Pennsylvania Passes Revenue Plan Necessary to Fund State Budget

The good news: Pennsylvania lawmakers took steps to fund state services, supporting an increase in basic education and likely guarding the state from a credit downgrade.

The bad news: rather than doing so through broad-based tax changes, they opted to rely on revenue-raisers that fall hardest on the average Pennsylvanian.

Last week Pennsylvania lawmakers enacted a revenue package that funds the state’s $31.5 billion spending plan that went into effect the week prior without Gov. Tom Wolf’s signature or veto. While the complete package, including both a spending and revenue plan, came together after the state’s June 30th deadline, Pennsylvanians’ were thankful to avoid another drawn out budget standoff after last years’ nine-month impasse.

Most notably, the state’s budget agreement marks the first time under Gov. Wolf that lawmakers agreed to raise revenue, but it lacks any broad-based tax changes and relies too heavily on regressive tax options, dubious revenue raisers, and one-time funds. The revenue package draws primarily from expanded sales and excise taxes. In particular, it includes a $1 per pack cigarette tax increase, bringing the tax from $1.60 to $2.60, a $0.55 per ounce tax on self-rolled and smokeless tobacco, and a 40 percent tax on the wholesale price of electronic cigarettes and other vaping devices. As the share of the overall population that smokes continues to decline, the cigarette tax is often seen as one of the more politically feasible revenue options available to states. But the tax’s regressive nature, and the fact that it is a declining source of revenue, make it an imperfect tax.

Pennsylvania’s move to include digital downloads under the state’s 6 percent sales tax is a move in the right direction. A broad base is key for a successful sales tax, and in today’s increasing digital economy there’s no reason for the exemption on the download of digital videos, books, games, music and applications to remain. However, the $47 million raised under that change is far from what was needed. Early last year Gov. Wolf put forth an extensive proposal to raise the sales tax and expand it to dozens of items and services. A more recent iteration of that plan narrowed the reach, broadening the base to include cable television services, movie theater tickets, and digital downloads (mentioned above). While one was broad and the second much more narrow, both of these approaches coupled with a proposed increase to the state’s flat personal income tax from 3.07 to 3.4 percent serve as much more significant revenue raisers, and good tax policy.

Also of note was lawmakers’ decision to end the “vendor discount” under the sales tax—an unnecessary giveaway that allowed retailers to keep a portion of the tax they collected from their customers.

Additional state funds will be raised through changes to the state system for wine and liquor sales, expanded gaming, a tax amnesty program, and an extension of the personal income tax to state lottery winnings. These, coupled with a $200 million loan from the state’s medical malpractice insurance fund surplus and a few expected revenue raisers that have yet to become law, largely close the state’s $1.3 billion revenue shortfall.

While raising some new revenue in Pennsylvania represents real progress, the extensive use of one-time funds will likely result in another debate next year over long-term sustainability and how to permanently close what has become a structural revenue gap. Further, the choice to use of regressive tax options – that have a far greater impact on the state’s low- and middle-income families – is a disservice to most Pennsylvanians. According to ITEP’s Who Pays? report, Pennsylvania has the 6th most unfair state and local tax system in the country. That ranking will not improve unless lawmakers enact more equitable revenue solutions in the years ahead.