The Commonwealth Moves Closer to a Budget!

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In what is perhaps one of the most dysfunctional budget processes in Pennsylvania history, it now appears that Governor Wolf and the Republican-controlled Congress are finally getting close to resolving the state’s budget impasse. The resolution is coming just in time, as Governor Wolf plans to reintroduce some of his more-acrimonious ideas in his budget for next year in February 2016.

The budget that looks to be forthcoming differs markedly from the one proposed by the Governor in March of this year. The stalwarts of the earlier proposal included an increase in spending by $31.6 billion dollars, plus a $3.2 billion dollar program designed to reduce school property taxes. In addition, the Governor’s plan included a rental household rebate program for individuals earning less than $50,000 or less per year. The total increase was slated at an astounding 9%!

The final budget plan still includes a substantial spending increase at just under $31 billion, an increase of 6%. However, the school property tax reduction packages, as well as the rental rebate program have been scrapped.

At the heart of Governor Wolf’s plan was a major increase in education spending with $400 million more slated for public school operations and instruction, a 7% increase, plus $120 million more for early-childhood education programs, $100 million more in special education funding and $160 million more for higher education institutions, including state system universities, state-related universities and community colleges.

The budget that looks likely to be enacted provides most of the money requested for public schools ($350 million), a 6% increase. In addition, there looks to be a substantial amount allocated to early-childhood education, special education and higher education, though the amounts are approximately half of those requested by the Governor.

A provision proposed by the Governor that would cut $160 million dollars of state funding for cyber schools is still under consideration. The prospects for passage are not yet known.

Little is known at this time as to whether any significant headway will be made with respect to the ever-growing problem of liabilities associated with the schools’ and the state’s defined benefit pension plans. While Republicans look to move to more-commonly-accepted defined contribution plans, such as Section 401(k) plans, in the future, the Governor is reluctant to change. The Budget proposal does allow the state to pay down pension debt by transferring $600 million of casino gaming money from an existing property tax reduction fund.

Lawmakers have dealt a death knell to almost every tax increase proposed by the Governor. Originally looking for a $4.6 billion tax raise in the 2018/2019 fiscal year, the negotiations have seen this number slashed to $600 million. The source of the new projected revenue is not yet known.

The most media-discussed tax was the Governor’s extraction tax intended to be levied against oil and gas industry taxpayers as they pulled gas from the ground. This tax now appears to be off the table. Also gone is the increase in state taxes to offset reductions in local school property taxes. Unfortunately, it looks as though no change is slated for the state’s corporate net income tax, one of the highest in the nation.

The one large state tax increase that looks to be moving forward at this point is the increase in the state’s sales tax. The increase is expected to move the rate from the current 6% rate to 7.25%. This increase equates to a nearly 17% percent increase. The rate will be even higher in Allegheny County at 8.25% and in Philadelphia at 9.25%. The increase brings Pennsylvania to a position of the second highest sales tax in the nation, behind California. The added revenue would cover a $1.4 billion statewide reduction in school property taxes, but the formula for disbursing that among homeowners has not yet been finalized.

As all negotiations are being conducted behind closed doors, it is difficult to assess the final outcome of the process. However, as clarity develops, we will keep our clients, contacts and friends up to date with further postings.

For questions or comments, please contact Bob Grossman or Don Johnston.