Everyone’s a Winner in State Budget, Except the Taxpayer

All of the Harrisburg power players got what they wanted out of the state budget, leaving Pennsylvania taxpayers with the bill. The public sector unions got to keep their unrivaled, unsustainable retirement benefits. Governor Tom Wolf got more money for public K-12 education, in excess of the record amount approved by the General Assembly last year, and the year before that, and the year before that too. Lawmakers got out of the Capitol, heading back to their districts a comfortable four months prior to November elections.

The taxpayers got more taxes and more debt - a lose/lose combination. They are left holding the bill to cover the cost of growing government by $1.4 billion, a nearly five percent increase in spending over last year. They will also pay more in the future to cover what wasn’t done to reduce ever rising costs in government, mainly in the area of pension debt obligations. 

In the short term, they will pay more through higher taxes for tobacco products and the application of the six percent sales tax on digital downloads. While these sin taxes seem to hold most harmless in the short term, long term taxpayers will pay to cover the fiscally confounding move as every study shows that the revenue from gambling expansion and tobacco taxes inevitably fades away. This budget process marks a complete turnaround from a promising trend of restraint, and even reductions, in spending… an unfortunate turnaround that portends even higher taxes and more spending.

“Just a few months ago, fiscal restraint won the day because legislators had to vote on the tax increase first,” said PMA President David N. Taylor. “In the House, the tax hike failed 0-193, after which expenditures were matched to existing revenues. This year the spending amount was approved first and then the taxpayers had to match the increase – a backwards approach with the opposite effect.”

The “new” revenue just digs a deeper hole and sets up a likely FY 2017-18 budget debacle. A $200 million raid of an obscure fund (the Pennsylvania Professional Liability Joint Underwriting Association) must be paid back with interest over five years. So the General Fund not only loses the $200 million the very next fiscal year year, but another $50 million in interest in the first installment of the payback.

Rep. Steve Bloom (R-Cumberland), one of a core of lawmakers to oppose the spending and revenue plans, notes the fiscal irresponsibility of it all. 

“If it were an emergency then I could understand doing it,” Bloom said. “But borrowing money to increase funding on last year’s record amount makes no sense.”

The reliance on so-called sin taxes on tobacco and gaming expansion compounds the hit on the taxpayer. The money raised for the additional spending will vanish in a few years, and absent real cuts in spending, will have to be made up some other way.

“The $489 million we are predicted to raise with the cigarette tax will be less ever year (less smoking, more smuggling) and will be gone entirely in four years,” said Rep. Seth Grove (R-York), who also opposed the spending and tax increases.

Grove predicts that adding all the cost factors up we’re looking at a $4 billion spending gap next year. “It’s imperative that we start focus again on the spending side again,” he said.

In May, Grove and Senator Scott Wagner (R-York) released a comprehensive report from the bicameral Taxpayers’ Caucus that listed over $3 billion in potential savings to taxpayers—$300 million more than Gov. Wolf proposed in tax hikes for the 2016-17 fiscal year. A few of the Caucus’ suggestions were considered in the budget but clearly not enough to make a difference.

Gambling expansion suffers from the same doubled-edged affliction as increasing taxes on tobacco. More of it eventually brings less revenue.  A recent study by the Nelson A. Rockefeller Institute of Government cites the shortsightedness:

“The recent geographic expansion of gambling created stiff competition, particularly in certain regions of the nation where states and facilities are competing for the same pool of consumers. Therefore, the weakening of the growth in gambling revenues is also attributable to market saturation and industry cannibalization. For example, Pennsylvania enjoyed strong growth in revenues from casino and racino operations until the opening of new casinos and racinos in neighboring Maryland, New York City, and Ohio. If history is any lesson, gambling is only a short-term solution to state budget gaps. Gambling legalization and expansion leads to some revenue gains. However, such gains are short-lived and create longer-term fiscal challenges for the states as revenue growth slows or declines.”

Lurking behind it all is the haunting presence of the $63 billion in unfunded liability in our public pension system, SERS for state workers and PSERS for public school employees, and the undue influence the public sector unions hold on the legislative process.

“Many Pennsylvania taxpayers don’t even have pensions at their jobs, certainly not ‘defined benefit’ plans,” Taylor said. “But in Harrisburg, the bureaucrat unions are turning up the dial to take more from working people to maintain these disproportionate public sector benefits.”

If the economy was steaming ahead we could perhaps afford the political expediency of catering to entrenched groups. But it isn’t, so we can’t. A recent Government Accounting Office (GAO) report shows that Pennsylvania and many other states continue to suffer from sluggish economic growth, showing only a glimmer of life since the Great Recession ended. The study showed that with current tax rates, total tax revenues for state and local governments as a percentage of GDP will not return to 2007 levels until 2047.

There is a winning equation and furthering the gap between expenses and revenue is not it. In fact, to close the fiscal gap, the GAO projects that underperforming states would have to undertake and maintain a five percent cut in state and local spending each year for the next 50 years.

But controlling costs is possible and in fact, some states have accomplished it. States such as Florida, Utah, Missouri, Alabama, and North Dakota have limited spending, borrowing, and taxes throughout multiple administrations. Not coincidentally, these states continue to climb up the economic competitiveness rankings while Pennsylvania lags behind.

States cannot tax themselves to prosperity, but they can increase revenues through economic growth, which broadens and deepens the tax base. Unfortunately, the FY 2016-17 budget does little make Pennsylvania more economically competitive. However, business competitiveness is a marathon, not a sprint. Hopefully the General Assembly will continue to gain ground on the competition in the FY 2017-18 budget.