As Budget Process Grinds On, Lawmakers Have Three Clear Choices

State lawmakers are in the thick of the frenzy of patching together a spending plan for the 2014-15 fiscal year that begins July 1. Enacting a budget is a formidable task that entails long, tense negotiations and, since it must be balanced, attention to hundreds of details. Complicating matters further, this year the legislature faces a $1.2 billion deficit and General Elections loom in November.

As complex as some policy discussions have become, the choice this June is very clear: cut costs by reforming a run-away public pension system, and reduce government and grow revenues by getting the state out of the liquor business; or create a new tax that will suppress a natural gas drilling industry that is creating thousands of high paying jobs and promises to return Pennsylvania to its former glory as one of the most desirable locations for manufacturing in the world.

For his part, Governor Tom Corbett has asked lawmakers to adhere to a policy of keeping government focused on its core functions. He’s asked for long-term reform of the teachers’ pension system (PSERS) and the state workers’ pension system (SERS) that are underfunded by a combined $50 billion. He has also stated that there are significant revenues to be had by privatizing liquor sales; getting the state at least part of the way out of a business that near every other state has turned over to the private sector since prohibition ended in 1933. Regrettably, what he might get is the serpent on the table - the imposition of a new, additional “severance” tax on natural gas drillers.

The argument lawmakers are hearing for approving the severance tax is the same one that the Democratic candidates for governor used in the recent primary debate – including nominee Tom Wolf. They claim that the drilling industry needs to “pay its fair share” to help fund a “neglected” education system. What is the problem with this statement? Over its short life, the Marcellus industry has paid nearly $3 billion in taxes, and impact fees, which fund local government infrastructure. If paying taxes is fair, then the debate is already over. What’s more, state funding for public k-12 education at the highest level in the history of the commonwealth.

Sure, states like Texas, Oklahoma, and even West Virginia have a severance tax. But it’s also true that these states do not have anywhere near a 9.99 corporate net income tax, capital stock and franchise tax, limited net operating loss carry-forward, and other burdensome tax structures that seem to be unique to our commonwealth. Most importantly, those “other states” include a long capital recovery period for drillers to earn back their $7 million-per-well costs. If Pennsylvania had a severance tax “like other states”, Harrisburg wouldn’t collect another dime until the end of this decade, at the earliest.

“Proponents of a severance tax that use other states to compare Pennsylvania to are not comparing apples to apples; it’s more like comparing apples and squares – there’s simply no relation,” said Carl Marrara, Director of Government Affairs for the Pennsylvania Manufacturers’ Association.

There are also the long-term effects to consider. What would an additional, industry-specific tax do to jobs that sustain the state’s revenue base?

“We’re attracting new industry interested in not just affordable energy, but the feed stocks that are the building blocks for hundreds of products,” said PMA Executive Director, David N. Taylor. “While there is never a good time to impose a new tax, nothing cooked up during the budget frenzy could possibly work to Pennsylvania’s long-term benefit.”

In a letter to the legislative leaders, representatives of the drilling industry recently wrote: “The economic reality is that there is a direct correlation between a severance tax, fees and regulatory environment and the investment decisions of our members. Many of those calling for a severance tax do not understand the complexity of the industry, market forces and the opportunity for investment around the U.S. and the globe against which Pennsylvania must compete.”

Pension reform and privatizing liquor sales face ever stronger resistance from opposition that has an inordinate influence over public policy - the public sector unions. The same public sector unions that have now publicly and financially backed Tom Wolf and his extraction tax plan. So again, the choice is clear: reform or retreat; restore government to core functions or expand the over burdensome bureaucracy; cultivate and grow or tax and spend. The early summer budget process is one that tests the patience, courage, and nerves of lawmakers and staff. But at least concerning these three issues, lawmakers can breathe easy by doing the right thing.

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