Originally published in the Allentown Morning Call, February 6, 2016
If we in Pennsylvania are to avoid another billion-dollar cut in education spending plus a billion-dollar cut in spending on health care and human services, the taxman is going to have to knock on someone’s door. It’s time the knock comes on the doors of corporations and the wealthy, not those of the middle class and working people.
The state’s Independent Fiscal Office recently projected that if no changes were made to current policy and taxes, the state of Pennsylvania would run a deficit of $318 million during the current year. That deficit would rise to $1.8 billion or more in the fiscal year beginning July 1. And that is the deficit before any new spending.
If Gov. Wolf and the General Assembly reach an agreement on education spending, but not on how to raise the revenue to pay for it, this year’s deficit could double and next year’s grow worse as well. Any new, and much needed, spending on health and human services makes the problem worse again.
Where does this structural budget deficit come from?
Over the last few years, the budget has been balanced by a string of one-time transfers and accounting tricks. State funds have been shifted from other areas with excess reserves to the general fund. And payments, such as those for Social Security, have been put off from one fiscal year to another. Budgets were technically balanced but the revenues the state brought in during the fiscal year were substantially less than its outlays.
But why did state spending exceed real state revenues? Here we come to a political divide.
Right-wing Republicans say the problem is an ever-growing state government. The state has been spending a bit more each year than the last, in part because of inflation and in part because the state is making long-delayed payments into pension funds. But if you look at the best overall measure of the size of state government — the percentage of the state gross domestic product spent by the state — Pennsylvania’s government has been shrinking.
Over the last 20 years, state government expenditures averaged 4.67 percent of the state GDP. The last four years, during the Corbett administration, were the lowest. Excluding them, the average over the previous 16 years was 4.78 percent. During the Corbett years, the average was 4.38 percent. Even if Gov. Wolf got all the spending he wanted this past year, it would only rise to 4.65 percent of the state GDP.
If the deficit was not created by spending going up, then it must have been caused by revenues going down. And here the culprit is obvious — corporate tax cuts.
From fiscal year 1989 to fiscal year 2003, taxes on corporations were, on average, 22.25 percent of all general fund revenues. They are only 18 percent today. The Independent Fiscal Office projects they will fall to 14.9 percent by fiscal year 2021. If taxes on corporations provided the same share of general revenues in fiscal year 2016 as they did before corporate tax cuts began, total general revenue would be $2.39 billion higher than projected.
The structural deficit is not something that just happened. It was created by an effort, begun under Govs. Ridge and Rendell and exacerbated under Gov. Corbett, to reduce taxes on the corporate sector. Not only were these tax cuts fiscally irresponsible but there is also no evidence that job growth in Pennsylvania relative to the rest of the country improved.
Given the source of the structural deficit, the solution is clear. We need to raise taxes, but in so far as possible on corporations and the wealthy, not the middle class. That means: adopting a severance tax on natural gas drilling; closing loopholes in the corporate income tax; and raising taxes on income from wealth as opposed to work.
If we need to raise general revenues, we should prefer the personal income tax to the sales tax; if we need more sales tax revenues, we should broaden the sales tax rather than raise rates, both to include services that are a growing part of consumer spending and to make it more fair; and protect people with low incomes by expanding the income tax forgiveness program and establishing a sales tax forgiveness program as well.
We can provide the level of education and health and human service spending that Pennsylvanians want and deserve without overly burdening working people and the middle class. But we can only do so if we tell the taxman to knock on the right doors.