Budget Debate Highlights Pennsylvania’s Need for Fundamental Tax and Pension Reform

Despite very different opinions on how to fix the budget, Pennsylvania legislators and the governor have agreed on something: there is a $1.2 billion budget shortfall. In the words of Senate Appropriations Committee Chair Pat Browne, “That’s progress. We know where we’re starting from.” However, the two sides are still very far from reaching a final budget agreement. Governor Wolf recently vetoed the Republican controlled legislature’s budget and negotiations between Republican legislators and the administration have stalled.

Representative Daryl Metcalfe, one of the Republicans disappointed with Governor Wolf’s veto, summarized the feelings of many of his colleagues saying: “On the budget deadline of June 30, the Republican legislative majorities delivered to Wolf’s desk a balanced, on-time, no tax-increase budget, state liquor privatization legislation, and a historic pension reform bill for Pennsylvania’s two public employee pension systems. However, the governor’s three vetoes demonstrate that he wants taxpayers to pay more and is only interested in making a political statement by siding with the unions rather than acting on behalf of the taxpayers. We need to make sure we balance the budget responsibly without any tax increases.”

The Republican budget proposes spending $30.2 billion, which is about a four percent increase from last year. It also includes reductions to corporate taxes and no tax increases. In contrast, Governor Wolf has proposed a budget that increases spending to $31.6 billion, an 8.7 percent increase from last year and the largest one year budget increase since 1991. His budget proposal also raises significant revenue through several tax hikes. These include increasing personal income taxes, sales taxes, tobacco taxes and adding a severance tax on natural gas production. However, the governor’s budget also provides property tax relief starting next year. When the governor’s tax reforms are fully implemented, the average family of four will still see a net tax increase of $1,372 per year according to the Commonwealth Foundation. Overall, Republicans have rejected Governor Wolf’s budget proposals, arguing that they will hurt the middle class and cost the state jobs, especially in the growing natural gas industry.

Given Pennsylvania’s already high tax burden, additional taxes would likely chase away even more residents and businesses. As shown in Rich States, Poor States, the state has some of the highest taxes in the nation and ranks 41st in terms of economic competitiveness. Many years of bad economic policy have taken their toll, with hundreds of thousands of residents and billions of dollars in wealth leaving for states with lower taxes.

Another major issue lawmakers are debating is how to combat the state’s rising unfunded pension liabilities. The state’s pension system has more than $50 billion in unfunded accrued actuarial liabilities, according to the most recent comprehensive annual financial report CAFR. However, State Budget Solutions reports the state has nearly $185 billion in unfunded liabilities. This significant discrepancy is largely due to the use of different accounting standards and assumptions. Pennsylvania uses an assumed rate of return of 7.5 percent for its pension fund investments, while State Budget Solutions measures liabilities based on the approximate equivalent of a 15-year U.S. Treasury bond yield.

In an attempt to improve the pension situation, part of Governor Wolf’s plan is to refinance $3 billion of existing pension debt at lower rates by issuing bonds. The governor claims this would be paid for by making changes to the state-run liquor store system through expanded hours and direct shipments, which is estimated to generate an additional $185 million in revenue. Republicans, however, have pushed for the privatization of wine and spirits stores. The Republican supported budget relies on $220 million in new revenue that would come from privatizing liquor sales and closing state run wine and spirits stores. However, Governor Wolf recently vetoed legislation that would have done exactly that. The bill would have ended what former Governor Dick Thornburgh once called the “soviet-style monopoly” of Pennsylvania’s state run wine and spirits stores.

One alternative to stop the increase in unfunded pension liabilities is to create a 401k-style pension system for newly hired employees. The defined-contribution system would be similar to the retirement plans most businesses in the private sector have been using for years. Supporters say that this system could save more than $18 billion over the next 30 years. Members of the General Assembly would also be enrolled in the program upon their election or re-election. Despite the benefits, Governor Wolf also recently vetoed a bill that would have established this type of pension system.

The hard working citizens of Pennsylvania would benefit considerably if the state adopts fundamental tax and pension reform.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth