PA Budget in Fair Shape as Midyear Approaches, but Business Tax Cuts Loom

Sharon Ward |

The Pennsylvania General Fund tax and other revenue collections are slightly ahead of official estimates through November. This is good news going into budget planning season for 2013-14. Unlike in many of the past few years, 2012-13 funding is less likely to be slashed to cover a midyear shortfall.

In fact, at the Commonwealth’s midyear budget briefing last week, Budget Secretary Charles Zogby said revenues are projected to exceed estimates by $85 million by the end of the fiscal year, creating an ending General Fund balance of $478 million. This funding could be used to restore some of the damaging cuts to education, health care, and human services over the past two years, though the Corbett administration has been resistant to using a General Fund balance to restore cuts.

Meanwhile, policymakers have dug a deeper hole by allowing hundreds of millions in new business tax cuts to take effect over the past two years. These special tax breaks are a major contributing factor to the gap between revenue and expenditures highlighted by Budget Secretary Zogby. The Independent Fiscal Office is also projecting slow revenue growth next year thanks in part to state business tax cuts, including the phase-out of the capital stock and franchise tax. This threatens the state’s ability to invest in the fundamentals that ensure long-term growth, while cuts already made to public schools, county human services, and colleges have cost jobs, hurt local economies and further eroded tax revenue.

For now, 2012-13 revenue collections are on track—coming in $59 million, or 0.6%, ahead of projections.

Corporate and personal income tax collections are running ahead of estimate (by 18.3% and 0.5%, respectively), while sales tax receipts are lagging behind revenue targets (by 2.9%). Corporate taxes, in particular, could see a downturn in early 2013, as the capital stock and franchise tax rate is cut for the second year in a row.

Compared to the previous year, tax collections are $380 million, or 4.1%, higher—indicative of the slow but steady national economic recovery.

If revenue estimates are reasonably accurate for the second half of 2012-13 (and they have been so far), we will see corporate tax collections decline from previous years, due largely to the capital stock and franchise tax cuts. This continues despite rising health care costs and previously underfunded pension obligations.

As corporate taxes decline, more pressure is put on personal income and sales taxes to fill the gap. This is a troubling trend for a number of reasons, not least of all considering that Pennsylvania’s unemployment rate has risen and for the first time since the recession began is now above the national level.