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Pennsylvania budget analysis for 2010
- 1 Budget Facts 2010: Pennsylvania State Budget Overview
- 2 Budget Facts 2010: Spending Increases by Department
- 3 Budget Facts 2010: Natural Gas Severance Tax
- 4 Budget Facts 2010: Pennsylvania Sales Tax Expansion
- 5 Budget Facts 2010: Unemployment Compensation
- 6 Budget Facts 2010: Tobacco Taxes
- 7 Budget Facts 2010: Pennsylvania Education Spending
- 8 Budget Facts 2010: Corporate Taxes
How much does the state spend?
State Government's Total Operating Budget (proposed) = $66.4 billion (FY 2010-11)
- General Fund Budget (proposed) = $29.0 billion
- NOTE: Most "budget" references are to this portion of the Commonwealth's Operating Budget, which represents less than half of the state's total spending.
- Other/Special State Funds (estimate) = $14.4 billion
- NOTE: This spending includes the Lottery Fund, Motor License Fund, Gaming Fund, and other such dedicated funds.
- Federal Funds (estimate) = $23.0 billion
- NOTE: These funds from the federal government are spent by the state (excluding stimulus funds used to support the state General Fund).
Local government spending (projection) = $67.8 billion (FY 2010-11)
How large is the state budget deficit?
Following January's collection, Pennsylvania General Fund revenues are $374 million below estimate for FY 2009-10, according to the Department of Revenue.
- Gov. Rendell has proposed "freezes" of $135 million in approved FY 2009-10 spending.
- Reductions have not keep pace with revenue declines.
Is Pennsylvania a high tax and high debt state?
- According to the Tax Foundation, Pennsylvania currently has the 11th highest state and local tax burden. At the beginning of Rendell's tenure, Pennsylvania ranked 17th.
- Pennsylvanians pay $4,463 per capita in state and local taxes (representing 10.2% of their income).
- Pennsylvanians owe $116 billion in state and local government debt as of Dec. 2009.
The Executive Budget Maintains Above-Inflation Increases in Spending over Rendell Tenure
- The FY 2010-11 budget proposal represents a 44.8% increase in total General Fund spending since Rendell took office in January 2003.
- The Executive Budget increases spending over fiscal year 2002-03 by inflation and population growth, plus an additional $4.8 billion.
The Executive Budget Proposal Increases Spending in K-12 Education and Public Welfare
- K-12 Education and Public Welfare--the two largest items in the General Fund Budget (representing 80% of all General Fund spending)-would receive increased funding in FY 2010-11.
- Contrary to the Governor's claim, these programs are not "mandated spending." The Commonwealth Foundation has suggested a variety of policy solutions, including expanding the Educational Improvement Tax Credit and Medicaid reforms (which would continue these services at a lower cost to taxpayers).
- K-12 Education would receive $443 million more in FY 2010-11 than in FY 2009-10-a 46.3% increase in spending since 2003 (16.7% in inflation-adjusted spending).
- Public Welfare would receive $482 million more in FY 2010-11 than in FY 2009-10-a 68.2% increase in spending since 2003 (41.3% in inflation-adjusted spending).
Natural gas booming Marcellus Shale Formation
The Marcellus Shale is a thick and difficult-to-drill geological formation containing natural gas nearly a mile or more under much of Pennsylvania.
- More than two-thirds of Pennsylvania contains accessible natural gas.
- Recent estimates place recoverable gas in the entire formation (not just Pennsylvania) at 489 trillion cubic feet.
- As of 2008, shale drilling created an estimated 29,000 jobs, and another 98,000 jobs are projected to be created in 2010.
Rendell's Proposed Tax
Gov. Rendell has proposed a tax of 5% on the value of extracted natural gas, plus $.047 per thousand cubic feet of extracted gas. There is an exemption for marginal wells producing less than 60,000 cubic feet per day.
- Rendell expects to collect $178 million in the upcoming fiscal year from the proposed severance tax and $500 million per year by 2014-15.
- Ninety percent of severance tax revenue would go to the state General Fund--not for local environmental or infrastructure improvements as claimed by most tax proponents.
The governor modeled his proposal after West Virginia's severance tax.
- In the last 10 years, drilling activity in the Commonwealth has increase by 400%, however, West Virginia has only seen a 20% increase.
Facts and Myths About the Severance Tax
- Tax supporters highlight the fact that other states already have a natural gas tax, however, this is only part of the story; most state's with difficult-to-drill shale formations have reduced their severance tax to encourage drilling.
- It is a false claim that drillers will come to Pennsylvania regardless of a tax.
- Drilling companies are already paying their "fair share" to the state without a new tax.
- Marcellus Shale exploration doesn't ravage the environment or local infrastructure.
Gov. Rendell's Proposed Sales & Use Tax Expansion
Gov. Rendell has proposed lowering Pennsylvania's Sales & Use Tax from 6% to 4% and expanding the tax to 74 goods and services currently not taxed.
- Philadelphia charges an additional 2%, and Allegheny County 1%, on top of the state rate.
- Major exemptions that would remain include: health care, food, clothing, tuition, prescription drugs, gasoline, manufacturing materials, and purchases by charitable organizations and governments.
Broadening the Sales & Use Tax base provides greater tax neutrality and fairness - i.e., not picking and choosing favored special interests for an exemption - and the lowered rate would make many goods less expensive for Pennsylvanians. However, the proposed tax change is not revenue neutral.
- The Sales Tax expansion would result in an estimated $531 million in additional revenue next year, and $900 million per year when fully implemented, coming out of the pockets of Pennsylvanians.
Rendell would also eliminate Sales & Use Tax vendor compensation.
- Vendors that collect the Sales & Use Tax and submit their collections properly and timely receive a 1% rebate on their collections; 99% goes to the state.
- This change represents a $74 million tax increase.
Based on the Pennsylvania State Tax Analysis Modeling Program (PA-STAMP), the increased collections will result in 10,000 fewer private sector jobs in 2011 and a loss of 15,000 jobs by 2012.
Unemployment in Pennsylvania
Since December 2007, Pennsylvania has lost more than 200,000 jobs.
Pennsylvania's Unemployment Compensation Fund is Bankrupt
Pennsylvania has borrowed over $3 billion from the federal government to keep its unemployment compensation fund solvent.
- Pennsylvania ranks among the top 10 states in highest unemployment taxes per employee.
- Last year, employers paid about $380 per employee in unemployment compensation taxes.
- For 2010, the average tax per employee increased to $432 while benefits decreased by 2.3%.
- Sandy Vito, PA Secretary of Labor and Industry, estimates the average cost per employee will increase by $189 by 2016 if no reforms are made.
- In March 2010, Pennsylvania paid out $442 million in UC benefits.
- Only California, with three times the population and a much higher unemployment rate, pays out more in unemployment claims.
- Pennsylvania has among the most generous unemployment compensation eligibility and benefits in the country.
Unemployment Compensation Extensions Increase Unemployment
- Since the 2008 "stimulus" was signed by President Bush, the Keystone state's unemployment rate has increased from 5.8 percent to 9 percent.
- Economists agree that benefit extensions lead to prolonged periods of unemployment. Congress's extension of benefits from 46 to 79 weeks has nearly doubled the average duration of aid for those out of work.
- Had the average unemployment claim duration for Pennsylvania matched the average of the five states with the lowest duration time, Pennsylvania would have and additional 57,300 jobs and the state would have saved $1.1 billion in UC trust funds last year.
Pennsylvania remains the only state that does not impose an additional excise tax on smokeless tobacco and one of only two that does not apply an excise tax on cigars. It is also the only state adding tobacco farms.
- According to Census data, Pennsylvania is the only tobacco farming state that added farms from 2002 to 2007. During this period the nation's tobacco farms dropped by 72%, while Pennsylvania's rose by almost 30%.
- Tobacco production from Pennsylvania family farms increased over 100% from 2005-2009, and reached a value of $31.5 million.
Governor Rendell's Proposed Tax
- Gov. Rendell proposed a tax of 30% on the retail price of cigars and smokeless tobacco products, in hopes of collecting $42 million in the upcoming fiscal year.
- House Democrats recently proposed to exempt cigars from the excise tax, but increase the cigarette tax by another 30 cents per pack, expecting to generate $194 million.
- Based on the Pennsylvania State Tax Analysis Modeling Program (PA-STAMP), this tax hike would result in 3,000 fewer private sector jobs in 2011 in the state.
Local Jobs Might Move
A disproportionate number of online cigar wholesalers call Pennsylvania home precisely because there is no additional excise tax on smokeless tobacco products and cigars.
- When a similar excise tax was proposed last year, Keith Meier, CEO of Cigars International, said his $90 million company with 150 employees might "swim to sunnier shores, such as Florida" if a tax was adopted.
A State Tobacco Tax Will Impact Pennsylvania's Farmers
Excise taxes on smokeless tobacco and cigars will hurt Pennsylvania's small tobacco farmers, many of whom are Amish or Mennonite--not large tobacco companies.
- According to the U.S. Department of Agriculture, tobacco is grown on small farms in the state with an average of 6.1 acres.
- Many tobacco farmers grow tobacco as supplementary income to cover annual real estate taxes and to keep their farms in production.
Taxes on Cigarettes and Tobacco Products Are not an Effective Revenue Source
In a 2009 study, Altria found the following: of 57 state excise taxes imposed from 2003 through 2007, only 16 met revenue projections.
- Thirty-nine state tax increases generated revenue 2% to 18% short of estimates.
Pennsylvania cannot spend its way to educational success
K-12 public education spending has skyrocketed in Pennsylvania:
- Pennsylvania's education spending increased from $4 billion in 1980 to over $25 billion in 2009- -a 133% increase in per-pupil spending, from $6,171 to $14,420 (in 2010 dollars).
- School construction and debt spending has doubled in just 10 years. Prevailing wage laws increase the cost of construction by 20% or more; repealing this mandate would save $400 million annually in construction costs.
Public School Staffing Has Increased While Enrollment Has Declined
- Since 2000, enrollment has decreased by 26,960 while schools have hired 32,937 more staff members.
- Most of these new employees pay dues to the PSEA labor union, which runs one of the largest political action committees in the state and heavily funded Gov. Rendell's campaigns.
K-12 Public Education Performance Has Stagnated
- Despite these spending and staff increases, performance on the NAEP exam has changed little.
- Academic studies have found little or no correlation between student achievement and class size, teacher salaries, or per-pupil expenditures.
- Pennsylvania ranks a dismal 43rd in the nation in combined SAT score, and scores have not improved over time.
Public Schools Have $2.7 billion in Reserves
- Reserve funds have increased over $1 billion since 1996-1997 to $2.7 billion
- School district fund reserves are almost 8 times the amount of Gov. Rendell's proposed $354 million increase in state subsidies.
School Choice Saves Taxpayer Money
The $75 million Educational Improvement Tax Credit (EITC) was reduced in last years' budget deal, while subsidies for school districts rose by four times the cost of the entire EITC. Another cut to the EITC is scheduled, while school districts are in line for an increase of over $300 million.
- The average EITC Scholarship is $1,100, compared with the average school district spending of over $14,000 per-pupil.
- If the EITC were to be cut and scholarship opportunities reduced, many students would be forced back into high-cost public schools, resulting in higher property taxes.
- The EITC saves taxpayers almost $500 million per year by allowing children to attend better or safer schools at a lower cost to taxpayers.
Corporate Taxes in Pennsylvania
- Pennsylvania collected $1.9 billion from the corporate net income tax inFY 2008-09. This collection is in addition to the property, sales, payroll, gross receipts, and other additional taxes business pay.
- Corporate income taxes cost Pennsylvanians $183 per person, as business taxes are ultimately passed on to consumers and employees, which represents about 2.4% of total state and local government revenues ($7,465 per person) in the state.
- In 2003, the latest year with available data from the Department of Revenue, 71% of corporate filers had no tax liability. This number is deceptive:
- Many of these are corporations that are no longer in operation but have never been legally dissolved.
- The corporate income tax is a levy on profits, and many businesses lose money. Over 53% of corporations filing returns in 2003 lost money.
- This percentage of "non-taxpaying" corporations is similar to the experience in other states.
- The Commonwealth has the second highest state corporate income tax (behind Iowa, which has more generous deductions and exemptions). When compounding state and federal corporate taxes, Pennsylvania's corporate income tax rate is higher than that of every other country.
Governor Rendell's Proposed Business Tax Changes
- Reducing Pennsylvania's corporate tax rate from 9.99% to 8.99%.
- Eliminating the cap on Net Operation Loss (NOL) carry-forwards.
- Pennsylvania is one of only two states to cap NOL carry-forward. An un-capped model will reduce the fiscal pressures on cyclical companies, i.e., companies with profits some years and major losses in others.
- Converting to a Single Sales Factor Apportionment.
- Currently, Pennsylvania's share of a multi-state corporation's profits is determined by how much of its sales, payroll, and property is in the state. The proposed change means corporations would only use the percentage of their sales in Pennsylvania-not the percentage of their employees or buildings-to determine what they owe to the state.
- Incorporating Mandatory Unitary Combined Reporting (MUCR).
- While reducing the state's corporate tax rate and eliminating the cap on NOLs would reduce the tax burden, these gains would be outweighed by MUCR.
- Gov. Rendell estimates these changes would result in a $67 million corporate tax increase next year, and $167 million more from corporations the following year.
Lower Business Taxes Generate Economic Growth
- Corporate taxes should be reduced, not hiked. Corporate taxes are passed on to shareholders, to consumers in higher prices, and to workers in the form of lower wages. Indeed, higher state corporate income tax rates result in lower wages.
- Ireland, which cut its corporate income tax rate to the lowest of the OECD nations, saw its economy boom.
- Pennsylvania offers $750 million per year in grants, loans, and tax breaks to attract or retain businesses-ranking the Commonwealth as the 2nd highest state in amount of economic development incentives. A better policy would be to repeal corporate welfare and lower the tax burden on all job creators.