Senate sets sea-change revenue proposal, budget implementation bills

The Pennsylvania Senate Wednesday night loaded bills that will provide for the majority of a $2.2 billion revenue package needed to balance the FY 2017-18 and 2016-17 budgets, and provide for the implementation of the budget through specific code bills.

About $570 million of the nearly $2 billion revenue package now set for a final vote in the Senate on Thursday represents a sea change from prior revenue discussions, since it does not rely mainly on gaming expansion, prior-year lapses and offline revenue transfers.

Instead, the bulk of the plan is led by a reimplementation of a gross receipts tax on natural gas; an increase in the gross receipts tax on electricity and telecommunications services; a severance tax on the volume of natural gas produced by drillers; and closing a sales tax exemption for third-party vendors operating on internet websites like Amazon and eBay.

In addition, $200 million is authorized to be transferred from the Joint Underwriters Association account to the General Fund.

$1.225 billion of the total package consists of borrowing money securitized by the Tobacco Settlement Fund.

Not included in what is being considered for final passage on Thursday is $200 million from expanded gaming legislation that the Senate hopes will be worked on with the House when a final agreement is reached with the majority in the chamber on the rest of the revenue plan.

While normally anathema to the House and Senate GOP, a severance tax based on 2 cents per thousand cubic feet of natural gas extracted is expected to garner $80 million for the current fiscal year.

“It’s a volume component which doesn’t exist in the impact fee,” said Senate Majority Leader Jake Corman (R-Centre). “It won’t touch the impact fee; the impact fee will remain the same. This component will go to the General Fund.”

According to Corman, the tax was arrived at after Senate Republicans secured agreement on substantial regulatory reform with the Wolf administration.

“We think we made an agreement with the administration in significant permitting and regulatory reform in the industry within the Department of Environmental Protection,” he said. “We’ve said all along if we get an overall discussion on the industry – obviously they’re not thrilled, they think they pay enough in taxes and probably they’re accurate – but at least in this component that we are putting together there are some things that help the industry as well.”

In particular, he noted headway in not starting the clock again when “deemed approved” drillers do not get their permit application in on time as a key change being made that helped grease the skids for moving along a severance tax. Others also mentioned pipeline expansion as a critical part of the package, a move that was said to allow the natural gas industry to expand and carry more product to market.

The bulk of the revenue – over $400 million worth – is expected to come from the changes in the gross receipts tax.

As previously mentioned, the Senate’s revenue proposal will reinstate the gross receipts tax – a consumer tax paid on the total amount of a bill – on natural gas consumption that was lifted in the 1990s. In addition, it will increase the same tax currently existing on electric and telecommunications services.

While the gross receipts tax component was discussed previously, one part of the current revenue plan that was not is the roughly $40 million expected from closing a sales tax exemption for vendors selling through Amazon and eBay.

While federal law might be questionable in terms of this option’s legality since these vendors may not have a so-called nexus with Pennsylvania (i.e. having no employees, offices or warehousing in the commonwealth), Corman said other states are now requiring these entities to pay sales tax and that such a levy would bring parity with other markets.

“We are following other states in doing that and, to me, it tries to add fairness to the sales tax,” he said. “People who invest in bricks-and-mortars in Pennsylvania and have employees in Pennsylvania have to charge the sales tax and they’re competing against companies that don’t, unless they have a nexus here. I think this goes a long way to try and maintain fairness in the sales tax.”

Finally, the chamber is booking $2.8 million from a new 12 percent tax on the sale of fireworks in Pennsylvania and $40 million from “tax appeals reform and revenue maximization.” The plan also places a new 5 percent tax rate on the gross transaction amount of electric grid virtual financial transactions in the electricity markets administered by the regional transmission organization – the so-called PJM tax – but does not book any revenue for the plan in the current fiscal year.

Before the legislation was considered by the Senate Appropriations Committee, Corman noted the revenue package is needed because Pennsylvania is no longer able to cut its way out of tough fiscal climates brought on by a bad economy.

“For the last decade, we’ve been working on budgets, trying to keep it afloat without raising any revenue,” he said. “Unfortunately, we are here today because we have run out of our ability to do that and if we are going to maintain our responsibilities…we are in a position where we need to get more revenue to make that happen.”

Democrats on Wednesday night were not entirely thrilled with some of the components of the revenue package – particularly as it relates to the consumer nature of the gross receipts tax.

However, Senate Appropriations Committee Minority Chairman Vincent Hughes (D-Philadelphia) said some other areas have helped sweeten the pot that might allow for Democratic support for some of the less desirable portions of the measure.

“In terms of the whole revenue package…there’s some good things in it and there’s some not good things in it,” he said. “We are trying to mitigate [the negative aspects that relate to the gross receipts tax] with the first time in 12 years adding state support for the LIHEAP program.”

A total of $40 million from the GRT is being split evenly between the Low-Income Home Energy Assistance Program (LIHEAP) and a Natural Gas Optimization Program to provide competitive grants to natural gas distribution companies to expand the natural gas industry.

Senate Minority Leader Jay Costa (D-Allegheny) praised the package as “the art of the possible.”

“This is what we can get done in the Senate, and we’re looking forward to moving it to the House as well,” he said.

In addition to the revenue component, the Senate also had committees insert language into various budget implementation bills, including the Human Services Code, the Public School Code, the Administrative Code and the Fiscal Code.

In terms of the Human Services Code, the Senate did remove a portion of controversial House language in House Bill 59 – the current vehicle bill – that placed a medical service premium on children with disabilities and a limitation of choice for managed care for individuals on medical assistance.  

However, it kept in place the work requirements inserted by the House and requires the Department of Human Services to engage in an evaluation of the efficacy and cost effectiveness of software programs designed to identify and prevent welfare fraud and similar activities.

While the legislation advanced through the Senate Rules and Executive Nominations Committee with some Democratic support, Hughes noted why some members remained opposed to the legislation.

“It’s pretty troubling for me as someone who has been involved in Medicaid managed care services since its inception here in Pennsylvania,” he said of some of the components. “It’s completely unnecessary, ungrounded, unfounded – that’s really troubling.”

There is no guarantee when or how they will be received upon their return to the House.

One early indication came from Sen. Scott Wagner (R-York) who, in explaining why he is opposed to the revenue package, placed the blame squarely on Gov. Tom Wolf and more veteran legislators.

“The people of Pennsylvania elected a governor who represented himself as a business person, that he ran businesses. He represented that he turned around a family business. Well, Pennsylvania needs a little turnaround help,” he said Wednesday night. “Instead of the governor and his staff doing their jobs and managing agencies…I see agencies totally out of control and not being managed and, unfortunately, because we have a governor who is not doing his job, we are backed into a corner tonight.”

Earlier in the day Wednesday, protesters organized by labor unions stood in front of House Speaker Mike Turzai’s office, urging him to call members back to session to conclude the budget process by supporting a revenue package with recurring, sustainable revenues.

In the past, Republican leaders have been particularly opposed to a severance tax and the Speaker went so far as to recently call the gross receipts tax floated by the Senate a “broad-based tax,” something Republicans and Gov. Tom Wolf have said is unnecessary and won’t be used to balance the budget.

House Republican Caucus spokesperson Steve Miskin said Wednesday that, regardless of the Senate’s actions, there are no immediate plans to call members back to voting session.

“We’ll see what they do,” he said. “We came into session last week to talk to our members and see what we can get 102 votes for. Obviously, we didn’t get that to coalesce.”

Gov. Wolf's office Wednesday night praised the Senate action.

"Gov. Wolf commends the Senate for taking a responsible step toward balancing the budget and for their willingness to include a tax on Marcellus Shale," said press secretary JJ Abbott. "Gov. Wolf believes all parties must quickly come together to bring this process to a close."

The bills advanced by the Senate Wednesday are scheduled for a final vote in that chamber on Thursday.

They would need concurrence by the House before they could be sent to the governor for enactment.