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Pennsylvania’s Stop-Gap Budget Buys Time to Search for Even Worse Tax Proposal

2 min readBy: Mark Robyn

Reuters reports that Pennsylvania Governor Ed Rendell has signed an $11 billion “stop-gap” budget for fiscal year 2010. Rendell used his line item veto power to strip down the $27 billion Senate budget bill that he and Democrat-controlled House opposed. The temporary, bare-bones budget will fund essential services like police and fire protection, critical health care programs, and prisons. The state will also continue paying its employees, who have not been receiving their full wages in recent days.

Pennsylvania’s budget impasse is entering its second month, and it may continue for a while. Republicans have called for spending cuts and opposed 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. hikes, while Democrats want to increase taxes, saying too much spending has been cut already.

The Governor’s income tax increase seems to be off the table, and for good reason. As my colleague Joe Henchman points out “Pennsylvania’s income tax isn’t too bad right now, which is pretty good because its business taxes and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es are awful. It’d be a shame if they got rid of the one bright spot about their tax system.”

Now lawmakers are looking for new revenue sources:

In recent days, Democratic legislators have abandoned Rendell’s plan to temporarily raise the state income tax, and are now considering a range of other revenue-raising measures. The list includes: a municipal 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. ; the legalization of table gaming at Pennsylvania’s slots parlors, and the taxation of natural gas extracted from the state’s massive Marcellus Shale field.

Bob Caton, a spokesman for Democratic House Speaker Keith McCall, said Democrats have been spurred by public opposition to the broad-based income-tax hike, and are looking instead for “temporary and narrowly based revenue sources.”

At least they’re being honest about trying to find “temporary and narrowly based” (read: terrible) revenue sources to fund general government services that benefit everyone. Pennsylvania has abandoned a bad proposal in hopes of finding an even worse proposal. If tax increases are absolutely necessary, they should look for broad based options that reduce distortions. Instead of increasing the sales tax rate, they could broaden the narrow sales 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. to include services, clothing, and even groceries. Or they could reduce their 9.99% corporate tax rate.