PA “Middling”

Two alarm bells on Pennsylvania’s spending trends have been rung in the past week. First, a press release from the Auditor General’s office noted that a potential $5 billion gap is looming with stimulus funds drying up, pension costs increasing, and unemployment costs rising. Noting that spending has increased faster than inflation (33.5% vs 18.5% from FY04-FY11) the projected state budget of $28 billion would have to be closer to $24 billion if spending followed the change in the CPI.

An additional report covered in an editorial in the Washington Examiner shows that of the 15 largest states (based on GDP) Pennsylvania is in the "middling" group when measured on economy, fiscal health, housing, and taxes (these variables are quite broad and not defined in the op-ed piece). That means not as healthy as Texas or Virginia, but not as bad as New York or Michigan. The piece, like the Auditor General’s release, points out that the "…stimulus package gave states a reprieve in FY10 by making up roughly 1/3 of their budget shortfall. But that money will dry up in FY11".

So what’s to be done? While some might point to generating a bonanza of revenue from natural gas extraction or the like, it might be worthwhile for the state to seriously consider tying spending growth to an objective measure like inflation.

More Choices on the Tax Menu

The real estate tax; the wage tax; the Local Services tax; the realty transfer tax; the parking tax; the poured alcohol tax; the gross receipts tax; the parking tax; the mechanical devices tax; the amusement tax…

You get the idea: there is a plethora of tax sources available to local government in Pennsylvania. That’s why it is always surprising to hear calls for even more sources of tax revenue, particularly when there is a call for layering more taxes upon the existing ones instead of phasing them out.

Just last week the PA League of Cities and Municipalities called for counties to get an additional 1 percent on the sales tax (except in Allegheny County and Philadelphia, which already have local add-ons) for "easing school property taxes (remember Act 1?) and helping county government and municipalities pay their expenses".

Or counties could get a poured alcohol tax like Allegheny County has or, failing those options, the state could just hand out revenue to offset the presence of tax-exempt property (which often generates much of the taxable activity that is captured by one of the many taxes listed above.

Maybe a better option-in light of the massive state budget shortfall, the looming problems with the two statewide pension systems, and the impact of legacy costs at the local level-would be to try and control the spending side of the equation with a spending cap that is tied to inflation and/or population, referenda on tax increases and creation of new tax sources, and a movement to a defined contribution system of pensions for new employees. Otherwise there might not be enough room in the local tax code to list all of those tax sources.

Taxpayer Protections Get Up or Down Vote Today—But Not Here

While Election Day is relatively "quiet" in southwestern Pennsylvania and the rest of the state with judicial and municipal offices dominating the ballot, there are questions on the ballots in other states that could determine whether taxpayers gain control of their government’s growth.

In Maine and Washington, voters get to decide on Taxpayer Bill of Rights measures: both states would control revenue or expenditure growth by pegging them to the rate of inflation plus population change annually. The National Taxpayers’ Union Ballot Guide points out that in Maine, should the measure pass, growth above the cap would be returned to the taxpayers and used for a rainy day fund. In Washington voters would get approval of proposed tax increases that exceed the cap.

If Pennsylvania had a similar measure in place there would have been enough money to close the $2-$3 billion shortfall that the state recently wrestled with and will wrestle with again. Just by tying spending growth to the rate of inflation (measured by the change in the Northeast consumer price index) spending since 2002 (when the state budget was $20.4 billion) would have grown 22 percent instead of the actual 36 percent state taxpayers have seen, resulting in $3 billion in savings.

But don’t look for any type of tax control measure soon. Even the highly touted Act 1 school property tax reform measure has received minimal play on ballots across the state, thanks to the loopholes built into the language. Voters have had little opportunity to see a tax increase proposal placed before them, and few districts seem interested in asking their voters to consider a shift to a higher earned income tax or a personal income tax in order to fund property tax relief.

Mr. Mayor, Tell Us How You Really Feel About Taxes

Discussing the Act 47 plan yesterday, Pittsburgh’s Mayor said this about the plan’s so called failsafe option of increasing taxes to fund budget shortfalls: "I will not raise property taxes on the residents of this city. I will not raise any tax that will solely be levied on this city’s residents".

Let’s take both parts of the Mayor’s statement. On the first, it is clear that the Mayor would not support a direct increase in the 10.8 City millage rate, but he would be fine with the County (voluntarily or involuntarily) conducting a reassessment.

The evidence? The Mayor’s own budget presentation for 2009 noted "one of the greatest challenges on the revenue side is the flat real estate tax, due to the base year assessment system…[which] fails to reflect the changes in property values, suppresses growth, and leads to inaccurate assessments and disproportionate taxation throughout the City". Even the amended Act 47 plan noted that the Supreme Court’s decision striking down Allegheny County’s base year was "a ruling favorable to the City" (emphasis added). A reassessment would absolve the City from raising the real estate tax rate according to the budgetary documents.

As far as taxes that are levied solely on City residents, one would be hard pressed to find one that the Mayor has control over, whether they apply to City residents exclusively or not. The state reform package of 2005 created new taxes (payroll preparation), ended old ones (mercantile and soon the business privilege), shifted some (gave the City a share of the school’s wage tax), and phased down one (parking). The amusement tax, a tax that would fall on City and non-City residents, is limited as a result of the RAD tax. That leaves the realty transfer tax (a tax raised before the declaration of Act 47 status) and the property tax. It could be further argued that a millage rate increase would not fall solely on City residents since all owners of property in the City would have to pay the tax.

There’s a simple solution to all of this if the Mayor wants to avoid a tax increase that might fall on a good portion of the City’s residents: commit to expenditure reductions, preferably through a spending cap amendment to the City’s Home Rule Charter.