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Pennsylvania is Scene of Disappointing Budget Deals

2 min readBy: William Ahern

Pennsylvania has provided some depressing stories the past week. Three months after the end of the last fiscal year, the state has finally produced, not a budget, but a political agreement to produce a budget. As the Inquirer explains, Gov. Rendell’s proposed 50% income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hike failed, but higher taxes on smokers and expanded gambling will fund his promised $300 million increase in education spending. Why should smokers and gamblers foot the bill for something that presumably benefits everyone? Besides, Pennsylvania has not been exactly depriving its full-time education workers – nationwide they ranked 12th highest in average compensation.

Expansion of the sales tax to some previously exempted entertainments may boost tax revenue as well. Theater, dance, music and performing arts are apparently on the hook while movies and sports events will continue exempt. This will no doubt consume most of the next two weeks of legislative infighting.

In Philadelphia, the budget deal was even worse. Once again from the Inquirer, the city will hike its sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. to 8% (compared to 7% in Pittsburgh and 6% in the rest of the state). Then lawmakers showed just how completely they are blinding themselves to their long-term problems:

[The state permitted the city] to defer pension payments for the next two years. Those deferrals have to be paid back, with interest, beginning in 2013.

Another key pension provision extends the amortization period from 20 years to 30 years, in effect spreading the city’s pension burden over a longer period.

Unlike earlier versions of the bill, the legislation passed yesterday does not include any statewide pension changes or cap or cut back retirement benefits for current or future Philadelphia employees.

Labor leaders had campaigned vigorously against those provisions and persuaded the House to delete them from the bill.

Pennsylvania is already paying out $7 billion each year to retired government workers in pensions that were nowhere near close to adequately funded by employee contributions through the years. Once again from the Inquirer:

As critical as the legislation is to short-term needs, it does nothing to address the city’s systemic long-term problems, such as an underfunded pension system, fast-growing health-care costs, a large debt load, and an anemic tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .