PBPC Calls on Legislature to Raise Additional Revenue to Bridge Budget Gap

September 18, 2009

Pennsylvania Budget and Policy Center Director Sharon Ward sent the following letter to members of the General Assembly today regarding the state budget:

Dear members of the Pennsylvania General Assembly:

With details regarding the purported budget agreement coming out in the press, we are concerned about crafting a plan that is too reliant on one-time revenues and transfers from other funds. To ensure a sustainable and responsible budget plan, Pennsylvania needs to consider additional recurring revenue to help bridge the current funding gap. The use of recurring revenue helps not only to solve fiscal problems in 2009-10, but in future years.

We urge the Legislature to enact two taxes that not only provide recurring, sustainable revenue for the state, but also make good public policy sense for Pennsylvanians.

1.   Enacting an excise tax on smokeless tobacco, cigars, and other tobacco products can benefit Pennsylvania in multiple ways.  As is the case with increasing cigarette taxes, levying a tax on other tobacco products would discourage young people from starting to use the products. It would help eliminate the price differential between cigarettes, which are subject to tax, and other harmful products which escape taxation. The revenues produced would be predictable and slowly declining over time – much like the state’s cigarette tax.  Pennsylvania is the only state in the nation without such a tax.

2.    Pennsylvania could join other energy producing states and enact a severance tax on natural gas extraction. A severance tax would not only provide needed revenue for the state, it also ensure that state and local governments would be reimbursed for infrastructure, environmental, and social costs associated with increased drilling activity.  The natural gas industry is very familiar with severance taxes, as they are extremely common, being levied in 13 of 14 states with greater natural gas production than Pennsylvania.  In those states, the tax has done little to discourage extraction activities.  Adding the tax now would reduce uncertainly for producers as they determine their cost structure for developing the Marcellus Shale.  While the deflated market price would limit tax collections in 2009-10, analysts expect both price and demand for natural gas to increase as the recession recedes.  In fact, drilling in Pennsylvania has accelerated, despite low market prices and the recession. Within five years, tax collections from a severance tax are likely to exceed $300 million per year.

The enactment of these two focused taxes is the fiscally responsible thing to do.  It would help Pennsylvania correct its structural deficit at a time when both employment and consumption are restrained.  They would also assist lawmakers in balancing future budgets and avoid haphazard mid-year service cuts.  Finally, the taxes could help limit the “rob Peter to pay Paul” practice of emptying out other state funds, placing the onus of funding the MCARE tail or catastrophic loss claims on all Pennsylvania taxpayers.

Sharon Ward
Director