Against the backdrop of a current projected $700 million shortfall and a multibillion-dollar structural deficit, Pennsylvania Governor Tom Wolf yesterday delivered his budget proposal for Fiscal Year 2017-18. Outlining his priorities for the upcoming fiscal year, Governor Wolf steered clear of suggesting broad-based tax increases in his proposed $32.3 billion General Fund budget (1.8% higher than the current fiscal year budget). Instead, he discussed a blend of targeted taxes, cost-cutting measures and functional consolidations to remedy Pennsylvania’s worsening financial situation.
Let’s take a closer look at the main elements of Wolf’s proposal and what they mean for businesses and individual taxpayers.
Governor Wolf’s main focus continues to be education spending. His budget proposal calls for an increase of $200 million in education spending, with the majority devoted to early childhood development and K-12 education. The Governor also continues to prioritize improving and expanding services for older Pennsylvanians and directing resources to combat the heroin and opioid addiction crisis that plagues the Commonwealth.
Cost Savings and Spending Reductions
Governor Wolf’s budget identifies a number of opportunities for cost savings and spending reductions that appear to have bipartisan support. The Governor’s budget identifies a proposed $2 billion in spending cuts, achieved through methods including:
- Prioritizing agency expenditures and creating cost efficiencies;
- Improved fiscal management;
- Revenue enhancement;
- Eliminating and reducing certain non-core programs;
- Employee complement controls;
- Consolidation and coordination of state services; and
- Facility closures, lease management and facility downsizing.
These are just some of the ideas the Governor has proposed to achieve savings, but we will have to wait and delve deeper into the specific details of each proposal to get a true feel for just how realistic this $2 billion figure is.
Impact on business and taxpayers
In a stark contrast to his budget proposal from last year, Governor Wolf provided that he would not seek an increase in the personal income tax or any significant increase or expansion of the sales and use tax. Although there are no proposed increases to these two broad-based taxes, business and individual taxpayers should be aware of some of the Governor’s proposals that will have a direct impact on them, such as:
- Increasing the minimum wage from $7.25 to $12 an hour;
- Imposing a natural gas severance tax;
- Closing “loop-holes” for insurers;
- Reducing available tax credits;
- Establishing uniform Net Operating Losses (NOL) provisions;
- Eliminating tax “loop-holes” for certain sales and use tax exemptions including software and computer services, food sold to airlines, aircraft maintenance and repair; and
- Adopting combined reporting; and
- Reducing the corporate net income tax rate over several years to a rate of 6.49% by 2022.
Each of the items listed above require close scrutiny and raise a number of questions regarding this budget. What does the higher minimum wage mean for small business owners? How do the NOL provisions impact Pennsylvania’s ability to attract and keep businesses? How will changing the corporate net income tax system impact revenue in the short-term? These questions and more are issues we at RKL will be tracking closely as the budget process continues.
While it is important to understand what items are included in the budget address, it is equally important to be cognizant of those items excluded. The main driver behind the structural deficit is the rising cost of public pensions that Pennsylvania has been trying to resolve for a number of years. It is hard to imagine a budget that does not address such a prominent issue as pension reform.
The Governor’s address is the first move in the budget-balancing chess match that will play out over the coming months in the Capitol. RKL’s State and Local Tax Team will closely monitor state budget negotiations, just like all developments in state government, for potential impact on business and individual taxpayers. Contact us for more information.