PMA Bulletin -- July 3, 2013

A Third Sensible and On-Time State Budget

The good news is that the General Assembly sent Governor Corbett a $27.83 billion budget that supports record investment in education, including science, technology, engineering, and math programs and vital job training initiatives throughout the commonwealth. This is a pro-jobs budget consistent with the same successful elements Pennsylvania has seen since Governor Corbett took office, aiding in the creation of more than 125,000 private sector jobs.

The disappointing news is that transportation infrastructure funding, pension reform, and liquor privatization bills did not reach the governor’s desk in time. However, the work on these three issues has only just begun. Because legislative sessions run for two years, these bills need not start anew in the fall, or even into 2014. More importantly, progress was made and public awareness and support continues to grow.

There has been much analysis of this situation by members of the media, other associations, organized labor, and the political parties. But these “big three” issues all share two themes in common: finding the lowest common dominator and establishing a deadline to create a sense of urgency.

It is clear that the lowest common dominator was not established within the deadline of June 30th, thus all three failed. There are many ancillary reasons they didn’t pass before the calendar flipped into July, but finding the basic common ground in which all parties in the house, senate, and governor’s office can agree remains the challenge.

What is evident is that action must be taken on all three policy priorities.

Our bridges and roadways are antiquated and adding costs to companies trying to move goods and people throughout the commonwealth. Transportation infrastructure is a core function of our government and proper maintenance and expansion is necessary. Increased funding could also mean the creation of more than 15,000 private sector jobs.

The commonwealth’s pension system is insolvent and in order to protect current and future beneficiaries, legislative action will be required. Otherwise, an undue burden will fall upon property owners in the individual school districts, current retirees will see their existing pensions jeopardized, and new hires would be subject to an uncertain future.

Liquor privatization is needed to get Pennsylvania out of the booze business. This is not a core function of government and what the private sector can do, PMA believes it should be allowed to do. Additionally, the system will lead to increased convenience, selection, and more jobs as proven by the recent privatization in the state of Washington.

In the arena of business tax reform, it’s a mixed bag.

The Capital Stock and Franchise Tax, currently at 0.89 mills, was scheduled for elimination in January 2014.  Instead, the tax will be continued at a rate of 0.67 mills in 2014 and 0.45 mills in 2015. In 2016 it reaches zero and is abolished from the tax code. This latest delay in eliminating the tax, combined with four prior delays, means that businesses will have paid well over $7.2 billion in additional tax above the original phase-out plan, according to statistics compiled by the Pennsylvania Business Council.

The budget’s tax code also contains language that targets the so-called Delaware holding company “loophole” by giving the Department of Revenue more latitude to pursue companies housing intangible assets in Delaware purely to avoid Pennsylvania’s highest-in-the-nation corporate net income tax (CNI).  Business leaders worked very closely with the Corbett Administration so that Revenue officials in future administrations are not empowered to undertake “hunting expeditions”, targeting companies for add-backs.

The budget does however contain language that reforms the business tax appeals process; a system that Taylor says can lock up money for ten years. “It’s a maddening situation where business is deprived of working capital and the government of revenue while the funds in dispute are locked into this seemingly circular process,” Taylor said.

The code also contains a needed business tax improvement by increasing the cap on the carryforward of net operating losses from the greater of $3 million or 20 percent of losses in 2013, to $4 million or 25 percent in 2014, to $5 million or 30 percent in 2015. Tax law in 48 other states allows employers to apply 100 percent of recent losses against current and future tax liability, as does the federal tax code. Pennsylvania and New Hampshire are the only states without this standard pro-growth tax provision.

Finally, the budget, in line with Governor Corbett’s original budget proposal, calls for spending the highest amount ever on public education.

“It’s criminally stupid, some of the comments you hear about ‘lack of funding for public education’ in a time when we’re spending more than we ever have,” Taylor said.

The budget directs $5.5 billion for basic education, the primary line of aid for public schools. That represents a $122 million increase. Special education will get $1 billion, and there is more money available for early intervention and pre-Kindergarten programs. There's also an uptick for efforts to keep schools safe. The budget directs $8.5 million to the safe schools initiative, up from about $2 million last year. However, the budget directs just over $1 billion to the school employees' retirement system, an increase of $160 million. This line-item will only prove to be more menacing as years go by without needed pension system reforms.

This is a sensible and on-time state budget. At a time when other states are hiking taxes, cutting core programs, and checking the coin returns of the vending machines in their capitol buildings, Pennsylvania remains the leader in finding the “sweet spot” of government budgeting.

When the legislature returns in late September, we look forward to working with them to expand funding for transportation infrastructure, enact meaningful pension reform, and remove Pennsylvania from the liquor business once and for all.

Click HERE for a full breakdown of the budget.