Revenue outlook might signal mayday for PA budget crafters

Harrisburg – The news that Pennsylvania’s General Fund revenue collections could potentially lead to a larger-than-anticipated budget deficit for the coming fiscal year continued to get worse this week.

Monday, the state Department of Revenue reported fiscal year-to-date revenues are currently $1.2 billion behind initial estimates after April’s collections were released, and the Independent Fiscal Office on Tuesday signaled that weak economic growth in the state, coupled with a potential shift in the realization of income into next year, has caused a downward revision in their revenue estimates for the current and coming fiscal years.

As to April’s revenue collections, the normally robust collection month saw collections for the General Fund fall over $500 million short of estimates and $200 million short of what was collected last year.

While some of the lower-than-anticipated collection amounts were attributable to a delayed realization of corporate net income tax that will be reflected in May, the foundering revenue injection for state coffers has put the commonwealth in even worse shape than initially forecasted by both Gov. Tom Wolf in his proposed budget and a budget passed by the House earlier this spring.

In revising their revenue estimate for the current and coming fiscal years Tuesday afternoon, IFO director Matthew Knittel noted a weaker-than-anticipated economy in Pennsylvania, coupled with business entities deferring the recognizing of capital gains and net business profits into the coming year, have caused a lowering of the initial revenue estimate by $695 million and next year’s baseline revenue to $32.447 billion.

Seeing the trend for the current fiscal year around the midway point, the Wolf administration took preventative measures by capping the state complement and working to streamline some HR and IT functions.

However, as of Tuesday, it is unclear how much of an impact these moves might have in turning back the tide of an ever-burgeoning budget deficit, slated to now exceed $3 billion next year.

In terms of how budget crafters might look to bridge the divide, Wolf has put forward a number of options, including the consolidation of four human services-related state agencies, implementing a natural gas severance tax, closing some corporate tax loopholes, and engaging in a $200 million lease-leaseback of the Pennsylvania Farm Show Complex, the host of President Donald Trump’s celebration of his first 100 days in office last week.

Save for the agency consolidation, many of those proposals were not included in a Republican budget plan that passed the House in recent weeks with exclusively Republican votes.

In order to balance that plan, Republicans are looking for members to support a menu of “revenue reform” options that total $1.66 billion, led by efforts to privatize significant portions of the state liquor monopoly, expand gaming to include iGaming and/or video gaming terminals, and raid a number of dedicated funds.

After the news Monday and Tuesday, leading Democratic lawmakers said the revenue reports are a “wake-up call” that one-time and short-term revenue sources will not suffice in balancing the coming year’s budget and making the current fiscal year whole.

"Real, recurring, sustainable revenues are critical to support a responsible budget that serves Pennsylvanians and their families," said House Appropriations Committee Minority Chairman Joe Markosek (D-Allegheny) in a budget update to members.

"A head-in-the-sand rejection of all of the revenue options put forward by the governor that do not raise broad-based taxes will not solve this problem; neither will more short-sighted cuts that shirk responsibilities and pushes the revenue burden to local governments."

A similar theme was echoed by Gov. Wolf’s office.

"This month’s revenue report reaffirms that we must address the deficit in a balanced way. Gov. Wolf has proposed $2 billion in cuts and savings to make up a significant portion of the deficit," said press secretary JJ Abbott.

"However, there must be a meaningful conversation about real recurring revenues. Gov. Wolf believes closing corporate loopholes and finally enacting a fair severance tax is the responsible way to achieve this goal."

That being said, it is not all bad news.

While the Independent Fiscal Office has revised revenue estimates downward, the potential to realize shifted income next year, coupled with gains in the labor market and higher-than-anticipated corporate net income tax estimated payments, means it’s possible the commonwealth sees a natural turnaround in revenue growth next year.

That’s adding fuel to the Republican message that now is not the time to increase broad-based taxes like the personal income or sales and use tax, and sources within Republican leadership scoffed at the notion that a severance tax would be the salve it’s been made out to be given the low price of natural gas.

In the same conversation Tuesday, the same sources contended that proposals to further divest the state of the liquor business and expand gaming tap enough recurring revenue to continue to get the Commonwealth through a still-tepid economic growth period.

In attendance at Tuesday’s IFO briefing, Rep. Seth Grove (R-York) issued a statement arguing the trends seen in Pennsylvania’s continuing budget deficit are caused as a result of spending problems.

“Pennsylvania’s revenue problem can be directly attributed to its spending problem. In fact, this manmade revenue problem could be averted through performance and policy-driven spending reductions," he said.

"My legislation, House Bill 201, also known as the SMART Act, would allow the Legislature to prevent overspending and allocate spending based off of program performance. It also establishes a revenue estimate committee to allow us to better forecast state revenues. We cannot continue down this path of overspending and basing budgets on unrealistic revenue projections.”

Jason Gottesman is the Harrisburg bureau chief for The PLS Reporter, a non-partisan, online news site devoted to covering Pennsylvania government.