Getting to Good -- An Analysis of Pa.'s Tentative Budget Framework

To download a pdf of the brief click here

Over the past 48 hours, news report have trickled out about a tentative budget agreement between Republican legislative leaders and the Wolf Administration. Lacking the information for a full analysis, we will instead lay out criteria for evaluating any budget deal; assess what the early information indicates about the likelihood of this tentative budget agreement meeting these criteria; and suggest how the negotiators might improve the budget framework as they further develop its details.

The criteria: Pennsylvania needs a budget that invests in people and is supported by sustainable revenues that are raised in a fair and progressive way. More specifically, a good budget for this year should:

  • restore funding to education (at all levels) and to human services;
  • provide property tax relief targeted to moderate- and low-income homeowners and to older rural and urban communities;
  •  solve the state’s structural budget deficit without resorting to one-time gimmicks;
  •  collect revenues in a progressive way that counters, or at least does not exacerbate, Pennsylvania’s regressive tax system – the sixth worst in the nation.

Given these criteria:

A severance tax on natural gas drillers is a critical means by which to provide new, sustainable revenues that are raised fairly. The omission of a severance tax from the framework budget agreement being considered by the governor and general assembly is a fatal flaw that undercuts the ability to achieve a good budget. The governor’s original proposal was to allocate most of the severance tax revenue to education funding. A severance tax would create a sustainable and growing source of revenue to ensure adequate education funding not only this year but in the years to come, a major step towards reducing the structural deficit. Absent this sustainable source of revenue, identifying adequate education funding will be more difficult in every annual budget negotiation.

Property tax relief must include a renter rebate and target low- and moderate-income homeowners. PBPC (and others) have pointed out for some time that property tax relief is an area where compromise is possible. The framework agreement could achieve a historic win on property tax relief for struggling families and communities.

The final budget agreement needs to get the details of property tax relief right for this to be a real win: property tax relief must include a renter rebate for working families (not just seniors) and must target dollars to moderate- and low-income homeowners and communities. Progressive distribution of revenues for property tax relief is even more essential because the budget framework raises all the revenue for such relief from Pennsylvania’s most regressive tax, the sales tax. Without a renter rebate, many families earning less than $50,000 per year could pay several hundred dollars in additional sales tax but get none of the tax relief. Similarly, if large portions of property tax relief go to businesses and to upper-income homeowners, moderate-income homeowners and neighborhoods could pay more in additional sales tax than they get back in property tax relief. Analysis of the original Wolf and House property tax relief proposals makes clear that many constituents in Republican-represented districts, including a majority in lower-income rural areas, would benefit from a more progressive distribution of property tax relief that includes a renter rebate. So, unless playing reverse Robin Hood has more appeal to some lawmakers than representing their constituents, getting the distribution of property tax relief right should be an easy bipartisan win.

Make sure the numbers add up – the final budget agreement needs to honestly deliver revenue adequacy and eliminate the structural budget deficit. The most recent estimates from the Wolf Administration put the structural budget deficit, without new revenues, in excess of $2 billion by July 1, 2016. News reports indicate that revenues of $600 million (potentially a recurring source of revenue) may be reprogrammed from existing gaming revenues to help address this deficit and fund education. Negotiators also appear to have agreed to find revenue from pension changes and from changes to the state’s wine and spirits stores (from privatization, modernization, or both) – but without having agreed to sensible plans that would actually deliver savings.

We are skeptical that revenues from pension or wine and spirits store changes can be realized in this fiscal year or that this revenue would be recurring.

If the numbers in the current framework don’t add up, negotiators need to find more money. That’s why we think they have no choice but to enact a severance tax. But even this may not be enough. Accepting that the best long-term options are politically unattainable this year – tax fairness that raises more revenue from high-income Pennsylvanians and from corporations that pay little or nothing  – there are other revenue options that could be added to the budget deal NOW, including fixing the bank tax; ending the smokeless tobacco and e-cigarette tax loophole; and limiting the sales tax vendor discount (which over-reimburses retailers for collecting sales tax).

The state could also free up an estimated $231.5 million dollars by increasing the minimum wage to $10.10 per hour. These savings would result because a higher minimum wage would lift the incomes of many low-income families above the old eligibility level for Medicaid and into the income range paid for through “Medicaid expansion.” This shift reduces the state share of Medicaid payments from nearly half to almost nothing. The state could also raise a small amount of revenue by ensuring that people with big pensions don’t qualify for income tax forgiveness on their supplemental earned income.

Restore funding for education and human services on a sustainable basis. The best news from the early reports of a deal are that the compromise budget would begin to restore the funding that was cut from classrooms in 2011-12. These cuts have been undermining educational opportunity ever since. Adequate and equitable education funding for the long run, however, will require sustainable funding. Indeed, news reports indicate disagreement about the level of funding for early childhood education in the first year and also regarding whether Republican legislative leaders have made commitments on education funding for the 2016-17 budget. To get started on securing adequate and equitable education funding for the long-term, we need a severance tax in THIS budget and some of the other revenue options identified above.

Tax fairness. Pennsylvania already has the sixth most regressive state and local tax system in the nation. This budget will not improve that standing significantly. At minimum, however, negotiators should seek to “do no harm” and make incremental progress. A severance tax, as well as equitable property tax relief that includes a rent rebate, are necessary to achieve such progress.

We have not addressed here in any detail the pension deal or changes to wine and spirits stores – except to note that we should not count on policy shifts in these areas as revenue sources. We will analyze the pension issue separately. We will analyze the wine and spirits store deal if and when there is one.

While we recognize that the perfect should not be the enemy of the good, Pennsylvania needs a fiscally responsible budget deal that reinvests in education in a sustainable way before lawmakers and the governor sign on the dotted line. Pennsylvanians also want this, and support a severance tax that would help us achieve it. Pennsylvanians have stood by the governor this far. They will stand by him a little longer if he needs to hold out for a good budget.

 

To download a pdf of the brief click here

 

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PBPC budget framework analysis to EL 20151111.pdf368.49 KB