Pennsylvania Governor Proposes Spending Boost, Broader Sales Tax, Heavier Business Taxes

On Tuesday, Pennsylvania Governor Ed Rendell (D) unveiled a $66.4 billion budget, the general fund portion of which is $29 billion, a 4.1 percent increase over the current budget. The budget includes the following tax elements:

• Broadening the sales tax and lowering the rate from 6% to 4%. Rendell proposes expanding the state sales tax to 74 currently exempted goods and services, and lowering the combined rate by two percentage points. Clothing, groceries, tuition, and medical services will remain exempt, but most other goods and services will be brought into the sales tax base. Unfortunately, the proposal would also tax many business inputs like advertising and truck transportation, which will result in double taxation for some final goods and services.
  The size of the current exemptions are large enough that even the lowering of the rate will result in additional revenue. This change would raise $531 million in FY 2011 and nearly $900 million in FY 2012. Republicans in the Legislature declared the proposal “dead on arrival,” either because it’s a net revenue increase or because the current exemptions are justified.
• Eliminate sales tax vendor compensation. Currently, those required by law to collect and remit sales taxes for the state are permitted to keep part of the gross for their administrative costs. This would be eliminated, a change estimated to raise $76 million in FY 2011.
• Reduce the corporate income tax rate from 9.99% to 8.99%, eliminate the net operating loss cap, but impose combined reporting and single sales factor. Pennsylvania has the second highest corporate income tax statutory rate in the United States, and its corporate tax system is ranked 37th best out of the 50 states in our most recent State Business Tax Climate Index. The modest reduction in the rate and uncapping net operating losses are more than compensated by the imposition of combined reporting and single sales factor, both of which are designed to increase business tax burdens. The changes would raise $66 million in FY 2011 and $167 million thereafter.
• A new severance tax on natural gas extraction, which would raise $161 million in FY 2011. Severance taxes are usually passed on to consumers in an opaque way, which makes them a popular go-to tax for states with natural resources.
• Increasing unemployment benefits that would enable to state to receive a one-time $270 million federal stimulus grant. The change would increase the state’s costs by $60 million per year indefinitely.
• Exploiting the Medicaid federal matching fund system to generate additional revenues while shifting Medicaid costs to the federal government.
• The budget still has a $525 million deficit.

Pennsylvania is one of the states that last year used one-time stimulus money to backfill its budget, and did not take meaningful steps to prioritize public expenditures. Consequently, the state now faces a built-in multi-billion dollar annual budget gap from those disappearing federal revenues. Rendell proposes using tax increases to bridge that gap, but even those aren’t enough to completely close it or address future budgets.

One final note about the Pennsylvania budget document itself. It should win an award. It is extremely user-friendly, has all the information about every line item in an organized format, and breaks out revenue impacts of a number of proposed and possible changes to each tax. Other states should look to Pennsylvania for ideas on budget document layout, presentation, and information resources.

More on Pennsylvania here.