This piece originally appeared in the Philadelphia Inquirer, December 28, 2016.
Many of us who write about budget politics have a keyboard shortcut to enter “Pennsylvanian Budget Crisis” into a document. Year after year, we write in December about the upcoming crisis and again in July (or sometimes far later) about how the crisis has been temporarily averted.
It is crisis time again. But perhaps this is the year we can change the script. There are new ways to do something that has eluded us in the past – solve the crisis on a long-term basis without imposing harsher new taxes on working people and the middle class.
Before coming to our long-term solution to the crisis, first a word about its dimension and cause.
The Independent Fiscal Office has projected that the deficit for the current fiscal year, ending June 30, will be $500 million while the deficit for the next fiscal year will be $1.7 billion. Those numbers do not include the cost of higher caseloads for medical assistance and long-term care than were projected last in July. Including those costs, and other likely shortfalls in revenue, the total deficit to be closed by June is roughly $3 billion.
Higher spending is not the cause of our budget crises. Measured by the share of the state GDP that flows through state government, general fund spending has been declining. From 1994 to 2011, under both Democratic and Republican governors, the spending averaged 4.7 percent of GDP. During the Corbett years that fell to 4.3 percent as spending on education and human services were sharply cut. And while the state has been able to restore some of those cuts under Gov. Wolf, overall spending remains at the same level as in the Corbett years.
So why do we face deficits year after year? There are long-term and short-term answers.
The long-term answer is that we have cut corporate taxes. They once accounted for more than 30 percent of general fund revenues. Today they are at 17 percent. If corporate taxes brought in just 22.5 percent of revenues, as they did in 2002-03, overall revenues would be higher by $2.3 billion. The deficit would be gone, with revenue to spare for us to invest in communities across the state.
The short-term answer is that, year after year, the General Assembly balances the general fund budget with short-term fixes: borrowing money from other funds (which needs to be repaid); shifting expenditures forward a year; selling licenses to new outlets for gaming and liquor; and instituting tax amnesties that mostly benefit the wealthy and create incentives to not pay taxes.
The General Assembly has been unwilling to raise taxes high enough to bring in enough revenue to solve the deficit problem now and in the future, while also making it possible to invest more in education, human services, and environmental protection, all of which are shortchanged in current budgets. Legislators on both sides of the aisle (rightly) don’t want to increase personal income taxes that, given the flat income tax mandated by the uniformity clause of our constitution, fall heavily on working people and the middle class.
The Pennsylvania Budget and Policy Center has proposed a way around this. We suggest separating our personal income tax and taxing different classes of income at different rates. We would keep the tax on wages and interest close to its current rate (while increasing tax forgiveness for those with low incomes). But we would raise the tax rate on dividends, capital gains, business profits, royalties, and estates – which we call “income from wealth” – to 4.5 percent. Over two-thirds of the revenue raised by this tax would fall on the top 5 percent while 82 percent would be paid by families with incomes above $95,000.
Combined with some other measures – expanding the sales tax base to services that are mostly purchased by those with higher incomes while offering a sales tax credit for those with lower incomes; a modest severance tax on natural gas drilling; corporate tax reform that would lower rates while taxing the 71 percent of mostly out of state corporations that pay no corporate income tax now; and raising the minimum wage, which would increase revenues while reducing expenditures – our proposal would generate $2.5 billion, going far to overcome the two-year deficit. And because income for families in the top 1 percent are growing rapidly (while that of other families stagnate) and natural gas prices will rise again, our proposal would generate growing revenues long into the future.
Fixing our budget problems long term would enable those of us who write about state politics to eliminate the “Pennsylvania Budget Crisis” keyboard shortcut. Instead, we can write about a budget that invests in the future of Pennsylvania families and communities.