The Revenue Shortfall and the Budget

Posted at http://thirdandstate.org/2016/october/revenue-shortfall-and-budget

Oct 07, 2016 11:33 am | Marc Stier

Almost as soon as the Pennsylvania budget was passed in July, rumors swirled about the legislature coming back—either in a lame duck session in December or next year—to fix it because it was not truly balanced. The Department of Revenue’s announcement yesterday that revenues for the year to date are running $218 million below estimates, makes revisting the budget even more likely.

In July, we at PBPC pointed out that estimates of some of the one-time revenues included in the budget—especially those from selling licenses for internet gaming, for a second Philadelphia casino, and for the expansion of alcohol sales—were possibly over-stated. We also said that we were not confident that enough money was appropriated to meet the likely caseload for medical assistance (The Commonwealth must appropriate its share of funding for these programs to continue to draw down the federal funding for them.) Those problems still remain.

But now we have a new, extremely serious issue. Tax revenues are falling 3.2% short of the year-to-date estimates. Tax revenues do vary a great deal from one time of the year to another. But if that trend were to continue, revenues for this year would be short $1 billion.

Given that the state is constitutionally prohibited from running a deficit, these problems must be addressed this year, either by a reduction in spending or through new revenues. As we will point out in subsequent blog posts on the current years’ budget, there is little room for reductions in spending. Most spending is mandated by contract or federal law. And in the areas where the state has some discretion—education, human services, and the environment—we spend far less than we should.

So the General Assembly is going to have to look again at revenues, and not just for the current year. Trouble looms ahead for the budget that will go into effect on July 1, 2017. The revenue shortfall for the current year means that revenue projections for next year are likely to be reduced. And since about half of the $1.3 billion in new revenues in the current year budget came from one-time sources, including the items mentioned above, the revenue situation for next year’s budget was already problematic. Even before we start looking at mandatory spending increases, we may be looking at a budget deficit for 2017-2018 of around $1 billion to $1.5 billion.

With a budget crisis looming, it would make sense for the General Assembly to look sooner rather than later at the sources of revenue that it would not consider raising in an election year: general taxes including the personal income tax, the sales tax and the corporate income tax. Given that incomes for all Pennsylvanians except those at the top of the income scale have been rising slowly, we would urge the General Assembly to focus on taxes that do not fall on working people and the middle class. Instead, they should focus on three proposals we have put forward in the past:

• An increase in the tax on income from wealth (dividends, capital gains, royalties, and estates.) An increase in the tax rate on these sources of income from 3.07% to 4% would raise close to $800, million and most of the revenue would come from families with the top 5% of incomes.
• Closing the Delaware Loophole in the corporate income tax. We estimate that closing the loophole could raise roughly $200 million in revenue even while we reduce the tax rate. Small corporations that mainly operate in Pennsylvania will save money while large multi-national corporations will pay more.
• A severance tax on natural gas drilling. Even at the currently low gas prices, a modest tax could raise $200-$300 million.

Elections sometimes bring out the best in our public officials. But sometimes they bring out the urge to avoid dealing with problems. Our General Assembly appears to have taken the later route this year. Perhaps they can redeem themselves sometime after November 8.