Budget Secretary Charles Zogby confirmed today during his final mid-year budget briefing that Pennsylvania will face a $2 billion budget gap next year. After balancing the 2014-15 spending plan with one-time resources, Secretary Zogby acknowledged that crafting a 2015-16 budget will be difficult for the next administration. This sentiment echoes what the Independent Fiscal Office (IFO), bond-rating agencies, and others (including we here at PBPC) have been saying for months.
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Pennsylvania has a structural deficit – meaning that revenues aren’t growing fast enough to keep up with spending growth on things that are necessary for the state, such as support for public education; health care for elderly, poor, and disabled Pennsylvanians; debt service; and prison and pension costs.
Last month, the IFO warned that a return to a “normal” (post–recession) economy won’t be enough to fix this ongoing problem.
This is not the first year that one-time revenues have made their way into the budget, but now the cupboard of such temporary fixes has largely been cleaned out. Secretary Zogby offered a few more possibilities in his mid-year review – infusions of cash from selling the liquor stores and “selling” electricity consumers to new suppliers – but these ideas have serious consequences and continue the current strategy of kicking the can of budget troubles down the road.
Secretary Zogby acknowledged that while there is little appetite in Harrisburg for new cuts, the only choices are big budget cuts or new revenue. Things we care about, like public safety and schools, must be paid for year after year. A more reasonable way of doing the state’s business would be to rely on revenues, like a Marcellus Shale tax, that come in year after year rather than on a one-time basis.
One thing the Secretary didn’t mention is that the state’s fiscal problems have been made worse by unaffordable tax cuts. Over several administrations, Pennsylvania has repeatedly cut the capital stock and franchise tax rate. This tax, which brought in more than $1 billion a year prior to the Great Recession, is expected to generate $118 million next year before being eliminated.
We’ve also seen an inadvertent tax cut for banks, several new tax credit programs, more generous rules for writing off operating losses, and other business tax changes that have resulted in less revenue for the state each year.
The General Assembly made these cuts with the hope that they would increase Pennsylvania’s competitiveness and grow the state’s economy. The cuts seem to have been more effective at diminishing tax collections than stimulating growth.
The 2015-16 budget process offers an opportunity to take a hard look at how the state raises and spends money. We can continue down the failed path of tax and spending cuts that result in higher college tuition and local property taxes, and fewer opportunities for our children, or we can improve the tax system by making it fairer.