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State Budget Discussions Must be Broadened to Include Revenue Options

HARRISBURG, Pa., Oct. 31 /PRNewswire/ -- Pennsylvania policymakers must close a growing hole in the state budget without jeopardizing critical investments in education, transportation, health care, and other core services, said Sharon Ward, director of the Pennsylvania Budget and Policy Center.

A day after Gov. Ed Rendell announced $311 million in spending cuts in response to a first-quarter state revenue shortfall, Ward said that budget discussions must be broadened to include new revenue options. October's revenue numbers are scheduled to be released today.

If state revenue collections for the 2008-09 fiscal year decline by 2.4 percent over last year, as they did between 2000-01 and 2001-02 during the last recession, Pennsylvania could be looking at a deficit of $1.5 billion.

"Such a gap cannot be bridged by spending cuts alone," Ward said. "Public investments play a critical role in the health of the Pennsylvania economy, meaning state spending cuts will result in a dollar-for-dollar reduction in state economic activity."

As policymakers work to balance the budget, policymakers should keep in mind the following key points:

-- The state budget deficit is a revenue problem that is being driven by a weak economy. Pennsylvania's level of spending and taxes as a share of personal income has remained stable at roughly 5.6 percent over the last 20 years.

-- Pennsylvania has a Rainy Day Fund of more than $740 million to help the state weather an economic storm like this one.

-- Federal policymakers are considering and should quickly adopt a "Main Street" economic stimulus plan that includes additional funding to the states for infrastructure projects and a temporary increase in the federal Medicaid contribution. Economists, such as Nobel Prize winner Joseph Stiglitz, generally agree that counter-cyclical public investments in infrastructure and other services are important when responding to a recession. And with many states already targeting Medicaid for cuts, the additional federal funding is necessary to prevent a swelling of the ranks of the uninsured.

-- The Clean Water Referendum on the Pennsylvania ballot in next week's election, if approved, will provide an infusion of funds into the Pennsylvania economy. It would authorize state officials to issue a $400 million bond to upgrade and repair drinking water and wastewater treatment systems. The Department of Environmental Protection estimates the new funding will support 12,000 jobs.

-- Policymakers should temporarily defer the planned reduction in the Capital Stock and Franchise Tax rate for 2009, as they did in 2002. This could save the state $125 million.

-- Pennsylvania could increase its revenue collections by adopting combined reporting. It would close a loophole in the Corporate Net Income Tax System that allows multistate and multinational companies to avoid paying taxes on earnings in Pennsylvania by hiding them in other lower-tax states. That would bring in $400 million in new revenue annually.

-- New revenue options should also be explored, such as a severance tax on natural resources. Estimates show that such a levy on natural gas drilling could raise $200 million in new revenue annually.

-- Furthermore, policymakers should review tax expenditures to determine if existing tax credit programs are still necessary. For example, the effectiveness of the Emergency Tax Credit, enacted in 1974 for Pennsylvania brewers and scheduled to expire this year, should be analyzed.

"The bottom line is that all options should be on the table as policymakers craft a plan to address the state budget deficit," Ward said.

The Pennsylvania Budget and Policy Center is a non-partisan policy research project that provides independent, credible analysis on state tax, budget, and related policy matters, with attention to the impact of current or proposed policies on working families. To learn more, go to

SOURCE Pennsylvania Budget and Policy Center
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