On February 9, 2016, Governor Tom Wolf proposed a 2016-2017 budget (the “Current Proposal”) with about $2.72 billion in new or increased taxes and totaling $33.3 billion without having a final 2015-2016 budget and fiscal code. Pennsylvania has only the Republican House crafted $30.3 billion spending plan which the Governor line-item vetoed to release approximately $23.4 billion after the House GOP refused to accept the $30.8 billion spending plan agreed to by the Governor and Senate in December 2015. As with the Governor’s 2015-2016 proposed budget introduced March 3, 2015 (the “2015 Proposal”), the Current Proposal would increase the rate of personal income tax (“PIT”), eliminate exemptions on sales tax, include a severance tax and other increases, but would not use increased taxes to reduce real property taxes unlike the $3.2 billion reduction in the 2015 Proposal. Further, unlike the 2015 Proposal, it would not increase the rate of sales tax or include the reductions in the Corporate Net Income Tax or the Net Operating Loss carry-forward limit. Instead, Governor Wolf continues to propose increased funding for education and human services and to address a perceived “structural deficit.”
The structural deficit comprises the difference between (a) available revenues and (b) existing and growing costs of pensions, human services, education and debt service. Critics point out that the Governor’s structural deficit exists as a result of increased spending, suggesting that the increases are those implemented by the Governor. The Independent Fiscal Office (“IFO”), however, identifies the increased costs of added beneficiaries to Medicaid and long-term care services already in place, increased pension costs and the loss of one-time savings and reduced payments from dedicated sources as the chief reasons for a greater burden on the general fund budget of at least 4% per year for next decade. Coupled with the loss of revenues to be collected from retiring Baby Boomers by the Commonwealth, the IFO identifies a structural imbalance.
The Administration’s proposed spending increases include about $1.3 billion more for education than was spent in fiscal year 2014-2015 (an $800 million increase over the 2015 Proposal) totaling $12.4 billion. They also include structural increases of (a) $800 million for human services, (b) $500 million for pensions, (c) $100 million for corrections; and (d) $100 million for debt obligations.
These budget expenditures and structural deficit amounts would be handled with new or increased taxes and fees of $2.72 billion (down from $4.7 billion in the 2015 Proposal), including (a) $1.4 billion in PIT from 3.07% to 3.4% (down from the 3.7% increase in 2015 Proposal of $2.4 billion), (b) $414 million in the state sales tax by eliminating exemptions on basic cable television, movie theater tickets and digital downloads (down from the 2015 Proposal’s increase to 6.6% on goods and services with 45 fewer exemptions; (c) a per cigarette tax increase of 5 cents totaling $468.1 million (same as 2015 Proposal); (d) a 40% tax on the wholesale price of other tobacco products and e-cigarettes totaling $136 million (same as 2015 Proposal); (e) a 6.5% severance tax on natural gas keeping the impact fee as a credit totaling $218 million (down from the 2015 Proposal levying a 5 percent severance tax together with a tax of 4.7 cents per thousand cubic feet of volume extracted); (f) a 5% surcharge on fire, property and casualty insurance policies totaling $100 million; (g) an 8% tax on promotional plays related to slot machines totaling $50.9 million; and (h) an increase from 0.89 to 0.99 percent in the Bank Shares Tax totaling $30.2 million.
One social policy underlying the Current Proposal is equitable relief for lower income taxpayers. For example, a family of four earning about $36,400 ($400 more than the 2015 Proposal) or up to 150% of poverty would be exempt from personal income taxes. As with the 2015 Proposal, the minimum wage would increase from $7.25 to $10.15 per hour. Critics of this increase, such as the Pennsylvania Chapter of the National Federation of Independent Business, state that the increase would (a) frustrate growth of small business, and (b) cost at least 31,000 jobs in Pennsylvania, mostly for teens, and (c) result in the third highest rate in the nation. Supporters, such as Pennsylvania Working Families, say that (a) the present minimum wage has not been increased for nearly a decade, (b) prices have increased each of those years and (c) 29 states have higher minimum wages. More information about the Governor’s Current Proposal is available at http://www.budget.pa.gov/Pages/default.aspx#.VtYUBJgo4dU.
Robert J. Hobaugh, Jr., Esquire © 2016