Pennsylvania’s Economic Recovery Slowed by Tax and Budget Cuts (revised)

The Pew Charitable Trust recently looked at how all 50 states are recovering from the Great Recession (late 2007 to mid-2009) and the challenges – loss of tax revenue, depletion of cash reserves, increased demand for certain services – they faced.[1] Unlike the federal government, most states can only spend what revenue they bring in. Pew followed quarterly state tax collections from 2006 through the first quarter of 2014, measuring how far individual state tax revenues fell in the aftermath of the recession, and how far they recovered through early 2014, adjusting for inflation.

A closer look at the Pennsylvania data showed that spending and tax cuts in 2011 reversed Pennsylvania’s initially robust recovery of state revenues following the Great Recession. Through the first quarter of 2014, Pennsylvania tax collections were 2% lower than they were at their peak (in PA, this was the first quarter of 2008), earning the commonwealth a ranking of 26th highest in revenue growth among states for the overall post-recession period. But within that period, there are two distinctly different tales to tell about Pennsylvania’s fiscal recovery.

From early 2008 to early 2011, Pennsylvania ranked 7th highest in tax revenue growth among states. Since then, Pennsylvania’s revenue recovery has slowed considerably, dropping to 46th highest in the nation through the first quarter of 2014. In this second time frame, which coincided with cuts in state spending and business taxes, Pennsylvania tax revenues grew only 0.4% more than the inflation rate, as compared to 11.5% nationally. Pennsylvania lost its advantage and now lags behind much of the nation.

Source: Pew Charitable Trusts analysis of U.S. Census data, August 2014.

Rebound of tax receipts is not only linked to the strength of a state’s economy, but also to lawmakers’ decisions. While some states made the hard decision to raise taxes to help restore funding for critical public investments, states like Pennsylvania resisted. Instead, Pennsylvania reduced its future revenue by cutting business taxes through the creation and expansion of tax credits and the continued phase-out of the capital stock and franchise tax. Pennsylvania also cut spending, especially on public education, leading to a loss of education jobs since the 2010-11 school year. This job loss, in turn, slowed the recovery of the private economy and, with it, the growth of tax revenue. While Pennsylvania has struggled with funding schools, colleges, hospitals, and other public services that help spur the economy, many other states, where revenues recovered more robustly, have had an easier time. For example, Pennsylvania is one of only a handful of states that has not begun to restore higher education funding cut during the recession. The state is providing $2,206 less per student in inflation-adjusted dollars to public colleges than it did in 2008.[2]

Since the recession began, the patterns of job and revenue growth in Pennsylvania have closely mirrored one another. While Pennsylvania was a top-10 state for job growth in 2010, it has plunged to 47th since then, a recent Keystone Research Center analysis found. [3] The same flawed policies have held back both revenue and job growth in the state since the end of 2010.

Outside experts have noted the commonwealth’s fragile fiscal state. In late September, Fitch Ratings downgraded Pennsylvania’s credit rating to AA-minus, citing the nearly $2 billion in one-time revenue sources needed to balance the 2014-15 budget plan and ongoing concerns about the state’s pension debt. Both Standard & Poor’s and Fitch have changed their outlook on Pennsylvania to negative, while Moody’s Investor Service has downgraded its bond rating for Pennsylvania for three straight years.[4] A credit downgrade makes it more expensive for the state to borrow money.

Without sufficient revenues, Pennsylvania can’t adequately invest in public services such as education and transportation infrastructure. That, in turn, results in local tax increases and service cuts. Pennsylvania won’t see a return to economic recovery until state officials pursue more responsible policies of revenue growth and reinvestment.

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