Spend First, Revenue Later Budget Stalls

Member Group : PA Manufacturers' Assn.

The General Assembly and Governor Tom Wolf are still working towards a budget agreement, which, as of this writing, will likely be finalized in the weeks following the June 30 deadline. While no one facing re-election wants to repeat last year’s bruising nine-month budget battle, the kind words exchanged about this year’s budget talks have failed to produce a balanced spending plan for 2016-2017.

Disagreements over revenue – how much is needed and how to raise it – interrupted the process just before the July 4 weekend, but now must be resolved.

The recent posturing, as PMA Chairman Fred Anton pointed out, on a recent edition of Pennsylvania Newsmakers has a lot to do with pre-election anxiety. "All 203 House seats are up and half the Senate seats," Anton said. "They don’t want this dragging on." Anton added that members of both parties have their national conventions on their minds as well.

In their election-year haste to get out of Harrisburg, however, lawmakers could leave a few messes behind. Most stem from the fact that the spending plan before the governor marks a sharp reversal from five straight years of spending and tax restraint.

If signed by the governor, the bill will require $31.6 billion in spending, a more than $1.6 billion increase over the 2015-16 fiscal year.

All the while, the budget doesn’t address the cost-drivers that keep loading up our public debt: the self-expansive increases in welfare, corrections, and public pension liabilities. As noted in our last Bulletin (Study: Pennsylvania On Wrong End of Debt, Solvency Ranking), a recent report from the Mercatus Center at George Mason University shows that Pennsylvania’s debt burden ranking among states is low and sinking.

One revenue generating plan favored by three caucuses and the governor to pay for the spending increase includes restoring a user tax on natural gas, a move adamantly opposed by the PMA and other business groups. PMA’s David N. Taylor and Carl A. Marrara recently sent this communication to all members of the Pennsylvania General Assembly explaining their opposition. (Read more HERE!)

"Natural gas is a tremendously affordable energy supply," said PMA President David N. Taylor. "It’s completely counterintuitive now to make it costlier with many businesses and households still struggling."

For their part, the House Republican revenue plan contains no natural gas tax, and some in the caucus have gone so far as to criticize the entire spending plan.

"Gov. Tom Wolf continues to believe that the way Pennsylvania can achieve a ‘promising future’ is by taking more money from people’s paychecks," said Rep. Jim Christiana (R-Beaver). "With some bipartisan help this year, he will succeed in jacking up government spending by a record $5.3 billion just so he can score some quick political brownie points. This reckless spending plan will come back to haunt us all when Wolf uses it to manufacture a crisis and resurrect his massive tax hikes. The fiscal train wreck has not been averted…simply put off for another year."

Other Republicans including Rep. Steve Bloom (R-Cumberland) and the entire York County Republican delegation likewise opposed the spending plan. In a recent media interview, Rep. Bloom said, "I know my taxpayers are already extended as far as they can go – they can’t afford another tax."

"Last year the General Assembly insisted on approving revenues first and fiscal restraint won the day," said PMA President David N. Taylor. "The current spending-first, revenue-later process proves that government must always match spending to revenues, not the other way around."

Meanwhile, the House and Senate still have to reconcile separate plans to reduce costs in our public pensions systems, SERS for state workers, and PSERS for public school employees. But even their best effort will amount to as Anton said a "drop in the bucket." The unfunded liability in SERS and PSERS is approaching $65 billion.

"It’s a first step, " Anton said referring to the progress in the General Assembly on pensions, "but the trouble in Harrisburg is that first steps tend to be last steps." He added that to substantially cut costs in the systems legislation must target the defined benefit plans of current employees. A now heavily Democratic state Supreme Court, however, would almost certainly shoot down legislation doing that.
Budget Summary:

The budget would increase spending to just over $31.5 billion. That is an increase of $1.6 billion, or 5 percent, over last year’s budget. The full spending authorization marks an increase of $1.7 billion, or almost 6 percent, including $95 million in capital project funding moved into an off-budget program and approximately $100 million in supplemental spending approved for the just-finished fiscal year.

Key Items:

• Increases spending in the Department of Human Services by $537.3 million, or nearly 5 percent, to nearly $12 billion.

• Increases spending on pension obligations by about $450 million, or 5 percent, to $2.6 billion.

• Increases aid for public school operations and instruction by $200 million, an increase of 3 percent to $6.1 billion.

• Increases spending in the Department of Corrections by $153 million, or 7 percent, to nearly $2.4 billion.

• Increases aid to higher education, including state system universities, state-related universities, student grants and community colleges, by $39 million, or 2.5 percent, to above $1.6 billion
As the revenue debate continues, we will provide complete coverage and will be tracking the votes of those legislators that support industry-squandering taxes to cover unnecessary spending increases.

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On a brighter note, the Senate followed the House in approving a resolution urging federal officials to support the steel industry by strengthening and enforcing federal trade laws. The resolutions in both chambers had strong bipartisan support. In the Senate the effort was led Senators Guy Reschenthaler (R-Allegheny) and Jim Brewster (D-Allegheny); in the House by Reps. Eli Evankovich (R-Allegheny) and Frank Burns (D-Cambria).

The steel industry supports more than one million engine good-paying manufacturing jobs in America and approximately 136,000 jobs in Pennsylvania, according to the American Iron and Steel Institute.

Finally, the Senate Finance Committee approved a measure that would ultimately eliminate the cap on the amount of losses corporations can write-off against income in future years. Sponsor of the bill, Senator Bob Mensch (R-Berks), said he introduced it in anticipation of a Supreme Court decision, Nextel Commc’ns of the Mid-Atlantic, Inc. v. Commonwealth, that could result in the elimination or alteration of the cap.

The case is the state’s appeal of last November’s Commonwealth Court ruling that the NOL cap violates the state Constitution as it’s applied unevenly and unfairly.

In 2007, Nextel carried over $150 million in losses from the prior tax year. But bumping up against the NOL cap of the greater of $3 million or 12.5 percent of taxable income (it’s now $5 million or 30 percent, whichever is higher), the telecom company could write off only $5.6 million of its $45 million in income that year. Thousands of business with losses that fit under the cap were able to cover all their losses.

Commonwealth Court ruled that the cap violates the uniformity clause that provides that "all taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax …"
In an analysis of the bill, Mensch wrote that if the Supreme Court eliminated the NOL cap altogether it would create a $2.3 billion revenue shortfall in the General Fund.

Mensch said that his legislation provides a solution that remedies the constitutional shortcomings of the current NOL relief provisions, and represents an opportunity to make progress toward the ultimate elimination of the NOL cap.