Since 2010, Pennsylvania has consistently enacted budgets that, instead of being paid for by current revenues, borrow from the future. The general fund budget has been balanced by borrowing from other funds, shifting spending from one fiscal year to the next, and more. In this press memo, we outline a few revenue options with bipartisan support that could provide at least some of the long-term revenues needed to balance Pennsylvania’s budget.
To: Editorial Page Editors, Editorial Board Members, Columnists, and Other Interested Parties
From: Marc Siter, Director, Pennsylvania Budget and Policy Center
Date: July 10, 2017
Re: Revenue Options to Finish the 2017-18 Budget
As legislative leadership and Governor Wolf look to wrap up the revenue portion of the 2017-18 state budget, the remaining negotiations are at least focused on the right subject: finding adequate and sustainable long-term revenues. Unfortunately, rather than work for new recurring revenues, Republican leadership continues on the irresponsible path it has taken for most of this decade.
Pennsylvania has consistently, since 2010, enacted budgets that, instead of being paid for by current revenues, borrowed from the future. The general fund budget has been balanced by
- borrowing from other funds.
- shifting spending from one fiscal year to the next.
- booking federal revenues from future years in the current year.
- over-estimating revenues.
- under-estimating case-loads.
- shifting spending from the General Fund to other funds.
- shifting operating costs — the money it takes to provide services in any one year — to the capital budget, which is supposed to be used for projects, such as roads and bridges, that benefit the public over a longer period of time and that is paid for by selling bonds.
- or by offering taxpayers an amnesty on back taxes.
Every one of those fiscal techniques leaves the state in a deeper fiscal hole in subsequent years, either by adding to what had to be spent in the next year or by reducing the revenues available in future years.
Every one of these fiscal techniques gives the public a false impression of the state of public finances, presenting an unbalanced budget as one that was balanced and paid for by current revenues.
This fiscal strategy is not just the result of an irresponsible fear of raising taxes. It is part of a deliberate plan to keep Pennsylvania in a state of perpetual budget deficit in order to make it impossible for the state to address its growing investment deficit.
Here are a few revenue options that have bipartisan support that could provide at least some of the long-term revenues needed to balance this year’s budget:
A Natural Gas Severance Tax
Impact Fees and Corporate Tax Payments from Gas Producers Remain Low
While Pennsylvania is the only major gas-producing state without a severance tax on the value of gas extracted, drilling companies do not make up for the lack of a severance tax by paying more in impact fees or corporate net income taxes according to a recent report. Drillers pay less in impact fees and corporate income taxes now than in earlier years when gas production was much lower.
Pennsylvania could raise over $200 million for the 2017-18 budget and about half a billion dollars for the 2018-19 budget year with a severance tax similar to West Virginia’s or with a proposal from Representative Kate Harper (R-Montgomery County) of a lower severance tax plus the current impact fee.
Closing Corporate Tax Loopholes
No, the Delaware Loophole isn’t closed.
The Delaware Loophole has never been closed, no matter what Republican leaders say. It helps 70% of multi-state corporations in PA, including the natural gas drillers, to pay little or nothing in state corporate taxes. It is time to follow the path of 26 other states and embrace combined reporting. Even if we lower the corporate tax rate, giving some relief to corporations that are based in Pennsylvania, we can generate hundreds of millions of dollars in new recurring revenues. (More on closing the Delaware Loophole on page 12 of this report.)
SB 555 — The Fair Share Plan
A tax CUT for 60% of Pennsylvanians that raises $2B a year
We have long called for dividing our Personal Income Tax into two parts: 1) a tax on wages and interest and 2) a tax on income from wealth (dividends; net income [from a business, profession, or farm]; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts.)
An increase in the tax on income from wealth from the current 3.07% to even just 4% would raise about $800 million a year in recurring revenues with 72% coming from the top 5% of taxpayers.
Even better would be embracing SB 555, the Fair Share Tax plan, which would make our income tax code fairer by asking those at the very top to pay a little more, while at the same time CUTTING TAXES on nearly 60% of Pennsylvanians. The Fair Share Tax increases the tax on income from wealth from 3.07% to 6.5% and decreases the tax on wages and interest from 3.07% to 2.8%.
Under the plan, 58.3% of taxpayers will see their taxes go down, 26.2% will see no change in their taxes, and only 15.4% will see their taxes go up.
The Fair Share Tax brings in $2 billion in new revenue. Of that $2 billion, 50% comes from the top 1% of families, 72% comes from the top 5% of families, and 88% comes from the top 20% of families.
Out-of-state taxpayers will pay 15.6% of the $2 billion increase in revenues.
Even after implementation of the Fair Share Tax, the effective tax rate on the top 1% of Pennsylvanians would be 3.6% — below that of every neighboring state and far below that of New York and New Jersey where it is 6.6%.
See how it impacts constituents: