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Despite empty coffers, state is divided on raising money

Education aid in Pa. increased this year, but without new revenues, the bottom will fall out next year.

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

Pennsylvania, like many states, faces a budget crisis caused by dwindling tax receipts, ballooning pension obligations, the end of federal stimulus money, and a decline in other federal aid.

Even so, Harrisburg lawmakers passed a state budget this summer without a single new source of recurring revenue. They declined to enact any new taxes, raise existing taxes, or close loopholes – instead making deep cuts in early childhood, health and human services, and environmental protection.

“The budget overwhelmingly relied on cuts and did not enact revenue measures, which will be required for the budget to be balanced going forward,” said Sharon Ward, executive director of the Pennsylvania Budget and Policy Center, an advocacy group. “Without these additional revenues, we might be able to stumble through this year, but next year will be very, very bad.”

State Sen. Vincent Hughes of Philadelphia said that without hard choices, “Pennsylvania will be looking at a budget situation similar to New Jersey, which is facing an $11 billion budget gap in 2011.”

Through a contentious budget process this year, Gov. Ed Rendell fought to maintain increases in basic education aid that have marked his administration.

But he encountered opposition from legislators, mostly Republicans, who are not committed to the formula adopted in 2008, designed to increase the state share of education spending and help districts reach educational adequacy for all their students. At $5.7 billion, basic education aid now consumes 20 percent of the $28 billion state budget, and is a prime target for cuts.

Discounting the educational adequacy targets, Senate Republican leader Dominic Pileggi called Rendell’s proposed increases in education aid “purely discretionary.”

When the dust settled, basic education aid to school districts increased by $200 million, or 3.6 percent. The state is not on pace to get all districts to “adequacy” by 2014. Legislative support for keeping the education formula intact appeared to erode.

Rendell met with resistance to revenue increases, such as eliminating an anachronistic sales tax discount and immediately taxing natural gas extraction from Marcellus Shale.

“Legislators are scared little rabbits,” he told the Notebook. “They don’t like to raise taxes.”

Throughout September, the lame-duck governor and the legislature were still battling over imposing a tax on the gas extraction that they had promised to enact by Oct. 1.

Basic education aid, up or down?

The state’s contribution to basic education over the past two years has actually gone down. For the 2010 and 2011 budgets, the legislature used $654 million in federal stimulus funds to underwrite education aid increases. But it used most of that infusion of federal money to supplant state dollars.

In 2011-12, the stimulus disappears. The $654 million needs to be replaced by state dollars, or basic aid will plummet.

Harrisburg also faces soaring pension obligations for state and public school employees that could total a whopping $6 billion per year. The General Assembly approved legislation that spreads the increased obligations over 30 years, but that will still cost an extra $915 million starting in 2011.

Meanwhile, with the economy struggling, revenue from the personal income tax and sales tax has declined $1.4 billion since 2008.

Though confronting this onslaught of budget challenges, legislators have declined to re-examine loopholes in the state’s tax structure.

For instance, 71 percent of multi-state corporations do not pay any state income tax at all. Most file through out-of-state entities in tax-haven states including Delaware. Nearly half the states have plugged this loophole in their own tax codes. If the Commonwealth did so, it could bring in $67 million this year.

Reforming corporate taxes could bring in as much $500 million annually down the road, according to State Sen. Andrew Dinniman, Democratic chair of the Education Committee.

Big corporations benefit from the current system, he said. “By closing the loopholes they’re exploiting, you’re not only adding to your tax base but also leveling the ground for small businesses.”

Also, Pennsylvania is one of only two states that don’t tax smokeless tobacco or cigars. An effort to change that failed in the General Assembly, forfeiting an estimated $43 million. And the Commonwealth is one of the few states that retains an archaic provision called a “vendor discount” on its sales tax. That costs $74 million a year.

With the opening of the Marcellus Shale, the legislature has been slow to tax natural gas drilling, even though every other mineral-rich state does so. Ward said the tax could ultimately bring in as much as $600 million a year.

Legislation introduced this summer by Rep. Dwight Evans, chair of the House Appropriations Committee, that would have closed some corporate loopholes and levied taxes on smokeless tobacco and cigars died a quick death.

Dinniman said that legislators are swayed by “gas interests, corporate interests, and parochial interests” in their districts.

Flat tax gives the wealthy a break

The peculiarities of Pennsylvania’s tax code are not limited to its treatment of corporations. Pennsylvania is one of only six states with a flat income tax, meaning that people of all income levels are taxed at the same rate. The Pennsylvania Supreme Court has ruled that a progressive tax, in which people with higher incomes pay a higher rate, is unconstitutional.

The flat income tax, combined with relatively high sales and property taxes, gives the Commonwealth one of the most regressive tax systems in the country. In 2007, for example, the poorest 20 percent of Pennsylvanians paid 11 percent of their incomes in taxes, whereas the wealthiest 1 percent paid less than 5 percent.

Ward’s organization has floated three proposals that could boost tax rates while exempting the poorest households and would raise an additional $1.65 billion. The lion’s share would come from an investment income tax increase, levied on types of income (dividends, capital gains) primarily earned by wealthier citizens.

State Rep. James Roebuck, a Philadelphia Democrat, rates the chances of any such measures making it through the General Assembly as slim to none. “Many people simply don’t want to see any taxes raised,” he said.

Advocates like Ward, who believes that legislators will have no choice but to raise broad-based taxes over the next few years, say there is a need to communicate that taxes are investments. “The investments Pennsylvania has made in education, green energy, and infrastructure have paid off,” she said. “What people want is a successful and accountable government. If you give them that, and communicate that properly, they will be willing to pay for it.”

But making that case can be tricky. “Legislators and the public want to know that schools are investing money wisely,” said Baruch Kintisch, director of policy and advocacy at the Education Law Center (ELC). “The challenge is to go beyond anecdotes.”

Kintisch also said that it may be a battle to save the fair funding formula.This formula distributes dollars by taking into account the needs of students in each district, but it has caused some backlash. Because of heavy reliance on the property tax to pay for education, Pennsylvania has some of the biggestgaps among rich and poor districts of any state.

“If you don’t have the distribution formula intact, the gaps will never be closed,” he said.

The best strategy, according to Susan Gobreski, executive director of Education Voters Pennsylvania, is to focus on education’s long-term benefits. For instance, a study sponsored by ELC estimated that the state could save nearly $300 million a year in spending on prisons and other crime-related activities if graduation rates among males were to increase just 5 percent.

“People need to talk to politicians about how education develops a taxpaying work force that is self-sufficient and doesn’t depend on state services,” Gobreski said. “Education is the single best thing we can invest in as a commonwealth because it pays for itself in the long run.”

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