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OP-ED: Is this the year Pa. resolves its perennial budget crisis?

January 4, 2017 - 5:29pm

This piece originally appeared in the Philadelphia Inquirer, December 28, 2016.

Many of us who write about budget politics have a keyboard shortcut to enter "Pennsylvanian Budget Crisis" into a document. Year after year, we write in December about the upcoming crisis and again in July (or sometimes far later) about how the crisis has been temporarily averted.

It is crisis time again. But perhaps this is the year we can change the script. There are new ways to do something that has eluded us in the past - solve the crisis on a long-term basis without imposing harsher new taxes on working people and the middle class.

Before coming to our long-term solution to the crisis, first a word about its dimension and cause.

The Independent Fiscal Office has projected that the deficit for the current fiscal year, ending June 30, will be $500 million while the deficit for the next fiscal year will be $1.7 billion. Those numbers do not include the cost of higher caseloads for medical assistance and long-term care than were projected last in July. Including those costs, and other likely shortfalls in revenue, the total deficit to be closed by June is roughly $3 billion.

Higher spending is not the cause of our budget crises. Measured by the share of the state GDP that flows through state government, general fund spending has been declining. From 1994 to 2011, under both Democratic and Republican governors, the spending averaged 4.7 percent of GDP. During the Corbett years that fell to 4.3 percent as spending on education and human services were sharply cut. And while the state has been able to restore some of those cuts under Gov. Wolf, overall spending remains at the same level as in the Corbett years.

So why do we face deficits year after year? There are long-term and short-term answers.

The long-term answer is that we have cut corporate taxes. They once accounted for more than 30 percent of general fund revenues. Today they are at 17 percent. If corporate taxes brought in just 22.5 percent of revenues, as they did in 2002-03, overall revenues would be higher by $2.3 billion. The deficit would be gone, with revenue to spare for us to invest in communities across the state.

The short-term answer is that, year after year, the General Assembly balances the general fund budget with short-term fixes: borrowing money from other funds (which needs to be repaid); shifting expenditures forward a year; selling licenses to new outlets for gaming and liquor; and instituting tax amnesties that mostly benefit the wealthy and create incentives to not pay taxes.

The General Assembly has been unwilling to raise taxes high enough to bring in enough revenue to solve the deficit problem now and in the future, while also making it possible to invest more in education, human services, and environmental protection, all of which are shortchanged in current budgets. Legislators on both sides of the aisle (rightly) don't want to increase personal income taxes that, given the flat income tax mandated by the uniformity clause of our constitution, fall heavily on working people and the middle class.

The Pennsylvania Budget and Policy Center has proposed a way around this. We suggest separating our personal income tax and taxing different classes of income at different rates. We would keep the tax on wages and interest close to its current rate (while increasing tax forgiveness for those with low incomes). But we would raise the tax rate on dividends, capital gains, business profits, royalties, and estates - which we call "income from wealth" - to 4.5 percent. Over two-thirds of the revenue raised by this tax would fall on the top 5 percent while 82 percent would be paid by families with incomes above $95,000.

Combined with some other measures - expanding the sales tax base to services that are mostly purchased by those with higher incomes while offering a sales tax credit for those with lower incomes; a modest severance tax on natural gas drilling; corporate tax reform that would lower rates while taxing the 71 percent of mostly out of state corporations that pay no corporate income tax now; and raising the minimum wage, which would increase revenues while reducing expenditures - our proposal would generate $2.5 billion, going far to overcome the two-year deficit. And because income for families in the top 1 percent are growing rapidly (while that of other families stagnate) and natural gas prices will rise again, our proposal would generate growing revenues long into the future.

Fixing our budget problems long term would enable those of us who write about state politics to eliminate the "Pennsylvania Budget Crisis" keyboard shortcut. Instead, we can write about a budget that invests in the future of Pennsylvania families and communities.

Two Approaches to the State Budget

January 3, 2017 - 9:58pm

It’s becoming more and more rare to see serious attempts on the part of newspapers (and their virtual counterparts) to compare policy proposals meant to deal with a serious public issue. That’s one reason I was so happy to see Tim Stuhldreher’s excellent piece, “Pennsylvania think tanks battle over remedies for $1.7 billion state budget deficit” in LancasterOnline.

The other reason I was happy is that the article demonstrates the difference between a serious proposal that actually tries to find a solution to the budget deficit—our Fair Share Tax Plan—and the Commonwealth Foundation’s right wing wish-list, which barely even gestures towards a solution. 

What, according to the piece, does the Commonwealth Foundation propose to close our state budget deficit? And what’s wrong with those ideas? They propose:

Putting new state employees in a 401(k) pensions—even though Republicans have failed time and again to find such a proposal that actually reduces state spending in the next fifteen years.

Expanding charter schools—even though, under our worst-in-the-nation charter school law, charters, especially in their provision of special education, tend not only to be more costly than public schools but also take funding away from those public schools.

End donation limits on the opportunity scholarship tax credit program—even though the program is a backdoor way to fund private schools and give tax breaks to corporations that actually reduces state revenues while not saving the state any money. 

Publishing labor contracts before they are finalized—even though this information is already available, there is no reason to think that greater publicity will change the contracts, and there is data shows that state employees are not remotely over-paid relative to the private sector. 

Increasing work requirements for welfare—even though welfare, as traditionally understood, was repealed in the 1990s, work requirements already exist in the TANF program that replaced it, and spending on that program is a small and declining share of the state budget. Of course, the Commonwealth Foundation is not really talking about “welfare,” but about federal programs such as food stamps that (1) don’t have any impact on the state budget; (2) can’t be changed by state action alone, and (3) create very little disincentive to work while providing essential support in helping those with low incomes escape from deep poverty.

You can find fault with our proposal, and we will continue to refinine it as we learn more. But you can’t deny that we actually have some ideas about how to close the deficit without massive cuts in spending on education and human services, and without broad-based tax increases.

But the Commonwealth Foundation proposal? There is a reason they don’t have estimates that show how their proposal reduces the budget deficit. It barely does so.

And unlike the Commonwealth Foundation proposal, we want to help people with low incomes, by raising the minimum wage among other things, rather than making them suffer while doing little to address the budget deficit. The Commonwealth Foundation, on the other hand, presents us with Ebenezer Scrooge’s Christmas wish list, updated for 2016. Their goal is to reduce the relatively little money we spend on helping people with low-incomes, no matter the pain it causes them. 

Broad and Narrow Taxes

December 23, 2016 - 5:55pm

Last week, just as we were putting out our paper on how to raise revenues without raising taxes on working people and the middle class, Governor Wolf announced that he would not call for raising broad-based taxes, particularly the personal income tax and sales tax, in the budget proposal he puts forward in February. And, of course, the Governor's statement echoes what the Republican leaders of the General Assembly have been saying as well. 

A friend asked me if I were disappointed by these announcements. I quickly responded, “not at all.”  Most of our tax plan is precisely designed NOT to require increases in broad based taxes.

Indeed, the core of our proposal—a new tax on income from wealth—targets families in the top 5%, and even more the top 1%, of incomes. Sixty-seven percent of new revenues would come from top 5%. Middle- and low- income families would pay very little because very little of their income comes from wealth—that is, dividends, profits, capital gains, royalties, and estates. 

We do call for an expansion of the sale tax base to some goods and services mostly bought by those with higher incomes, combined with a sales tax rebate for those with low income. And our proposal includes a small increase in the tax on wages and interest, but that is offset by a increase in tax forgiveness for those with low incomes. But that is a minor component of our larger proposal. Raising the tax on income from wealth to 6.5%, which would still leave it below similar rates in other states, would raise $2.5 billion per year, going far to close the deficit next year and leaving us a little extra to invest in schools and human services, and combined with our other tax proposals, enough to also cut broad-based taxes a bit.

So, my response is, when it comes to being against a broad-based tax increase, we are on the same page as Governor Wolf and the House and Senate Republicans as well. 

The Budget Our Democracy Deserves

December 23, 2016 - 5:24pm

Many of the ideas in this post are components of PBPC's recently-released "Fair Share Tax Proposal for Pennsylvania."

The recent political talk about Pennsylvania is focused on the latest in a series of fiscal crises. But lurking in the background is a larger crisis—a crisis of democracy in Pennsylvania. 

The deficit approaches $3 billion for this year and next year combined. Yet the solutions that one would think were most obvious in a putative democracy are not the ones the leaders of our General Assembly seem inclined to support. 

We are never going to solve our budget crises in Pennsylvania if we don’t fix our upside-down tax system. Pennsylvania is one of what the Institute on Tax and Economic Policy calls the “terrible ten” states when it comes to tax fairness. We tax those with high incomes at a far lower proportion than those with low incomes. State and local taxes take 12% of the income of the bottom 20% of families, 10.3% of the income of the middle 20% of families, but only 4.2% of the income of the top 1% of families. 

Over the last twenty years, incomes have been largely stagnant for those at the bottom and middle of the income scale. But the very rich have seen their incomes grow by leaps and bounds. We can’t generate more revenue in Pennsylvania to pay for schools and colleges and roads and bridges and clean air and water we all need when the very rich don’t pay their fair share of taxes. 

So, why, in a democracy, do we have a tax system that year after year punishes low- and middle-income families while rewarding those with high incomes?

We could take an important step toward fixing our budget problems if we instituted a severance tax on natural gas drilling. A modest tax would raise over $200 million now. And when gas prices recover, it could generate up to a billion dollars a year. Every other state that has substantial natural gas fracking operations has a severance tax. Polls show that over two-thirds of Pennsylvanians support such a tax.

So why, in democracy, do our legislators again and again fail to vote for such a severance tax?

Another important step we could take in dealing with our fiscal crisis is to reform our corporate income tax. We could raise $200 million in additional revenues while lowering the corporate tax rate by closing the “Delaware loophole.” Because of that provision, 71% percent of corporations, mostly large, rich, multi-national ones, avoid paying taxes to Pennsylvania. Moreover, it is the decline in corporate taxes that largely accounts for our deficits. Those taxes once accounted for over 30% of general fund revenues. Today they are at 17%. If corporate taxes brought in the 22.5% of revenues they did in 2002-03, overall revenues would be higher by $2.3 billion for this year’s budget. That would have eliminated our budget deficit and provided revenues for investments in K-12 and higher education, infrastructure, and clean air and water. 

Very few Pennsylvanians hold much corporate stock. And our current tax puts smaller, in-state corporations at a disadvantage against large, multi-state corporations. 

Why, in a democracy, would our legislators again and again fail to vote for corporate tax reform.

A full answer to these questions would take a much longer piece. But the main barriers to democracy—and a budget that serves all of us—are clear. 

One problem is that some of our legislators are more responsive to big campaign donors than to their constituents. That the natural gas fracking industry is a huge contributor to state legislators has much to do with our failure to tax them.

Another problem is that so many legislative district lines, especially in the House, have been drawn to create overwhelming partisan majorities. In those districts, legislators are far more concerned about losing a primary election to extremists in their own party than losing a general election to the opposing party. In Republican districts, that has encouraged legislators to care more about the views of right-wing ideologues who defend our upside-down tax system than the majority of their constituents who need the high-performing schools, access to college, safe roads and bridges, and protection of clean air and water that the state cannot fund at adequate levels now. 

When party leaders elected by a majority of their party, but a minority of the whole House or Senate have absolute control over the legislation that comes to the floor, they can block legislation that a majority of legislators and Pennsylvania voters want. I have no doubt that, even with Republican majorities in the House and Senate, more than 50% of legislators in both houses would vote for corporate tax reform and for a severance tax if they had the chance.

A final barrier to democracy in our state is the uniformity clause of the Pennsylvania Constitution, which prohibits graduated tax rates. Under our Constitution, the General Assembly cannot tax families with high incomes at higher rates than those with low incomes. 

There is, however, a way to fix our upside-down tax system despite the uniformity clause. The Pennsylvania Budget and Policy Center has proposed splitting Pennsylvania’s personal income tax in order to tax different classes of income at different rates. We would keep the tax on wages and interest close to its current rate (while increasing tax forgiveness for those with low incomes). But we would raise the tax rate on dividends, capital gains, business profits, royalties, and estates—which we call “income from wealth”—to 4.5%. Over two-thirds of the revenue raised by this tax would fall on the top 5%, while 82% would be paid by families with incomes above $95,000. 

Our proposal has been introduced in the General Assembly by Senators Art Haywood, Vincent Hughes, and Jay Costa. A state government that accurately reflected the interests of the vast majority of Pennsylvanians would embrace this proposal. But in our current state of affairs, it is difficult to enact. 

Difficult but not impossible. There are barriers to democracy, but if citizens from around the state rally together and demand action to fix our budget crisis without drastic cuts to education and human services, we can overcome them. 

Many advocacy groups, human service agencies, educators and labor unions have joined together in the Pennsylvania’s Choice campaign to help fix our broke tax system. You can help make that happen by signing up in support of Pennsylvania’s Choice today

The ideas in this post are components of PBPC's recently-released "Fair Share Tax Proposal for Pennsylvania" that are outlined below:

New Report: A Fair Share Tax Plan for Pennsylvania

December 21, 2016 - 6:35pm

In the wake of Budget Secretary Randy Albright’s mid-year budget briefing and the news that the Pennsylvania budget for 2016-17 will have a deficit of $600 million, the Pennsylvania Budget and Policy Center today released a new, comprehensive revenue proposal to address the looming deficit for FY 2017-18, which when combined with the deficit for this fiscal year, could approach $3 billion.

The new report, "A Fair Share Tax Proposal for Pennsylvania: How to Raise Revenues While Sparing Most Pennsylvanians," can be read in full here

While the current year deficit is a problem for the state, unfortunately it is not the biggest budget problem we face. The Independent Fiscal Office is projecting a 2017-18 deficit of $1.7 billion, which does not include the ongoing costs of higher human service caseloads which might add $300 million or more to the total.   

One barrier to raising revenues is the reluctance of legislators on both sides of the aisle to place additional taxes on Pennsylvania’s poor and middle-class. That reluctance is well motivated. Over the last 25 years, incomes for the richest Pennsylvanians have been rising fast, while incomes for all other Pennsylvanians have been stagnant. Despite that, Pennsylvania’s tax system is profoundly unfair, as it taxes those with the lowest incomes at a rate triple those with the highest incomes.  

The new report proposes a series of revenue increases that, taken together, would close the structural deficit and provide the funding necessary to meet the needs of the state, while sparing low- and middle-income people from most of the additional tax burden. 

The report proposes that the state:

  • Bifurcate the personal income tax into two parts and establish a higher tax rate on income from wealth (dividends; net income from a business, profession, or farm; capital gains; net income from rents, royalties, patents, and copyrights; gambling and lottery winnings; and income from estates or trusts). Raising the tax on income from wealth from the current 3.07% to 4.0% would bring in an estimated $788 million in new revenue. At a rate of 4.5%, the tax would bring in $1.2 billion. Over two-thirds of the new revenue would come from families in the top 5% of income; 82% would come from families with incomes of $101,000 or more. 

  • Raise the tax rate on wage and interest income from the current 3.07% to 3.25%, while expanding the tax forgiveness program to reduce taxes on those with the lowest incomes. This would raise revenues by a net of $375 million.

  • Expand the sales tax base to include goods and services that are more likely to be purchased by those with high, rather than low, incomes. Combined with a credit to low-income families for the sales tax they pay, this would net $338 million in new revenue.

  • Eliminate corporate tax loopholes by instituting combined reporting of corporate taxes (closing the “Delaware Loophole”), while lowering the tax rate. This would net $200 million in new revenue. 

  • Institute a modest severance tax of 6.5% on natural gas drilling. This would raise $218 million.

  • Raise the minimum wage to at least $10.10 per hour, which would increase income and sales tax revenues while reducing state expenditures for Medical Assistance. The net contribution to deficit reduction would be $225 million.

WATCH THE WEBINAR OF THE REPORT RELEASE

Unequal Pennsylvania

December 16, 2016 - 11:24am

For those of us that follow inequality statistics, this December has been a blockbuster month.  Most recently the Center on Budget and Policy Priorities (CBPP), in a prelude to a full reboot of its seminal report "Pulling Apart" (jointly produced with the Economic Policy Institute), released data (see the PA Fact Sheet) on family incomes in Pennsylvania by income fifth for 2015. In slightly less wonky language, CBPP sorted family incomes from lowest to highest and compared the distance between the highest and lowest earning families. According to CBPP, on average the top 5% of families in Pennsylvania earned $313,265 in 2015, a figure slightly less than 14 times the $22,638 earned on average by the bottom 20 percent of families. Ranked against the rest of the country (highest to lowest) the distance between the top 5% of families and the bottom 20% of families in Pennsylvania is in the middle of states (23rd). The distance between family incomes matters because income shapes our access to transportation, voting, quality of education for our children, health care, paid sick days, paid family leave and so on; and the more spread out incomes are the more you get communities of concentrated poverty and wealth.

Along with the CBPP release we published new data on the average incomes of the highest earners in Pennsylvania in 2014 based on tax returns filed with the Pennsylvania Department of Revenue. This data complements the CBPP release by going beyond what is possible in Census data and tracking more closely trends in the very highest incomes. We find that the average income of the top 1% of Pennsylvania taxpayers rose 9% from 2013 to 2014. With an average income in 2014 of $1,175,600, incomes for the highest earners are up 19% (an increase of $189,800) from their 2009 levels. The upper middle class in Pennsylvania, taxpayers with incomes higher than the 90th percentile of $123,849 but less than the 99th percentile of $445,841, saw their incomes rise in 2014 by 3%, bringing their income gains since 2009 to 8%.  We will be back in 2017 to examine trends of the incomes of the rest of us (the bottom 90%) in this period (if you haven’t seen it here is our review of trend in top incomes from 1917 to 2013).

ZERO ECONOMIC GROWTH FOR BOTTOM HALF OF INCOME EARNERS

The first two weeks in December also saw the release of groundbreaking and frankly breathtaking research from income inequality researchers.  The first eyepopping paper from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman does something entirely novel. To understand that, consider the top incomes figures for Pennsylvania I just summarized above. Our data summarizes taxable incomes and thus misses things like the income from pensions and health care which have become a larger (although still relatively small) part of compensation over time. This new data from Piketty and company measures ALL income both pre- and post-tax and assess how much goes to the bottom 50% compared to the top 1%.  It’s a stunning piece of work. Here is one of many insights from the paper:

“Perhaps the most striking development in the U.S. economy over the last decades is the stagnation of income in the bottom 50%...Figure 3 shows how the pre-tax and post-tax income shares of the bottom 50% have evolved since 1962. The pre-tax share increased in the 1960s as the wage distribution became more equal - the real federal minimum wage rose significantly in the 1960s and reached its historical maximum in 1969. The pre-tax share then declined from about 21% in the 1969 down to 12.5% in 2014. The post-tax share initially increased more then the pre-tax share following President Johnson's \war on poverty"-the Food Stamp Act was passed in 1965; aid to families with dependent children increased in the second half of the 1960s, Medicaid was created in 1965. It then fell along with the pre-tax income share. The gap between the pre-and post-tax share of income earned by the bottom 50% increased over time. This is not due to the growth of Social Security benefits because pre-tax income includes pension benefits but owes to the rise of transfers other than Social Security, chiefly Medicaid and Medicare. ..almost all of the meager growth in real bottom 50% post-tax income since the 1970s comes from Medicare and Medicaid. Excluding those two transfers, average bottom 50% post-tax income would have stagnated around $20,000 since the late 1970s. The bottom half of the adult population has thus been shut off from economic growth for over 40 years, and the paltry increase in their disposable income has been absorbed by increased health spending.

Our colleague, Colin Gordon, from the Iowa Policy Project has a very easy to follow summary of what’s in the new data; you should check it out.

BARRIERS TO UPWARD MOBILITY

Finally Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang tackle a different dimension of inequality, absolute income mobility. Or as they have constructed it, what fraction of people at age 30 earn more than their parents did at that same age.  For children born in 1940, 90% had incomes at 30 that were higher than their parents at that age. That fraction has fallen steadily over time such that for children born in 1980 only half had incomes by age 30 that were greater than their parents at that age. As Jared Bernstein explains, the researchers conclude that the growth in the distance between family incomes plays the more important role in explaining this unsettling trend than slow economic growth.

POTENTIAL SOLUTIONS

It's clear that opportunity and shared prosperity are not what they once were in Pennsylvania and in America. It is possible to push back on these trends, for instance, by raising the minimum wage and funding increased education spending with a higher tax on high income households. KRC’s “Agenda to Raise Pennsylvania’s Pay” includes a host of other ways Pennsylvania lawmakers could reduce the inequality of incomes before taxes and transfers (the “pre-distribution”).

The CBPP report and recent reports of the Pennsylvania Budget and Policy Center (PBPC) also offer recommendations for how state tax policies reduce inequality. Currently, Pennsylvania’s tax system takes a larger bite out of the incomes of working people and the middle class than from top earners. Policies that would raise revenue to make critical investments in education while making the tax code fairer include:

  • Raising tax rates on non-wage income (“income from wealth”) which goes mostly to high earners, a change that is permitted by Pennsylvania’s constitution even though it does not permit graduated income taxes.
  • Closing costly and ineff­ective corporate tax loopholes that allow many large corporations in Pennsylvania to pay little or nothing in taxes.
  • Broadening the sales tax base to include more services consumed by wealthy individuals — such as investment counseling or country club memberships.
  • Enacting a state earned income tax credit or expanding the state’s income tax forgiveness program, which boost incomes among low-and moderate-wage working families.

We have the tools for creating more broadly shared prosperity; our task is to build a consensus in support of change.

 

On The Mid-Year Budget Briefing: The Full Picture Is Even More Grim

December 15, 2016 - 5:46pm

Budget Secretary Randy Albright’s mid-year budget briefing this week brings worrisome news that, at its current level of expenditure and revenues, the Pennsylvania budget for the 2016-17 will have a deficit of $600 million. Part of that deficit is the result of lower tax revenues than were projected when the budget was enacted in July. Another part is higher human service caseloads, which will require a supplemental appropriation. The projected deficit might increase again if the General Assembly does not enact legislation to bring in $100 million in internet gaming revenues and if a second Philadelphia casino license is not sold for $50 million.

While the current year deficit is a problem for the state, unfortunately it is not the biggest budget problem we face. The Independent Fiscal Office is projecting a 2017-18 deficit of $1.7 billion, which does not include the ongoing costs of higher human service caseloads which might add $300 million or more to the total. 

All told, between the current year and next year, the General Assembly may need to close a budget gap that approaches $3 billion by June 30. And, as mandated costs grow faster than revenues, budget deficits in future years will approach that number as well. 

The recurring budget problems are not the result of higher spending. As a percentage of the state’s Gross Domestic Product (GDP), state spending fell from an average of 4.71% in the years between 1994 to 2011 to 4.33% during the Corbett Administration. It has stayed at that level in the first two years the Wolf Administration. On the other hand, largely due to reduction in corporate taxes, revenues have fallen faster from 4.89% of GDP between 1994 to 2011 to 4.49% during the Corbett Administration to 4.44% during the Wolf Administration.

The long term budget problem, then, is not something that just happened. It was created by reductions in corporate taxes that were not made up by other revenues. And it has been made worse by the willingness of the General Assembly to plug holes in the budget this year and in previous years by relying on one-time revenues from the sale of licenses, from borrowing from special funds (which must be paid back), and from shifting costs from current to future years. 

Despite these budget problems, Governor Wolf and the General Assembly have managed to invest more in education and some human services, such as opioid addiction, while maintaining the state’s commitment to critically important spending for medical assistance and long-term care and to funding pensions. But investments in education and human services have not, in all cases, restored the cuts during the Corbett era. Nor have they provided the new investments we need in education and human services to generate more economic growth and shared prosperity.

The Governor and leaders of the General Assembly are, rightfully, focused now on finding ways to restructure or reinvent government to save money. And the Governor’s GO-TIME office has already found substantial savings through initiatives of this kind. While necessary and admirable, no one should imagine, however, that innovations in government and finding new efficiencies can close the large budget deficits we see before us.

No one wants to raise taxes on working people and the middle class to close the budget deficit. So, ultimately, the General Assembly is going to have to fix Pennsylvania’s upside-down tax system, which taxes those with lower and middle incomes at much higher rates than those with higher incomes, in order to provide the revenues the state requires to meet the needs of all Pennsylvanians.