FY2021-22 Budget: No New Taxes, Positive Reforms, More to Do.

Last Friday, the General Assembly approved a $40.8 billion state spending plan for FYI 2021-22, without raising taxes. This budget, which covers the fiscal year starting July 1, marks seven in a row where lawmakers have rebuffed Gov. Tom Wolf’s requests for higher taxes, as he has proposed historically high tax increases in most years. Lawmakers now have one budget to go before Wolf runs up against his constitutionally mandated two-term limit. And, business leaders hope, of that will also mark the end of executive branch spending that has far exceeded levels approved by the General Assembly.

“The executive branch has engaged in chronic overspending to crank up the baseline each year,” said PMA President & CEO David N. Taylor during a post-budget Monthly Business Briefing co-hosted with the PA Chamber of Business and Industry at PMA’s Anton Center. “This has been a trick that Wolf has done repeatedly. Looking over the horizon, we hope to see an end to that.”

The latest example of this tactic was seen in the Department of Human Services. The just-passed budget begins to clamp down on unauthorized spending by the executive branch before Wolf’s exit. A provision in the fiscal code prevents the Department of Human Services (DHS) from establishing new programs not authorized or funded by the General Assembly.  As State Representative Torren Ecker (R-Adams) explained, Medicaid enrollments have been 15 percent over the past year because of relaxed eligibility requirements. Continued cost overruns at DHS, stemming especially from the year-to-year growth of Medicaid, crowds out funding for other worthwhile programs.

Rep. Kate Klunk (R-York) correctly noted at the PMA-PA Chamber “Monthly Business Briefing” that, “There’s a lot to be happy about. including the fact that we didn’t spend, as some wanted, all the federal money available to us. We need to pump needed resources into the economy, but we also have to be prepared for next couple of years.”

The means not repeating the mistakes of what former Gov. Ed Rendell did with federal rescue dollars after the 2008 recession, as the House Republican Caucus pointed out in statement issued after the budget was approved.

“It's important to remember how federal dollars have been allocated in recent history - after the 2008 recession, the Rendell administration eagerly and quickly spent the money right away and significantly grew the size of state government with that funding,” the caucus said. “When Gov. Corbett took office, he was left with an enormous $4 billion deficit and had to cut spending after the federal funding was depleted. Now that Pennsylvania is in a similar situation, House Republicans are ensuring that federal funding is responsibly allocated over the long-term.”

In the Senate, Majority Leader Kim Ward (R-Westmoreland) said of the budget: “Pennsylvania’s 2021-2022 budget demonstrates resilience by helping the Commonwealth transition out of crisis while positioning Pennsylvania for success. It is not a statement of a ‘new normal’ rather a declaration in rejecting restrictions and ‘retuning to life as normal.’

Positive Reforms

Besides holding the line on spending, budget highlights include little noticed but significant positives for the state’s economy: the implementation of dynamic scoring for the Independent Fiscal Office (IFO); the halting to the phase-in of a job killing overtime rule ordered by Wolf; an additional $40 million for the educational improvement tax credit (EITC) that gives disadvantaged kids options on school attendance; $2.5 billion more into the state’s Rainy-Day Fund; and the reopening of the Pennsylvania-Taiwan Trade and Investment Office in Taipei.

Giving the Independent Fiscal Office dynamic scoring capabilities was an idea pushed principally by state Rep. Frank Ryan (R-Lebanon), a certified public accountant and a leading fiscal watchdog in the House. More accurate projections of macroeconomic behaviors based on changed tax policy are needed to enact meaningful tax policy reforms. Empowering the IFO to be able to model these policies is a productive first step.

Currently, all tax reform is viewed with a price tag; not with the notion that an opportunity exists for growth in collections with the lowering of rates or changes in policies. But the opportunity for growth exists as seen to be true in the past with the phase-out of the Capital Stock and Franchise Tax. The collections when the rate was at 3mils was nearly identical when it was at the full amount. With the lowering of rates comes the opportunity for increased investment and overall tax revenue growth through all outlets.

House Bill 230 would strengthen the analytics used by our IFO to more effectively identify economic options and alternatives,” Ryan said after the House approved his bill in March “We have a number of issues in Pennsylvania that we identify as critical risk factors. Dynamic scoring capability would enable us to weigh the implications of those risk factors and determine the best course of action.”

Also of great importance: Governor Wolf’s overtime rule was scheduled to start in October but will be suspended under this budget negotiation. Prior to the compromise, salaried workers earning beneath a certain threshold would earn time and half for working over 40 hours in a week. Opponents, including many nonprofits and colleges and universities, cited higher costs, forcing those with thin margins to lay off employees, or slash wages and benefits.

Finally, a critical line item in the budget will reopen the Pennsylvania Office of Trade and Investment in Taiwan. Taiwan is Pennsylvania’s 20th largest export partner but is ripe with potential as seen in Arizona where a $12 billion microchip factory is being constructed. In the House, Representatives David Rowe (R-Snyder) and Ryan Mackenzie (R-Lehigh) joined with Senators David Argall (R-Schuylkill) and Cris Dush (R-Jefferson) and more than 60 other members of the General Assembly urging the office’s reopening in a June 3 letter to Dennis Davin, Secretary of the Department of Community and Economic Development. But there’s more than business at stake.

“The COVID-19 pandemic has shifted the geopolitical and macroeconomic dynamics in both the United States and in East Asia. Currently, tens of billions of dollars are being reallocated by Taiwanese companies from the People’s Republic of China and investors are seeking new locations, such as the United States, to relocate. Pennsylvania can and should be one of those locations for investment but without having an official Pennsylvania Office of Trade and Investment, we will miss out on these critical opportunities,” the letter stated. “Our trade, our investments, our supply chains, and our talent are all enhanced by strong Pennsylvania-Taiwan relations. It is the Pennsylvania Office of Trade and Investment in Taiwan that is the catalyst for these relations, and we urge the Department of Community and Economic Development to reopen the office as soon as possible.”

More to Do

There is more to do when the Legislature returns in the fall. Most notably, cutting-off, as other states have done, the extra $300-a-week unemployment subsidies keeping Pennsylvania’s workforce on the sidelines. As State Representative Natalie Mihalek (R-Allegheny) said at the PMA-PA Chamber budget briefing, “It comes down to an easy, fundamental question: Do we want leaders in the room to coddle Pennsylvanians to be dependent on government money, or do we want leaders who embrace free markets, capitalism, and letting businesses thrive and create?”

Expect this issue, pushing back on the Governor’s Regional Greenhouse Gas Initiative (RGGI), and redistricting to be the themes.

 

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