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Curtain Up on State Budget Tuesday – Sondheim Season?

A Funny Thing Happened on the Way to the Forum edition: As ERG Partners watches and listens to the pronouncements, the leaks and the responses this week, we can’t help but be reminded of Stephen Sondheim’s refrain from  Zero Mostel as Pseudolus – “Something familiar, something peculiar, something for everyone, a comedy tonight!”

Governor Tom Wolf has spent much of the last week calmly repeating the mantra, “You’ll have to wait until next Tuesday” to see his proposals boost the state’s economy, move his policy goals forward, and raise sufficient revenues to balance the state budget.  The full details of his 2015-16 Budget will be released on Tuesday, March 3.

Information IS dribbling out of the Governor’s Office from both formal statements and informal leaks, the Wolf Administration is setting the table for their PR push, the House and Senate are firing off their packaged messages, and lines are already being drawn in the sands of Harrisburg that could portend  

“something appealing, something appalling…”
This week, Wolf announced some plans for business tax cuts and talked about a “fairer tax system.”  The House passed legislation to get the state out of the wholesale and retail liquor/wine/beer basis, and the Senate leadership said pension reform must come before any other revenue measures.

Wolf has said that he would address creating a “fairer tax system” in his budget address.  On Tuesday the Governor said he would include significant reforms to create a pro-growth business climate, build the state’s manufacturing sector and create workforce partnerships.  After opening up at the Economic Forecast Summit in Harrisburg, Wolf went even further Wednesday night, telling a business group in Bethlehem that he planned to reduce the Corporate Net Income Tax from the nation’s second highest rate at 9.99 percent to 5.99 percent in 2016, 5.49 percent in 2017 and 4.99 percent in 2018. Then he said he would continue the elimination of the Corporate Stock and Franchise Tax, while closing tax loopholes through combined reporting to expand the amount of income subject to taxation.

To further support manufacturing, Wolf said he would propose a $5 million tax credit for manufacturing companies crating good paying middle class jobs, and providing $5 million to the Industrial Resource Centers.

By our accounting, that adding the need for replacing roughly $1.25 billion to the state’s revenue needs from corporate tax cuts alone within four years, on top of the roughly $2 billion facing budget negotiators this year.  That’s before property tax reform.  Obviously, the revenue side will have to be addressed as well with Wolf proposing increases in costs for Medicaid, education funding, and more. 

Pennsylvania Senate Majority Leader Jake Corman, R-Centre County, said Wolf’s proposal sounds appealing but evaluating it is impossible without knowing the rest of his plans. Some lawmakers contend Wolf will propose raising the personal income tax, and reducing property taxes.  “We look forward to receiving and considering an entire package of specifics from the governor, not one idea floated at a time,” Corman said.

Corman said the proposed corporate tax cut could have a $1.25 billion impact on the state’s collections. The corporate net income tax last fiscal year brought in about $2.5 billion, about 9 percent of the state’s $28 billion budget.

Senate Minority Leader Jay Costa, D-Forest Hills, called Wolf’s plan “a very positive approach” that would broaden the base taxed under the corporate net income tax.  “You have to make it revenue neutral at a minimum,” Costa said.

“something aesthetic, something frenetic…”
The governor acknowledged, as he has during his first five weeks in office, there will be disagreements. He said he intended to present “a fairer tax system,” but did not elaborate on what that would mean. Wolf has in the past suggested replacing the state’s flat income tax with a graduated tax.  Some Democrats have also suggested he will propose increases and closing loopholes in the state sales tax, and Wolf has also already proposed significant increases in taxes on natural gas drilling. 

“This is a chance for a reset, and I hope the people of Pennsylvania will like what I propose,” said Wolf.  It sounds like the Governor hopes to use public support to convince GOP legislators to support his new plans.  Those legislative leaders said they could support some additional spending, but not significant amounts.  They also made it clear repeatedly that they think little of raising taxes.  Senate President Pro Tempore Joe Scarnati said the Senate expected to address pension reform before discussing new spending or revenues. 

“Old situations, new complications…”
The Republicans presented a united front in support for the Taxpayer Protection Act, which would limit the annual growth in state spending to the lower of the following thresholds: the average change in personal income for the three preceding calendar years, or the average inflation rate plus the average percentage change in state population over the three preceding years, with exceptions allowed for certain extraordinary circumstances. The exceptions would still require two-thirds of both General Assembly chambers to vote to exceed the TABOR limit, a provision GOP lawmakers are hoping to place with the Pennsylvania Constitution.

Scarnati said neither he nor Speaker Mike Turzai want a government shutdown but noted, that “For the last four years, we stayed within TABOR -I haven’t heard Gov. Wolf say that he’s staying within TABOR.”

“We think the budget can be done on time, we think it can be done with real fiscal responsibility under TABOR, and we think it’s important that that become a part of the law” not just for this year, but for future generations, said Turzai.

“There’s going to be massive spending increases and massive tax increases,” predicted Scarnati.

The Governor’s Office remains mum about what that spending figure will be, and the administration doesn’t sound like it’s backing away from a conflict.

Scarnati said he wants to avoid the tax increases that will likely be needed to produce a balanced state budget, and said the legislative GOP plan to help avoid that starts with pension reform and liquor privatization.  “The choice for me is real clear, and the members have seen that – we have to find value in the liquor system and we need to do a major pension overhaul that brings immediate savings to the General Fund.”

This week, the House passed liquor privatization legislation by a 114-87 vote, with four Republicans voting with all Democrats in opposition.  The House GOP claim that privatization of the state liquor system would raise more than $1 billion.

But Wolf has repeatedly said he opposes liquor privatization and supports liquor “modernization” efforts that could mean $100 million in additional revenue.  Wolf had also said he wants to let the current state pension law run, but suggested he might support a bond issue to pay a small portion of the current public pension unfunded liability in hopes of delivering some immediate savings.

If the Governor insists on significant new spending and tax increases, the spring and budget hearings may not be pretty.  “How do you sit down and negotiate with unrealistic expectations?” Scarnati asked.  In 2009, the Legislature engaged in a 101-day budget impasse with then-Gov. Ed Rendell.

“Tragedy tomorrow, comedy tonight…?”
Referring to comments made by Wolf at the National Governors Association meeting last weekend, when he said Pennsylvania suffers from a lack of self-esteem, Senate Majority Leader Jake Corman tweeted “I don’t know that billions in new taxes will help the self-esteem of PA-People want to keep their $ in their pockets.”

Let’s see if “this time it all turns out right!”