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

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 tax 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 taxes 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 tax; 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 base to include services, clothing, and even groceries. Or they could reduce their 9.99% corporate tax rate.