Pennsylvania Budget Relies on Patchwork of Revenue Sources

June 30, 2014

Today marks the end of the fiscal year in the Keystone State, and a state budget for 2014-2015 is poised for final passage in the Pennsylvania General Assembly in just a few hours. The proposed $29.1 billion deal increases spending in the general fund by about 2 percent from this year to next, and lawmakers have looked under nearly every couch cushion for extra funds.

The budget cobbles together the revenue from an unusual array of sources, including $95 million from leasing state property for hydraulic fracturing, $75 million from granting two new casino licenses, and $40 million from changing the state’s interpretation of a tax paid by banks. Perhaps the most amusing aspect of the budget is its reliance on “stepped-up revenue collection efforts” by the Department of Revenue – expected to bring in an extra $40 million. Other provisions include raiding loan funds directed toward small businesses, capital investment, and the purchase of new facilities for volunteer fire and ambulance crews.      

This type of gimmicking and arbitrary transferring of funds is no way to balance a budget. Pennsylvania, which currently ranks 24th in our State Business Tax Climate Index, continues to avoid making necessary reforms to its revenue structure. The state has the highest corporate tax rate in its region, and the second highest in the nation – harming its potential for economic growth. Lawmakers also took a step back from sound tax policy last year by extending the phase-out of the state’s particularly burdensome tax on capital stock, which damages investment incentives and hampers business activity. 

Another important aspect of these negotiations is that Governor Tom Corbett (R) is hoping to get pension reform rolled into the budget. Gov. Corbett, who pledged not to raise any taxes on Pennsylvanians while in office, originally sought to bring in additional revenue by privatizing the state’s liquor system – a proposal which did not gin up enough support in the Senate.  Although he and others were able to silence the troubling whispers of a new tax on cigars and smokeless tobacco as well as a severance tax on natural gas drilling, Corbett might not be able to escape suspicion as the budget deadline looms. 

In a press conference on Sunday night, the Governor offered to allow a $2-per-pack increase to the cigarette tax in just Philadelphia in exchange for Democratic support for reform to the state’s pension system. The city needs authorization from the state to impose the additional tax, which they say will bring in $45 million the first year, and $85 million in following years for the district’s school system. 

This political trade would mean Corbett is indeed threatening to break his promise to the Pennsylvania taxpayer.  The Governor has attempted to market this deal as one that ultimately provides tax relief to Philly residents, because reform could ostensibly avoid higher property taxes to cover swelling pension costs. But this weak rationalization is far from convincing, and also brings forth the mound of political, practical, and economic concerns of funding education through tobacco taxes.

More on Pennsylvania here.

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