Memo to Editors & Reporters: With Final Push for State Budget On, Here’s Where We Stand

To: Editorial Page Editors, Editorial Board Members, Capitol Reporters & Columnists

From: Sharon Ward, Director of the Pennsylvania Budget and Policy Center

Date: June 1, 2012

Re: With Final Push for State Budget On, Here’s Where We Stand

Next week begins the final push in Harrisburg for a state budget. The Senate passed its budget bill on May 9, and it is now before the House of Representatives. Legislative leaders say things could wrap up as soon as mid-June.

The Senate, responding to Pennsylvanians’ deep concerns about service cuts, passed a budget bill (SB 1466) that is a significant improvement over Gov. Tom Corbett’s budget. Still, lawmakers are leaving money on the table, failing to act on the governor’s proposal to cap the discount that retailers receive for submitting sales tax payments on time. Efforts to close corporate tax loopholes, a cause recently adopted by House leadership, have been sidelined, while a $275 million cut to the state’s capital stock and franchise tax remains on track even though the Commonwealth can ill afford it.

Deep cuts to schools over the past year are taking a toll on the economy, and we are likely to see more of the same in the coming year. In recent weeks, numerous school districts have announced teacher layoffs, including as many as 364 in Reading, 285 in Pittsburgh and 52 in Upper Darby (where music, art, physical education and libraries are on the line). Other districts have already cut jobs, including 265 in Allentown and more than 200 in Erie. Cuts to education and other services cost more than 22,000 Pennsylvania jobs last year, slowing the state’s rapid recovery coming out of the recession. (Pennsylvania actually went from among the top 10 states in job creation in 2010 to the middle of the pack in 2011.)

A report by school administrators and business officials indicates that about three-quarters of the 281 school districts surveyed will raise taxes next year, 60 percent will increase class size, and 58 percent are cutting classroom programs. Fewer classroom resources will erode the quality of education and diminish options for our kids, thus reducing our competitiveness over the long term.

All eyes will now be on the House, where Republican leaders have signaled that their caucus is divided over how much to restore in cuts. On top of that, the House has approved major tax breaks in recent weeks, including a cut to the corporate income tax rate and a sales tax exemption for the purchase of private jets. These tax cuts would come at a time when the Commonwealth can least afford it, putting us on shaky fiscal footing for the years ahead.

Senate Budget a Good First Step

With the state’s revenue outlook improving, the Senate adopted a budget that restores all the governor’s funding cuts to public universities as well as $50 million of a $100 million cut to Accountability Block Grants, which support full-day kindergarten and other early childhood programs. The plan keeps most of the $900 million cut last year for K-12 education while adding $50 million to basic education for “distressed schools.” It also scraps the governor’s plan to pool the basic education subsidy and other education funding into a block grant for school districts.

SB 1466 follows the governor’s plan to eliminate General Assistance, a modest benefit provided to 68,000 Pennsylvanians who are sick, living with a disability, escaping an abuser or completing a treatment program. The bill also advances the proposed human services development block grant and restores only 50 percent of a $168 million reduction in funding to counties for behavioral health, intellectual disabilities and homeless services.

While the bill restores some proposed cuts to early childhood programs, notably state funding for pre-kindergarten and Head Start, it adds an $8.7 million cut on top of the governor’s initial $9 million cut to child care services for low-income working families.

In all, SB 1466 raises Gov. Corbett’s $27.1 billion spending plan by $517 million. This still keeps state spending below 2008-09 levels, despite record high demand for health care and human services as the commonwealth continues to deal with the effects of the recession. While some might argue that lower spending is beneficial, we now have clear evidence to the contrary. State cuts lead to fewer jobs, diminished educational opportunities, higher local taxes and a move away from cost-effective preventive services that over time will increase reliance on more costly options like nursing homes, psychiatric hospitals, homeless shelters and prisons.

State Tax Revenues Recovering

Lawmakers received a green light to set a higher spending number when the Independent Fiscal Office (IFO) offered its preliminary revenue estimate for 2012-13. The IFO, established to provide the General Assembly with information and revenue projections independent of the governor, projected $800 million more in available revenue, all or part of which could be available to restore service cuts.

The budget process in the House seems carefully planned to sidestep the important revenue numbers that shape the June budget discussion. The House set a deadline for amendments to its budget for May 29, three days before May revenue numbers are released, and both chambers want to wrap up before June 15, when the IFO issues its final revenue estimate. It is widely expected that May numbers will come in a bit lower and June a bit higher than estimated.

This play is known as the “Bittenbender,” named after former Governor Tom Ridge’s budget secretary who pressed for early adoption of the state budget and allowed the June revenue to pile up in reserve. The General Assembly has since enacted a rule requiring 25 percent of any year-end surplus to be deposited in the Rainy Day Fund. Last year, with the Legislature’s permission, the governor sidestepped this rule, leaving a year-end balance of $1.1 billion. Draft language for this year’s fiscal code bill that accompanies the budget would once again skip the Rainy Day Fund deposit. Why? The use of surplus dollars is highly restricted — spending the money requires a two-thirds vote — but suspending the rule demands only a simple majority.

Restoring Cuts Good for Families and the Economy

One thing is clear: state revenue has improved and estimates of growth for next year are higher, as the national economy is showing signs of recovery. Pennsylvania is in better fiscal shape now than just a few months ago. This allows lawmakers to restore some of the deep cuts proposed by the governor. Doing so is vitally important for a number of reasons.

First, continued cuts to schools and county human services amounts to a tax shift to local taxpayers. Many counties and school districts have responded to state budget cuts by enacting efficiencies and cutting jobs to save money. But limited resources can be stretched only so far, and local taxpayers will be asked to pay more at a time when many families are still struggling in the wake of the recession.

State cuts also put children, seniors, people with disabilities and other vulnerable Pennsylvanians at risk. Cutting early childhood education, for instance, will limit opportunities for our next generation, while reductions in cost-effective preventive services will end up sending more people to the ER, shelters or nursing facilities at a higher cost.

While SB 1466 improves upon the governor’s budget, it still makes many deep cuts to education and services that will hurt Pennsylvania families, cost jobs and threaten economic growth. As I mentioned earlier, budget cuts have already cost 22,000 jobs across Pennsylvania – in the classroom and on the front lines of many communities. Lawmakers need to once again invest in schools and preventive services to strengthen the economy and help our communities grow.

Lawmakers Should Enact a Responsible Budget

Gov. Corbett has held fast to his no tax rhetoric, if not his no tax pledge, and lawmakers are loathe to raise taxes in an election year (or any year for that matter). Still, lawmakers have numerous options before them to adopt a balanced approach to this year’s budget.

Support Gov. Corbett’s proposed cap on the sales tax vendor discount:

The governor proposed in his executive budget to cap the discount for timely sales tax payments enjoyed by the state’s retailers. The proposal would affect 2 percent of the state’s businesses. The discount is a windfall for a few large retailers. Five retailers collected more than $1 million in 2010 and 2011 and another 11 collected between $500,000 and $1 million. Gov. Corbett’s proposal would raise $41 million, about as much as is needed to support a much scaled back General Assistance Program for low-income adults with temporary disabilities.

Hold the line on new special interest tax cuts:

The House has been sending tax cut bills over to the Senate and seems determined to put some on the trade table. One doozy is the sales tax exemption for private jet purchases and repairs. Several surrounding states, at the behest of a private aviation trade group, have been promoting a race to the bottom on sales taxes for plane repair, arguing that a pilot can fly to another state for repairs (OK, but will the pilot then walk home?). The Pennsylvania bill goes much further, exempting sales tax on planes purchased for use in the state as well as repairs, at a total annual cost of $9.3 million to the commonwealth.

No additional changes to sales factor and net operating loss:

The state’s business community argues that Pennsylvania’s corporate income tax rate is an impediment to growth, but each year comes to the Capitol asking for special tax breaks that benefit a select few corporations at the expense of everyone else.

Over the past decade, the cost of business tax cuts has tripled, rising to $2.4 billion in the coming year. These tax breaks primarily benefit the largest corporations and come with no commitment to create jobs. The impact on economic growth has not been measured. It is an article of faith for some politicians that tax cuts stimulate growth, despite economic evidence that demonstrates otherwise.

For too long, lawmakers and governors from both parties have taken a piecemeal approach to business tax reform. A smarter approach, before making any more tax cuts, is to step back and undertake a more comprehensive analysis of the state’s business tax system. A smart analysis that sums up the costs and benefits of tax changes should be the basis of any business tax reform plan going forward.