Rather than the Armageddon predicted by Democrats, the passage of federal Tax Cuts and Jobs Act now has Pennsylvania’s Independent Fiscal Office (IFO) predicting “an acceleration of economic growth.” Running with that positive economic news, lawmakers sent Governor Tom Wolf a balanced spending plan comfortably ahead of the June 30 fiscal deadline. The vote in the House was 188-10 and 47-2 in the Senate. The governor signed the budget Friday evening, and now lawmakers can return to their districts and gear up for November’s General Elections.
This marks the first budget that Governor Wolf has signed in his four-year tenure. During the first three Wolf budget cycles, the Republican majorities in General Assembly held the line against $13 billion in proposed tax hikes, so the governor passive-aggressively allowed them to lapse into law without his signature.
The overall General Fund spending total for FY 2018-2019 is $32.7 billion, a 1.7 percent increase over last year and also below the rate of inflation. The plan requires no new fees or taxes and notably lacks Governor Wolf’s priorities from his February budget address: higher taxes on energy production, mandatory unitary combined reporting, and increases to the government mandated minimum wage.
Along with approving the budget, the General Assembly reversed a Department of Revenue policy that prevented Pennsylvania businesses from making full use of a pro-investment provision of the federal tax reform package.
David N. Taylor, President & CEO of the PMA, praised lawmakers for thwarting Wolf’s tax hikes and for voting to overturn Revenue’s tax policy.
“Under a rule change made by Governor Wolf’s Department of Revenue, employers could not depreciate an asset until it was sold or decommissioned, putting Pennsylvania businesses at a unique competitive disadvantage,” Taylor said. “This stunningly punitive interpretation rendered Pennsylvania uninvestable. Even after Harrisburg fixes this, we’ll never know how much potential business investment Pennsylvania missed out on while the rule was in place.”
The policy reversal sent to the governor was contained in legislation, SB 1056, introduced by Michelle Brooks (R-Crawford), and HB 2017, introduced by Representative Frank Ryan (R-Lebanon). Under the bill, it allows a state tax deduction for the depreciation of qualified property placed in service after September 27, 2017 (date of the passage of U.S. Tax Cuts and Jobs Act). The additional deduction is equal to the depreciation on the qualified property for the taxable year as determined in accordance with Section 167 (Depreciation) and Section 168 (Accelerated cost recovery system) of the Internal Revenue Code. This change puts Pennsylvania on level footing with our competitor states. The legislation passed the Senate 42-7 and the House 194-0.
“That one slight regulatory change by someone that’s not an elected official (Department of Revenue) has undermined the ability of the Commonwealth of Pennsylvania to reap the benefits of the new tax code that was just passed by the U.S. House, Senate, and President Trump,” said Rep. Frank Ryan. “What we need to do is reinvest in the business infrastructure of this commonwealth and to make us competitive.”
Revenue’s decoupling required businesses to add the amount of the federal deduction back when calculating taxable income in Pennsylvania. Not allowing a deduction until an investment is sold or discarded, as Taylor noted, effectively killed any incentive for businesses to invest in new equipment. Most would be more likely to repair a piece of expensive equipment rather than sell it and purchase new equipment that could expand business operations.
Furthermore, Pennsylvania businesses would have overpaid hundreds of millions in taxes, endured greater administrative burdens by having separate state and federal compliance records, and, as an outlier among states with this new policy, missed out on capital investments the federal changes were enacted to encourage. This is especially true as the Wolf Administration made their policy change retroactive to September 27, 2017, the day the U.S. Tax Cuts and Jobs Act was signed into law by President Trump. Manufacturers, which are inherently capital-intensive, would have been particularly hard hit.
“By disallowing this important deduction indefinitely, Pennsylvania would be unique among states and would create a business climate that discourages investment and spawns economic contraction rather than opportunity and expansion,” Brooks said in her sponsorship memo.
The new spending plan also sets aside an additional $25 million for the Education Improvement Tax Credit (EITC) program, which gives tax credits to businesses that give scholarship money for K-12 students to attend nonpublic schools.
“Families who want educational opportunities to attend non-public schools or to participate in afterschool educational enhancement activities but cannot afford them have found the educational improvement and opportunity scholarships to be positively life-changing,” said House Speaker Mike Turzai (R-Allegheny), one of the General Assembly’s leading supporters of the program. “Taking this step to increase the funding for EITC programs continues to prove the importance placed on education for all Pennsylvanians.”
In addition, under this year’s budget, funds are slated for the state’s Rainy Day Fund for the first time since the start of the Great Recession.
As in past years, the budget does contain some fund transfers and accounting maneuvers. Lawmakers, for instance, moved about $800 million in Medicaid expenses off the main budget books. The money for those expenses is expected to come from one-time cash infusions, including funds from the state’s landmark settlement with tobacco companies.
But, this is where the dissenters -- ten votes in the House and the two in the Senate -- are justified. This budget does little to correct the course that our state government has wrongly chartered for two decades. The rate of growth of Pennsylvania’s state government has outpaced private sector growth year after year. While the bleed has been stopped, other states are reforming taxes and drawing trillions of dollars of private sector investment as money and jobs are reshored.
Last week’s revenue analysis by the IFO gave federal tax cuts credit for improving the state’s revenue picture since Pennsylvanians have more money to spend on purchases subject to state sales tax. In addition, IFO projects an acceleration of economic growth from 2017 into 2018, partly due to the federal income tax reduction. For 2018, the IFO predicted that wages will grow 4.3 percent in Pennsylvania and the state will add 62,500 jobs.
Even as we welcome these positive signs, Pennsylvania’s economy continues to grow at just a fraction of the national average. Rampant lawsuit abuse, regulatory overkill, and our highest-in-the nation 9.99% corporate tax rate remain deterrents to growth. There are many pro-growth improvements still to be enacted if we hope to have future balanced budgets completed on-time, without tax increases, that improve Pennsylvania’s competitiveness.