Fact: The healthiest way to increase tax revenues is through job growth not higher tax rates. Along these lines, the incoming Senate Republican Leadership team released a promising statement as Pennsylvania faces the duel threat of yet another budget deficit and an incoming governor who campaigned on raising taxes. Recent news articles and statements from the transition team indicate that he won’t back down from those ideas either.
“We wanted to lay down some markers early going into next session,” said Whip John Gordner (R-Columbia.), referring to a recent statement issued by himself and caucus leaders Senate President Pro Tempore Joe Scarnati (R-Jefferson), Majority Leader Jake Corman (R-Centre), and Appropriations Chairman Pat Browne (R-Lehigh).
In the statement, the Republicans identified the culprits behind a succession of pending budget deficits. The statement read, “…mandated spending drivers, such as pensions and Medicaid, continue to outpace any fiscal growth and are simply unsustainable. Opponents have refused to recognize this reality while conveniently acknowledging the crowding out effect that the imbalance of these mandated costs are having on all areas of the budget.”
If reforms to the public employee pension systems had been approved in the past, the deficit now anticipated by the start of the next fiscal year on July 1 would never be realized. In fact, with the pension systems under control, increased revenues from higher employment over the past few years would leave us with a budget surplus at the end of the fiscal year.
State debt will approach $2 billion when the fiscal year ends on June 30, predicted Budget Secretary Charles Zogby in his mid-year budget report released in early December. The state’s Independent Fiscal Office (IFO) puts the state’s share of the cost to cover the state employee retirement system (SERS) and public teachers system (PSERS) next fiscal year at $2.4 billion. Deputy Director of the IFO, Mark Ryan, says that state’s obligation is nearly all unfunded liability; debt that wouldn’t exist if the plans had been managed right in the first place, or reforms made later that adjusted for the earlier mismanagement.
Last session, a plan to reform the systems and reduce the unfunded liability was blocked by organized labor. The surge in Republican majorities in both the House and Senate (the Senate gained three seats in November and will lead 30-20 going into next session) could change that. Conservative leaning changes in leadership in both chambers also indicate the direction the General Assembly will head.
“We just came a few votes short last time around,” Gordner said referring to the pension vote. “Next session we should have the votes to get meaningful reform passed.”
Another encouraging sign for the new two-year session that begins January 6 is that Gordner said he’s witnessed the most positive effort in years to work with the House to set and accomplish an agenda. (House Republicans increased their lead by 8 seats in November and have a 34 seat majority.) Leadership of both chambers plans to meet in early January to discuss that agenda.
It’s impossible to predict, of course, how the change in political dynamics will play out with the new governor. But key differences in approach between the House, Senate and Tom Wolf exist. Regarding the pension crisis, Wolf said during the gubernatorial campaign that he was content to allow a 2010 pension reform to work. The experts tell us that the 2010 act simply can’t work. Rep. Glen Grell (R-Cumberland), who has been championing reform for the past three sessions, said lawmakers knew that when they approved the 2010 changes the fix was just temporary.
Another point of conflict will be the incoming governor’s support for new taxes, including a five percent extraction tax on natural gas drilling in the Marcellus Shale.
Next session’s Senate Majority Leader Jake Corman rightfully worries the impact the tax will have on a massive new petrochemical plan planned by Shell for western Pennsylvania, and on shale jobs in general. The Shell plant, a cracker plant, will convert ethane in natural gas taken from Pennsylvania’s Marcellus fields to ethylene, a synthetic building block for hundreds of products.
"First and foremost for us on the topic of energy is to make sure we stay attractive for that cracker plant," Corman said. "That's a game changer for southwestern PA, which will create thousands of jobs. It will create far more revenue and wealth to the commonwealth than any severance tax would even hope to accomplish."
(The latest on the plant: The Department of Community and Economic Development notes that Shell that it has exercised a land-option agreement in Monaca, Beaver County, a significant step forward as Shell continues its site evaluation for the proposed multi-billion dollar project. This announcement follows other recent positive indicators for the project including the filing of the Air Quality Permit application, the continued demolition of buildings to prepare the site for development, and continued discussions regarding the moving of State Route 18.)
But, new private sector jobs and growth heals all wounds.
The other key clause in the GOP Senate statement read, “Our commitment to fiscal responsibility (over the past four years) has led to the Commonwealth’s lowest unemployment rate in six years, which continues to be below the national jobless rate. Additionally, 185,000 new private sector jobs have been created in Pennsylvania since 2011 and continues to trend upwards.”
A recent Governing Magazine story shows the direct correlation between more jobs and higher tax revenues. Governing calculated the state-by-state increases in total tax revenues since 2009, the worst year of the Great Recession.
In 2009, total tax collections in Pennsylvania equaled $30,071, 179,000. In 2012 the collections at $32,949,117,000 were nearly $3 billion higher. That increase occurred over a period with no tax increases.
A severance tax will surely jeopardize that upward trend; precisely because it would hit at the very jobs responsible for the higher revenue.
“The answer to Pennsylvania’s economic challenges is more growth,” said PMA Executive Director David N. Taylor. “If our leaders in Harrisburg enact a pro-growth agenda that improves Pennsylvania’s competitiveness, the private economy will expand and bring with it more jobs, more opportunity, and stronger revenues for the Commonwealth.”
The American Petroleum Institute (API) chief economist John Felmy said that a severance tax would encourage drillers to look at neighboring, energy-producing states with more favorable tax climates. Even if the actual severance tax is lower, the overall cost to do business in Pennsylvania will be higher than almost any other state due to highest-in-the-country business taxes at the corporate level.
“We entice (other) industries to come to us by paying them subsidies,” Felmy said. “Now we want to tax (natural gas drillers). That is upside-down economic policy. The gas won’t leave, but the rigs will. Ohio has a more attractive mix of oil and natural gas liquids in their gas than Northeastern Pennsylvania.
What’s more Pennsylvania already has a local impact tax in place for every shale-drilling site in the commonwealth and it's distributed more than $630 million to communities since 2012 – including more than $224 million just in 2014.
That's in addition to over $2.1 billion in state and local taxes generated by the shale energy industry. The revenue supports road and bridge improvements, water and sewer projects, local housing initiatives, environmental programs and rehabilitation of greenways. The revenue does not support the run-away freight train of mandated pension inflation, luckily.
At the PMA Seminar at The Metropolitan Club in Manhattan, Senator Corman said that there would be “no discussion of new revenue until we pass meaningful pension reform.” For that, we thank the leader and look forward to working with the General Assembly in the next legislative session.
If you missed the analysis of the newly elected House leadership from the last edition of the PMA Bulletin, click here.