The General Assembly returns to Harrisburg this week in search of more than $2 billion to fully fund, as required by law, the $32 billion spending plan that was sent to the governor last Friday. The available options are all unwelcome: borrowing; more gambling; increasing taxes; shifting money between funds.
“Pennsylvania’s economy continues to underperform. Predicted revenue growth at the start of the fiscal year was much too optimistic,” said PMA President David N. Taylor. “Now, state government has to backfill last year’s shortfall and fund the additional spending in this year’s plan.”
Legislative leaders say they hope to patch together a revenue plan before Monday at midnight when the spending portion becomes law with or without the governor’s signature. Once the plan is finalized, rank-and-file members will be called back to vote on it. As Daniel Webster’s caution rings true even today: “no man’s property is safe” when the politicians are in town.
Behind some of the reasons for the shortfall lie recurring year-to-year increases in spending -- human services increases are the largest -- coupled with sluggish revenue collections due to an economy grudgingly emerging from the Great Recession. Other culprits include last year’s budget when the lawmakers similarly sent the governor a spending plan first then a revenue package later. At the start of the previous fiscal year, they overestimated overall revenue receipts to the tune of $1 billion. In one instance, revenue from a newly enacted 40 percent tax on vape shops came in 70 percent less than predicted. Many shops simply shut their doors because they couldn’t come up with 40 percent of the value on their shelves called for under the new tax.
Simultaneously, budget experts underestimated the cost of human services; a $400 million supplemental had to be added to cover overruns.
The governor has indicated he’s willing to agree to a revenue package lawmakers send him, even without his often-requested additional tax on energy production. Protecting the growth in an otherwise volatile industry might be the only thing good to come out of the next couple of days.
However, given the constitutional requirement of a balanced budget leaders have to find the money somewhere. They could include all or portion of a massive gaming expansion earlier approved by the House; approve a tax on drinks; take money from solvent funds and put it in the General Fund; borrow against tobacco settlement money. Adding debt could lead to an even grimmer fiscal situation next year.
“In the end, we are all after the same thing: a strong economy that generates sufficient revenue for sound budgeting,” Taylor said. “And you do that by having a tax policy that encourages investment, one that’s separate from budgeting.”
The governor’s proposed shale tax of 6.5 percent is the worst of the bad ideas. It would further burden an industry already paying hundreds of millions in impact fees, an industry that is one of the bright spots in not just Pennsylvania’s economy but the entire nation’s. A recent study by ICF International examined the economic benefits and opportunities from the entire natural gas value chain, including the production of natural gas, its transportation and end uses like power generation and manufacturing.
In 2015, the industry supported 178,100 or 3.1 percent of jobs in the state, and contributed a whopping $24.5 billion to the state’s economy. Beyond that, the study shows that all 50 states benefit from natural gas produced domestically, including non-producing states.
“Natural gas is critical to our way of life in Pennsylvania,” said Stephanie Catarino Wissman, Executive Director, Associated Petroleum Industries of PA. “Over the past decade, our state has experienced massive growth in clean-burning natural gas production due to technological innovations and industry investment, helping create jobs and strengthen our state’s economy.”
Carl Marrara, PMA’s Vice President of Government Affairs, notes that other states are scrapping extraction taxes and copying the Pennsylvania model of levying impact fees.
“The impact fee in Pennsylvania adds approximately $200 million to local governments throughout the commonwealth annually — more than would be realized with Governor Wolf’s proposal,” he said.
There is some good news in this year’s budget. Lawmakers did approve legislation that’s at least a start at public pension reform. And the spending plan contains a $350 million decrease in money allocated to Medicaid managed care.
House Majority Leader Dave Reed (R-Indiana) said that general savings reductions are also on the agenda.
"There's no secret, we want to have a serious discussion with the administration, with the senate, on some changes, perhaps, to our DHS system, particularly the Medicaid program, going forward," Reed said.
Also the spending plan calls for a $103 million cut in the Department of Corrections partially due to the merger of Corrections and the Board of Probation and Parole, and from the closure of SCI Pittsburgh.
Pennsylvania must improve our fiscal health or we risk sinking so low that we can’t dig our way out. Illinois is a sad example of how bad it can get. It has $15 billion in unpaid bills and owes a quarter-trillion dollars to public employees when they retire. The state is on the verge of junk bond status. There’s no future in that.