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Wolf Makes “Historic” Budget Proposal

Within a half hour after Governor Wolf’s first budget address, ERG Partners realized that virtually every Administration spokesperson and every member of the House and Senate were in agreement.  The proposal outlined by the governor was “historic, and complicated” 

The definition of historic varied depending on your point of view.  Wolf’s chief of Staff Katie McGinty told ERG Partners, “It’s a historic day! We will reduce state property taxes by 50 percent!”  The “Wolf Pack” talked about historic funding levels for education, a historic opportunity to reform the state’s tax system, and a historic cut in the state’s Corporate Net Income Tax. 

But Republican leaders called it the biggest one year spending hike in state history, and “a request for the largest tax increase in the history of the Commonwealth.”

(Budget, Continued) Wolf’s speech was called bold and ambitious even before the formal presentation, and in fact the address provided more of a vision than an outline, and he avoided the details of his spending proposal during the address.  This is not unexpected, as the Governor’s budget address also serves as a platform for his proposals for the commonwealth.  And Wolf was clear throughout last year’s gubernatorial campaign that he had several key priorities.  Wolf said this was a “different kind of budget,” relying on their consistent theme that he’s a “different kind of governor,” but Republicans in the House and Senate disagreed.

The proposal itself was pegged by the Governor as $29.88 billion, but it removes the spending for the school employees’ pension system and property tax relief from the General Fund

The pension contribution amounts to $1.75 billion in spending, while the property tax relief spending totals $2.14 billion, moving $3.99 billion out of the General Fund in total, putting state spending at $33.87 billion.

The Governor proposed to pay for the increases with a five percent severance tax on natural gas, a 21% increase in personal income taxes to 3.7%, and an increase in the state sales tax of 10% to 6.6%, along with elimination of exemptions from sales tax for dozens of products and services.  He also proposed cutting the corporate net income tax by fifty percent to 5.99% this coming year and 4.99% in 2017.

And Complicated…
The impact fee and the severance tax are both to be levied during 2016 – despite provisions in Act 13 that a severance tax would eliminate impact fees.  This would make the effective tax rate on drillers in 2016, if natural gas prices remain as low as they are now, 10 percent or more. The severance tax/education funding relationship brings up another matter to consider: the interrelatedness of the budget’s major components.

Trying to explain the budget’s many proposals and conditions is a complicated task any year, as funding can be state, federal, or augmented funds, put into special funds or the General Fund.  Observers of Governor Wolf’s Executive Budget are also nearly unanimous in saying it’s like unravelling a spider web, 3-D chess, a “giant Jenga game,” and blaming his claim that the General Fund budget would only increase by $880 million was an example of “Common Core math.


The reality is that many of the proposals – his $675 million bond issue for economic development, infrastructure and energy for example – would be paid for using funds from the severance tax.  The House Republican leadership has turned on this idea already, and is not willing to even consider a severance tax of any size without privatization of the state liquor system.  Senate Republicans have said that without first addressing pension reform, the other proposed taxes won’t be considered. 

Another $3 billion in borrowing to employ what has been called a “risky – and currently illegal – pension obligation bond” to reduce some of the state’s unfunded pension liability would come from modernization, not privatization, of the state liquor system.  That modernization was projected to provide $185 million in annual additional revenue which would be used to pay the costs of that bond for 30 years.  And the $3.8 billion proposed for property tax relief would come from the increases in personal income and state sales taxes.

And the numbers are in flux.  Wolf’s budget was based on filling a $2.3 billion structural deficit, but just this week, the state’s Independent Fiscal Office said that number would be $1.5 billion.

The address itself…
“The idea of Pennsylvania is the idea that all things are possible.  And if we work together, there is nothing that we can’t accomplish.  We are the state that built America.
“Let’s be the generation that rebuilds Pennsylvania.”

With those words, Governor Tom Wolf presented the General Assembly with his framework for a $33.87 billion state budget for 2015-2016 and his vision for “the future of Pennsylvania.”  

Wolf’s budget calls for a $4.87 billion increase in state spending, which would be funded through a series of new tax reforms, aimed squarely at increasing education funding and helping the “middle class.”  He based his proposal on the three themes of his campaign – “Schools that teach. Jobs that pay. Government that works.”

But a political reality is that Tom Wolf was elected governor on one theme, while Republicans increased their majorities in the House and Senate campaigning on another –growing jobs, tackling pension issues and limiting government spending.

Among the major proposals, Wolf called for a “historic investment in our schools,” and a shift in education funding from local property taxes to state funds.  He said his proposed five percent severance tax would preserve impact fees for counties, with the bulk of new revenue going to public education funding.  Wolf claimed his plan would reduce the average person’s property tax burden by 50 percent, or $1,000.00.

Wolf proposed raising the state Personal Income Tax from 3.07% to 3.7 percent, and raising the state sales tax from six percent to 6.6 percent with loopholes being closed, a proposal he called similar to House and Senate Bills 76, endorsed by many Republicans.

In the jobs area, Wolf proposed a “Made in Pennsylvania” cash-back jobs program, allowing manufacturers that increase their taxable payroll by at least $1 million to receive cash payments of up to five percent of new taxable income.  He called for priority to PA companies in Grant and Loan Programs, and proposed a hike in the state minimum wage from      to $10.10 an hour. 

He proposed cutting the corporate net income tax rate from 9.99 percent to 4.99 percent, and called for closing loopholes in the tax code, including the Delaware loophole.  And he called for finishing off the phase out of the Capital Stock and Franchise Tax by the end of the year.

Reaction to the budget proposals was swift and determined.  Senate Majority Leader Jake Corman said, “Higher taxes are not a recipe for solving the problem of self-esteem.  If one of the Democrats wants to introduce this budget, we’ll be happy to run it and see how it fares.”  Corman said he would not even discuss new revenue until Wolf and the General Assembly deal with pension reform.  And that any property tax cut would be eaten up by other tax increases.  “People will be excited about the new revenue coming their way, but we will have to start from scratch.”

House Speaker Mike Turzai called the proposal, “Disappointing and old school.  And disrespectful of taxpayers.”

House Appropriations Chairman Bill Adolph said, “Wow!”  I have concern for small business folks, with an increase of $4.8 billion in spending, his proposal to increase income tax by 21%, sales tax by 10% and adding 300 new items and services, and increases in cigarette tax by 60%; increase in severance tax – $4 billion in new taxes.  Someone is gonna be paying for that.  “If you are earning $52,000 per year, could be paying between $1,000 and $1,400 more in taxes, with no guarantee you receive a property tax reduction.” 

Senate President Pro Tempore Joe Scarnati said the tax increases would come out of the middle class’s pockets.  “Sound bites are warm and fulfilling,” he said, “but it really is a very bad plan for all of Pennsylvania.  We stand prepared to first off make sure all the Senate Democrats vote for that plan.”

In response, this week, Governor Wolf presented legislation to the General Assembly to put his budget into law.  Katie McGinty, Gov. Tom Wolf’s chief of staff, announced that the governor’s proposed budget is now in legislative form and in the hands of state lawmakers.

“If I had cigars, I’d pass out cigars, because we’ve given birth to a huge, bouncing, baby budget,” McGinty said with a chuckle speaking to state Capitol reporters. She indicated the administration delivered language of several bills – all needed to deal with the various Pennsylvania codes affected by the governor’s budget proposals – to lawmakers and that Democratic leadership is now determining who will sponsor and introduce each of the bills.

Many of the bills are standard in the annual appropriations process, but some will be necessary to fulfill the Governor’s intertwined proposals.  “I think that it’s important, now that we have the legislation delivered, to come back and say ‘what’s the rhyme and reason of this budget, what’s the big picture, what are we trying to achieve with this budget,” said McGinty, reciting the Wolf mantra that the budget is all about “rebuilding the middle class and the economy of Pennsylvania.”House Majority Leader Dave Reed summed up his response in one word:  “Overwhelming.”  Reed noted, “We all want schools that teach, jobs that pay and government that works.  We just have different ideas on how.” 
The good news is that there is agreement on the goals.  That appears to be the only agreement besides the historicity of the plan as the House and Senate begin three weeks of budget hearings.