Five Takeaways From the Governor's Budget Proposal

This morning Governor Wolf laid out his plan for the 2017-18 state budget. Here are the five things you need to know:

1. Shift to redesigning government. This is a sharp contrast from Gov. Wolf’s first two budget addresses. His focus has shifted from massive tax and spending increases to streamlining government and making government more efficient. This is a positive development, representing the economic and political reality in Pennsylvania.

2. Good news and bad news on taxes. Gov. Wolf has dropped proposals to raise the income tax or raise the sales tax rate—two cornerstones of his first two budget proposals. He touts this as “no broad-based taxes” in the new budget.

He does, however, propose imposing the sales tax on several businesses services that are untaxed. Absent tax reductions elsewhere, it will increase Pennsylvania’s tax burden—already 15th highest in the country.

For the third time, Gov. Wolf proposed a natural gas severance tax. This 6.5% proposal isn’t likely to get traction in the legislature. The severance tax, which targets one group of people, ignores the 5% tax drillers already pay, plus all of the high taxes every other Pennsylvania business pays. With gas prices still depressed, this tax wouldn’t generate much revenue, and would only hinder job growth at a time the gas industry is already laying off workers.

In total, Wolf calls for $1 billion in additional taxes or $315 per family of four.

3. Serious efforts to control spending. From closure of SCI Pittsburgh to reducing corporate welfare, Governor Wolf is making a real effort to control spending.

His proposal to reduce corporate welfare tax credits by $100 million is a laudable first step towards ending the $800 million practice of handouts to corporations. Yet, at the same time, he expands certain corporate welfare programs.

In addition, his corporate welfare reduction plan treats the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC) like other tax credits, potentially cutting funding for students’ scholarships. Read more from James about why that would be a mistake, and why we should increase opportunities for educational choice.

Wolf has proposed merging four departments into the Department of Health and Human Services ($100 million savings); the Department of Correction and Probation & Parole into one agency ($10 million savings); and merging the management of the states two pension funds (SERS and PSERS). These mergers are intended to both eliminate unnecessary bureaucracy and to provide more efficient services. In principle, these recommendations are a welcome development. Commonwealth Foundation has long highlighted the need to streamline state government.

Wolf has outlined $2.1 billion in government efficiencies through these reforms—though these proposals will require more vetting and analysis to see if the administration's estimates hold true. More than $300 million of this is not savings but "revenue enhancements."

Gov. Wolf’s estimate of $95 million in new revenue from increasing the minimum wage mandate is the most dubious. Not only is he discounting the individuals who would lose their job under this mandate, but this projection acts as though a law can mandate a more robust economy. It doesn’t—minimum wage laws merely redirect money in the economy. 

Finally, the governor has proposed new sentencing reforms designed to reduce recidivism and help parolees stay in the community. These recommendations are estimated to save $108 million over five years.

4. Modest spending increase above TPA with some accounting gimmicks. Gov. Wolf proposes a General Fund budget of $32.34 billion, representing an increase of 1.8 percent. While a modest increase, certainly in comparison to prior proposals, it exceeds the index in the Taxpayer Protection Act (advanced in the Senate today). The TPA limit—the average increase in population and inflation over the past three years—was only 1.16 percent, as Pennsylvania’s population declined last year.

The baseline for this comparison also includes $234 million in “supplemental appropriations”—spending levels higher than the legislature passed last June. His proposal calls also for $300 million in borrowing to fund programs like health research grants and grants to the arts, which merely shifts spending to the future.

In total, the operating budget would reach $81 billion, or more than $25,000 per family of four ($6,300 per person).

5. Need remains for transformative structural reforms: No amount of new taxes, one-time revenue tricks or borrowing can permanently fix the commonwealth's fiscal woes. Pennsylvania is suffering from a deep-seated structural spending problem.

For starters, almost half of the Pennsylvania state operating budget (49 percent) is spent on Human Services, with the bulk of that on Medical Assistance and Long Term Living (i.e., Medicaid programs). Human Services costs are expected to increase by more than 5 percent every year, while state revenue growth is projected at around 2 percent per year. Yet Medicaid patients experience inferior care, such a long waiting times and difficulty finding a provider.

Structural reforms are essential to solving Pennsylvania's budget crisis once and for all. These structural reforms include limiting state spending to the growth of inflation and population through the Taxpayer Protection Act, fully privatizing the state liquor system, and reforming pensions to create an affordable system for taxpayers that gives workers more flexibility.

Governor Wolf's 2017-18 budget proposal is a welcome departure from past massive tax hike attempts. However, it doesn't do far enough to stem the rising costs of state government, which continues to burden families across the state.