The Budget

As you are all aware, the Commonwealth is currently facing an estimated $3.2 billion deficit.  There are several proposals before us - including the elimination of state programs, cuts to services, the implementation of taxes on smokeless tobacco and the extraction of natural gas, and a .5 increase in the personal income tax.  The information that follows is intended to give you as much information as possible regarding our current budget situation, the proposals before us and to allow you the opportunity to educate yourself and weigh in on the options.  I look forward to working together with you.

How Did We Get Here?

When setting its budget each year, the General Assembly works from a revenue number (expected taxes, fees, etc. coming to the state) that is set by the Governor.  Because of the recession and downturn in the economy, the state has collected $2.36 billion less revenue than was budgeted as of the end of May. 

Following is a list of revenue sources and the amount of money that collections are under as of the end of May:

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State Spending

Many of the communications that I have received regarding the budget encourage the state to control its spending.  Following is a breakdown of the different spending areas and how much of the Commonwealth’s budget goes to each item.  If you click on a particular area, it will take you to more detailed information on proposed eliminations and cuts and their impact.  A large share of state spending is devoted to areas over which we (the state) have little or no control.  Health & Human Services, Education and Corrections, together, make up almost 85% of the budget.

Health & Human Services – 37.4%   Education – 35.4%   Protection of Persons & Property – 11.1%   Transportation – 6.1%   Direct & Supportive Services – 4.3%   Debt Service – 2.9%   Economic Development – 1.6%   Recreation & Cultural Enrichment – 1.2%

See How The State is Spending the Money - Click here

Cuts to Date

In December 2008, the Governor identified nearly a half billion dollars in cuts including 4.25% reductions in most agency budgets, freezing salaries for more than 13,600 non-union employees and eliminating the COLA for the Governor and Cabinet members this year.

The Governor’s proposed budget presented in February eliminated a total of 118 programs (See Eliminated Programs Here) for a total reduction of $385,718,000.  He made cuts to another 346 line items.

The Senate Republican budget (SB 850) passed earlier this month eliminated an additional 117 programs (See Eliminated Programs Here) for a total reduction of $363,144,000.  Even with those cuts, the Senate Republican budget is approximately $1.5 billion out of balance as of today.

None of the budgets that are being considered contain any WAMs.  There are very few COLAs in place, and many in the legislature (including myself) have given them back to the State Treasury.  I do contribute to my health care - as does the rest of the Senate and its staff.  We (the Senate Democrats) have also reduced our workforce by about 13% and have had a hiring and wage freeze in place for quite some time.  We also committed months ago to providing funds from our legislative accounts to balance the budget.

Without additional revenues, the Governor’s Office has estimated that our budget deficit will be $400 million this year; $2 billion in 2010-2011; $5 billion in 2011-2012; and $10 billion in 2012-2013.

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Where Do We Go From Here?

One-Time Revenue
There have been several proposals about using one-time revenue sources to help fill the gaps in the state budget for the current fiscal year and the coming one.  Those sources include the use of Federal Stimulus ($2,410,000,000) which does contain some discretionary funds for use by the Commonwealth, but is directed spending otherwise.  The Governor has also proposed the use of money from Health Care Provider Retention ($350,000,000), but that proposal has not been received well by the Senate Republicans.  The Governor would also like to see the legislature tap into the state’s Rainy Day Fund ($375,000,000), but – again – it has not been well received.  A MCO Provider Assessment ($200,000,000) is also being considered; while currently paid by Medical Assistance organizations, it would now be payable by all parties.  The MCO Smart Pharmacy ($54,000,000) discussed under Health & Human Services is also being proposed, but has not gained any real traction.  Finally, there is a proposal to use some other DPW funds ($55,000,000) as a one-time fix.

Tax Proposals
During the Governor’s February address, he proposed five taxes to bring in additional revenue to the Commonwealth.  While three of the five have had related bills introduced, none of the proposals have been discussed at any great length as part of the budget process.  They include a severance tax on natural gas extraction (estimated $107 million); a tax on other tobacco products (estimated $39 million); a 10 cent/pack cigarette tax increase (estimated $60.8 million); a diversion of 25 cents per pack of the cigarette tax from the MCare Fund (estimated $250 million); and the elimination of 1% “prompt payment discount” from sales tax retailers (estimated $74.9 million).

The federal cigarette excise tax just increased to $1.00 in April (although most cigarette manufacturers raised prices well before the effective date).  Currently, PA’s tax rate is $1.35 – near the middle of the pack.  According to the National Conference of State Legislatures, at least 25 states have legislation pending to increase tobacco taxes.  As of April 2009, seven states have already passed tobacco tax increases.

Personal Income Tax Proposal
Governor Rendell has proposed a .5 increase in the personal income tax for a period of three years.  The proposed tax will generate an additional $1.675 billion.  The rate is currently 3.07%.  If the increase is approved, PA will have the fourth lowest PIT rate among all states that have a PIT.

The impact of a 3.57% PIT would be as follows:

	Family Income - $40,000	PIT Increase per Year - $200
	Family Income - $48,562	PIT Increase per Year - $243
	Family Income - $50,000	PIT Increase per Year - $250
	Family Income - $70,000	PIT Increase per Year - $350
	Family Income - $100,000	PIT Increase per Year - $500

Over 2.5 million Pennsylvanians are over the age of 60; because the PIT does not include social security or pension income, many seniors will pay no increase whatsoever. Over 785,000 households are seniors who do not file state income tax returns; another 1,023,000 individuals are also seniors who do not file state income tax returns. They also will pay no additional tax. The state’s $32,000 poverty exemption shields many working families who earn less than the median income from any PIT increase.

This is being proposed as a temporary tax increase for a period of three years.  The concern by many is that there is no such thing as a temporary tax, but PA has had a temporary tax increase three times in its history.  It occurred first in 1983.  It occurred again in 1991, when a temporary increase was proposed for both the PIT and Corporate Net Income Tax. 

Business Taxes
The Governor is proposing a temporary pause in the phase-out of the Capital Stock & Franchise Tax.

The PIT is the tax for most small businesses; opponents say that companies would be forced to postpone new hiring, equipment purchases and upgrades, reduce work hours for current employees and cutting jobs.

NFIB (National Federation of Independent Business) PA, the PA Business Council, the PA Chamber of Business & Industry and the PA Manufacturers’ Association have indicated that the tax increase would kill nearly 24,000 PA jobs in the short term, worsen the Commonwealth’s budget and financial problems, and extend them deeper into the future.  The hike would also reduce disposable income by an estimated $1 billion

The Governor’s proposal also includes the elimination of a 1% sales tax vendors’ allowance (essentially, vendors keep 1% of all sales tax they collect as an administrative fee) which would result in a savings of $75 million; opponents indicate it would have a direct negative impact on businesses and could lead to reduction in workforce.  According to a national study, retailers can incur costs of up to 13.47 % for remitting and collecting the sales tax

Property Tax Relief
Property Tax Relief funded through the gaming industry is not impacted in any way by the current budget issues because the funds come from a restricted account.  For the coming fiscal year, $612.9 million will go out to all homeowners (for wage tax relief in Philadelphia).  A total of $143.4 million will be used for enhanced property tax rebates and $30.6 million will be spent to provide higher rebates for seniors with a high tax burden/or those who live in a city with a high tax burden.

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