Features of Pennsylvania’s Tentative Budget Agreement

In Pennsylvania, now in its fifth month without a budget, legislators and the Governor appear to have an agreement in principle to bring an end the impasse, although details are still emerging and assurances somewhat lacking. With the understanding that, in this environment, nothing is certain until Governor Wolf’s signature is affixed to a bill, here’s what we know thus far:

• State expenditures would come in at $30.75 billion, an increase of about 6 percent from last year’s approved budget of $29 billion. For reference, in Fiscal Year 2015, general fund revenues were $30.18 billion, and the Republican-controlled legislature adopted a (quickly vetoed) $30.2 billion budget earlier this year. That plan did not include any tax increases, though it did draw on one-time moneys and projected receipts from liquor privatization. The expected budget deal relies primarily on a sales tax increase for additional revenue.
• Under the tentative agreement, the state sales tax would increase from 6.0 to 7.25 percent. In Pennsylvania, localities can impose local sales taxes of up to two percent, which would mean a top combined rate of 9.25 percent. Barring a local policy change, Philadelphia would impose this 9.25 percent rate, one of the highest for any major city in the country. All told, the sales tax increase is projected to raise about $2 billion in new revenue.
• On property taxes, the proposal gives with one hand and takes with the other. Some portion of revenue from a sizable sales tax increase is intended to facilitate local property tax reductions, though, at the same time, about $500 million in gaming revenue, currently dedicated to property tax relief, would be diverted to meet public school employee pension obligations. The precise amount of property tax relief offered is unclear, and depending on how the relief is structured, there is a good chance that less of it may flow to taxpayers than anticipated. At present, in fact, agreement does not even exist on how the revenue would be distributed among school districts, which could well prove a sticking point in concluding the negotiations.
• Public education would be the largest beneficiary of new funding, though details are murky. All sides agree that public schools will see a six percent increase ($350 million) in funding for instruction and operations, though how much of this will go to K-12 education, and whether any of it will be earmarked for pre-K expansion, appear to be in doubt. This is actually slightly lower than the additional amount appropriated to public education in the vetoed Republican budget.
• The Governor’s severance tax proposal has been shelved for the year, as have proposals to hike the individual income tax or use a portion of any new revenues to pay down rate reductions for Pennsylvania’s high 9.99 percent corporate income tax. Thus far, there is no indication that the deal would imperil the scheduled phase-out of the state’s antiquated capital stock tax. A cigarette tax increase, or a new bank franchise tax, could still be on the table.
• In a compromise, new government employees will be enrolled in a hybrid pension plan which includes a diminished defined benefit component along with a defined contribution component with a 2 percent contribution. Existing employees will retain their current defined benefit plans. Liquor privatization will not be part of the budget deal, though there could be a management reshuffle for the state’s Liquor Control Board.
• Preliminarily, the plan appears to involve a tax increase of about $500 million even if all revenues from the sales tax increase are poured into local property tax relief. If any of that relief is offset at the local level, or a portion of new sales tax revenues is retained rather than shifted, the taxpayer cost could be proportionally higher.

Further details and analysis to follow as information is available.