State Budget & Taxes > New Revenue Options Needed

State Must Look at Revenue Options in New Budget

Pennsylvania's projected budget shortfall for the current fiscal year has jumped to $2.3 billion, Gov. Ed Rendell said Thursday. Looking ahead to the 2009-10 fiscal year, he predicted deep cuts in public services and state worker layoffs to keep the budget balanced amidst the economic recession.

However, state budget and staff cuts will only exacerbate the recession hitting Pennsylvania by taking money out of the state economy and sending more people to the unemployment line. The state needs to look at new revenue options to balance the budget.

In December, Gov. Rendell outlined his plan to close a projected $1.6 billion budget deficit with $500 million in cuts and money from the state's Rainy Day Fund, federal economic stimulus dollars and other one-time revenue sources.

With the deficit now projected to be $2.3 billion, Gov. Rendell said the additional $700 million gap could be filled with federal economic stimulus money and a $175 million draw-down of legislative surpluses. The governor said Pennsylvania will likely get between $2 billion and $4 billion over two years in federal stimulus funds.

Economic stimulus is absolutely necessary for Pennsylvania to close the deficit. Without it, Pennsylvania has little chance of balancing its budget without deep and painful program cuts or significant tax increases.

It is also appropriate for the Legislature to surrender the lion's share of its surpluses, before it asks Pennsylvanians to take on the burdens that will come with state budget cuts.

But those options alone are not enough to balance the budget in 2009-10. The revenue decline is a result of the deep recession that has gripped the nation and the world. While the economy is foundering now, it will recover at some point, jobs will return to Pennsylvania, and state revenues will rebound. The state's goal, therefore, should be to get through this cyclical downturn without doing significant damage to public services.

Pennsylvania policymakers must look at new revenue options to make that happen.

First of all, state officials should ensure that everyone is paying their fair share. That includes closing corporate tax loopholes that allow big retailers and other multistate corporations to avoid state taxes by hiding profits in low-tax states such as Delaware. Pennsylvania should also collect a tax on the extraction of natural resources, such as natural gas and oil, just as mineral-rich states like Texas, West Virginia, and Wyoming do. And Pennsylvania should join the ranks of every other state by putting an excise tax on smokeless tobacco.

To stem the decline in state revenues, policymakers should temporarily delay the phase-out of the Capital Stock and Franchise Tax and undertake an analysis of the cost and effectiveness of special interest tax credits.

While the governor has rejected a broad-based tax increase, Pennsylvania should look at taxing dividends, net profits, and other classes of unearned income at a higher rate than compensation and interest. This would impact wealthier Pennsylvanians much more than poor or middle-income earners and make Pennsylvania's tax system less regressive. It would also be consistent with research by Nobel Prize-winning economist Joseph Stiglitz and federal budget director Peter Orszag showing that cutbacks in state government programs are more harmful to the economy during a downturn than a tax increase on upper-income households.

Gov. Rendell predicted there would be "universal pain" in the upcoming budget, but there are better choices. State lawmakers and the governor can work together to fashion a budget that won't derail the long-term goals of Pennsylvania and efforts to transform our economy.