PA biz tax phase out joins spending cuts, deficit in budget plan
State anticipates $719 million deficit
By Eric Boehm | PA Independent
HARRISBURG — By continuing the phaseout a state business tax, Gov. Tom Corbett hopes to create jobs and bolster the economy, state Budget Secretary Charles Zogby said.
But some lawmakers argue the loss of an estimated $200 million in revenue translates into spending cuts.
And an estimated $700 million budget deficit lurks in the background, threatening the state’s fiscal health.
The state Senate Appropriations Committee on Monday explored the ramifications of the governor's $27 billion budget with its proposed $20 million in spending cuts despite $1.4 billion in new required expenses.
Democrats stressed the impact the budget would have on Pennsylvania residents, specifically pointing to students in public schools and colleges as well as welfare recipients.
“Sometimes we talk about the numbers and we forget that there are real people attached to those numbers,” said state Sen. Vincent Hughes, D-Philadelphia, minority chairman of the committee.
State Sen. Larry Farnese, D-Allegheny, told Zogby that the budget should be more than a “mathematical calculation.”
Zogby said more than $1.4 billion in required new spending — growing pension costs and debt service payments — was squeezing out discretionary parts of the budget, like college aid.
“Just as families are making choices to maybe not buy a new car or not take a vacation … state government is have to make those same choices,” Zogby said.
Zogby said constrained revenue growth would force the state to think differently about how to approach the budget, such as Corbett’s plan to use block grants to distribute the state’s funding to school districts, one of the major changes in this year’s budget.
Tax break for businesses
Despite these changes, Zogby said the phaseout of the capital stock and franchise tax, which businesses pay on assets they are unable to sell, was one of the governor's priorities.
Doing so will allow job creators to invest in the economy and hire more workers, Zogby said. He said those goals were at the front of Corbett's plan for the state.
Business groups have been pressing for the elimination of that business tax for years. It was scheduled originally to phase out during Gov. Ed Rendell’s administration, which ended in 2010, but the process was put on hold.
At present, it is scheduled to phase out in 2013.
David Patti, president and CEO of the Pennsylvania Business Council, which lobbies on behalf of businesses in the state, said the tax is particularly onerous when put on top of the state’s 9.99 percent corporate income tax, the highest in the nation.
“When you take the two together, that’s what makes Pennsylvania is so uncompetitive,” Patti said. “This tax was supposedly being phased out for more than 10 years, in fact it would have already been gone if we stuck to the phase out, so we just want to get the job done.”
Most states have either a corporate income tax or a tax similar to the capital stock and franchise tax, but Pennsylvania is one of the few with both taxes, he said.
Deficit and revenue
At the committee’s hearing Monday, Zogby and Matthew Knittle, director of the state’s new Independent Fiscal Office, or IFO, agreed that Pennsylvania is likely to face at least a $700 million shortfall, because revenue collection is unlikely to pick up before the end of June.
Closing the shortfall will require an unexpected uptick in tax revenue this year or the use of existing revenue, which takes funding away from other areas of the budget.
As the governor announced in his budget address last week, Zogby said the Corbett administration expects a $719 million shortfall at the end of the fiscal year in June. Knittle predicted a “significant shortfall” of more than $500 million but said he expects it to be less than the budget office’s prediction.
Lawmakers at the hearing criticized Corbett’s budget for cutting welfare funding, decreasing state aid to public universities and changing how the state funds basic education.
The departments of education and welfare, along with the state universities and all other state departments and agencies affected by the budget, will have hearings with the state House and Senate in the coming weeks.
Knittle said the IFO is expected to study the full fiscal impact of the phaseout before the end of the year.
Knittle said his office agrees with Zogby’s expectations of a $500 million shortfall in the current budget year, but they forecast better economic growth in the next fiscal year, which begins July 1.
However, those projections are tempered by two major areas of uncertainty — the worsening economic situation in Europe and potential changes to the federal payroll tax policy expected to be resolved in the coming months, he said.
“There is going to be a significant shortfall this year, and the budget secretary was correct, there are going to be some tough decisions going forward,” Knittle said.
State Sen. Jake Corman, R-Centre, chairman of the Senate Appropriations Committee, said he expects the IFO to be an independent voice in assessing the state’s budgetary situation.
“Much like the Congressional Budget Office in Washington, D.C., this just (gives) us an independent voice to do the analysis to give us the true cost of things,” Corman said.
Monday's hearing kicked off a three-week schedule of legislative hearings on Corbett's new budget proposal.