The Budget Solution We Need

Marc Stier |

It appears that the Pennsylvania Senate is about to vote to not concur with the recently-passed House bill to fund this year’s budget. That will set the stage for what will certainly be intense negotiations among the four legislative caucuses and Governor Wolf about a compromise bill. 

We hope these negotiations will be completed quickly, as the state is already delaying payments to the pension funds and Medicaid managed care organizations and the state is getting very close to a credit down grade that will cost hundreds of millions over the next few years. (And keep in mind that, just like a household cannot fix its credit rating over night after a financial faux pas, a state cannot do so either. A credit down grade will cost the state, county and municipal governments and school districts for years.)

We want to set out what we think are the key elements of any reasonable compromise:

1. We need real recurring revenues. 

Speaker Turzai and the majority of Republicans in the House appear to still be in the grip of a fantasy that we can balance the budget without new taxes. But first, as we will see below, the alternatives to new taxes to balance the budget this year are mostly fantasies. And second, we need recurring revenues to deal with the long-term structural budget deficit. Citizens of this state are sick and tired of perpetual budget crisis in Harrisburg. And so are the credit rating agencies. There is going to be a credit down grade without at least $700 to 900 million in new recurring revenues. And that will mean tax increases to cover the added interest costs. Far better to raise revenues now then to have the state and local governments be forced to raise them later.

Some Republicans in both the House and the Senate say we should balance the budget with more cuts. But, first, the spending plan is already in place and September is not the time to change it. Second, there is no political will to reduce spending. Governor Wolf and the General Assembly actually went far in finding savings that enabled them to increase spending in education and human services, that is, areas where there is strong popular support for new spending. And, third, further cuts, particularly in education and environmental protection, will be disastrous for our future. It is absolutely clear that the economic future of not only our state as whole, but our kids, depends upon providing not only our kids but adults with more education and, training not less.

2. Include a substantial severance tax. 

It’s long past time for Pennsylvanian to enact a severance tax on natural gas drilling. It is beyond obvious that a state with massive reserves of natural gas that is relatively inexpensive to extract can and should have a serious severance tax without reducing production. Natural gas drillers pay very little in corporate or personal income taxes and nothing in property taxes, and the effective rate of our impact fee is far below the severance taxes in other states.

3. Stop improper raids on special funds and stealth budget cuts.

The House bill reduced the proposed raid on special funds from the original $1.2 billion to about $600 million. This is an improvement. But the House bill takes too much from special funds that provide support for public transportation, environmental protection, public safety, and small business job creation. Raiding these funds in many cases amounts to a stealth budget cut for important public purposes. As we delve into the details of the proposal to raid special funds, it becomes ever more clear that the proponents of this approach simply haven’t recognized the difference between bank balances and budgets and do not understand that those balances mostly contain funds that are committed to public purposes and, where there are genuine surpluses, they mainly provide a necessary reserve fund. There are no doubt some balances that are genuinely too high, and we are not adverse to drawing them down. But the burden of proof is on those who claim that there are surplus funds.

4. Do Not Rely on Phantom Funds. 

The House bill includes a number of phantom funds — projected revenues that are simply not likely to be come to fruition. There are place holders for funds that are supposed to come from legislation on gaming and liquor, that has not been enacted and most likely will not be enacted at all or in a way that generates revenues at the projected level. It includes $400 million in lapsed funds, double what the governor has identified and without any indication where the second $200 million will be found. It includes a $200 million raid on the JUA medical malpractice fund, even though that was blocked by the courts last year.

The citizens of Pennsylvania deserve, and the credit ratings agencies demand, a truly honest budget without phantom funds.

5. Raise money on the tobacco settlement the right way. 

We have already pointed to our qualms about borrowing on tobacco settlement funds since this, like all other borrowing, deepens our budgetary problems in future years. But it is clear the General Assembly will not raise taxes to the level necessary to pay off the deficit from last year. So, if the tobacco settlement funds are to be used to raise the money to pay off the accumulated deficit, then it should be done in the right way. That means, first, doing it at least cost and risk to the state. The plan adopted by the House to sell the rights to tobacco settlement funds in order to avoid borrowing — even though that plan is borrowing under a another name — is likely to be more costly than the Senate plan. And it means, second, raising enough recurring revenue to insure that there are funds available for human services to make up for the tobacco settlement revenues that will be used to pay back bonds.

6. Limit the impact of revenues on working people and the middle class.

The Senate bill relied on new and higher gross receipts taxes to generate recurring revenues. If there is no alternative we can live with those taxes. But it is not ideal by any means because a larger burden falls on working people and the middle class. A small increase in the Personal Income Tax would be better.

Even better would be a small increase in the tax on income from wealth — business profits, dividends, capital gains, estates, royalties and gambling winnings. A small increase in the tax from 3.7% to 3.75% would raise $600 million. Over 50% of revenues would come from the top 1%

 5. Don’t trade revenues for bad environmental or human services provisions. 

Finally, we don’t need a budget deal that includes environmental provisions that will threaten the safety of our air and water. The permitting process can be reformed and expedited without undermining state supervision of fracking and other activities that are potentially dangerous to our health.

A budget deal should also not include so-called reforms to Medicaid that impose onerous burdens on those who have a legitimate need for government help in securing health care. Work requirements for Medicaid recipients will have little effect on work effort because almost everyone who can work already does work. People already pay for part of the Medicaid benefits. Unless the state spends far more than it will save to ensure that no one is denied the healthcare to which they are entitled, these so-called reforms will not save the state any money.