February 26, 2010

Report: Rendell Budget Burdens Business, Increases Spending

Pennsylvania Governor Proposes Broadening Sales Tax Base and Lowering Rate, Reducing Corporate Income Tax Rate, Eliminating Cap on Net Operating Loss Carry-Forwards

Washington, DC, February 26, 2010 -- Pennsylvania Gov. Ed Rendell's $66.4 billion budget contains some sound tax policy reforms, but it also boosts spending and relies on one-time money, out-of-state businesses and the federal government, according to a new Tax Foundation report.

"Pennsylvania is one of the states that last year used one-time stimulus money to backfill their budgets, postponing meaningful steps to prioritize public expenditures," said Tax Foundation Director of State Projects Joseph Henchman, who authored the report. "As a result, the state now faces a built-in multi-billion dollar annual budget gap from those disappearing federal revenues. Governor Rendell proposes using tax increases to bridge that gap, but even those aren't enough to completely close it or address future budgets."

Tax Foundation Fiscal Fact, No. 213, "Pennsylvania Governor Proposes Spending Boost, Broader Sales Tax, Heavier Business Taxes," is available online at http://www.taxfoundation.org/publications/show/25905.html. The significant tax proposals in Rendell's budget include:

• Broadening the state sales tax and lowering the rate from 6% to 4%. The change would eliminate many unjustified exemptions (while retaining the largest unjustified exemptions: most groceries, clothing, legal and medical services) but would double-tax some retail items by taxing business-to-business transactions. The change would be a net revenue increase despite the rate reduction, raising $531 million in FY 2011 and nearly $900 million in FY 2012.
• Eliminating sales tax vendor compensation, which would raise $76 million in FY 2011.
• Reducing the corporate income tax rate from 9.99% to 8.99% and eliminating the cap on net operating loss carry-forwards, but imposing combined reporting and single-sales factor apportionment. The net result of this package of positive and negative reforms (which are expected to raise $66 million in FY 2011 and $167 million in 2012) would be an increase in business tax burdens, particularly for out-of-state businesses.
• Imposing a new severance tax on natural gas extraction, which would raise $161 million in FY 2011.
• Seeking federal aid by increasing unemployment benefits and exploiting the federal Medicaid matching fund system.

"Some of the governor's proposals -- such as broadening the sales tax while lowering the rate, uncapping losses that businesses can deduct and lowering the corporate income tax rate -- are moves in the right direction, but the budget also boosts spending significantly, relying on one-time money, out-of-state businesses, and the federal government to do so," Henchman said. "Without reprioritizing expenditures, slowing the rate of state spending, and meaningfully addressing the state's structural deficit, Governor Rendell may have difficulty selling his proposal to legislators and the people of Pennsylvania."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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Tax Foundation Fiscal Fact, No. 213, "Pennsylvania Governor Proposes Spending Boost, Broader Sales Tax, Heavier Business Taxes," is available online at http://www.taxfoundation.org/publications/show/25905.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.