a wide range of faulty revenue assumptions.

For example, the governor’s budget assumes additional revenue from the Personal Income Tax will be generated by raising the state’s minimum wage. The theory is if workers are paid the higher wage then the state will realize more revenue from the Personal Income Tax.

That assumption makes the mistake that raising the minimum wage increases economic activity. It does just the opposite. Government mandated wage hikes result in fewer job opportunities for those earning the minimum wage because businesses cut jobs to afford the higher pay rate.

The move by many fast food operations to replace minimum wage workers with self-service kiosks is an example of the overhead reducing innovations companies will use to comply with higher minimum wage laws, but still remain competitive or even survive as a business. The result is fewer jobs for low skilled workers, hence fewer workers paying personal income taxes.
Thus budgeting additional revenue by hiking the minimum wage is a faulty assumption.

The governor’s budget also assumes a $63 million cash infusion by forcing townships that do not have a municipal police force to pay for state police protection. He plans to levy a $25.00 per person fee on townships without a local police force to help fund the Pennsylvania State Police. Assuming such a bill actually passes the legislature, the end result is not a cost savings but rather a tax shift to a different group of taxpayers.

And, the governor who ran falsely accusing his predecessor of cutting funding to public education is now proposing his own cut to school districts. The Wolf Administration wants to reduce state subsidies for transportation on the premise that gasoline prices have dropped. The end result would be school districts having to make up the difference through budget cuts, or more likely property tax hikes.

At the end of the day, the governor’s budget is rife with faulty revenue assumptions, tax shifts, and spending increases again ignoring the reality that state government already spends more than we can afford. To make matters worse it does nothing to address major cost drivers like the massive unfunded liability in our state employee pension funds.

And the people who will pay for all of these faulty assumptions are U and ME.

(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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