The eye of the storm

As August melts into September the halls of the state capitol building are relatively quiet. This is a marked contrast to a year ago when state government was in what turned out to be the early phases of the longest budget stalemate in state history. This year the budget, or at least the spending part of it, was done reasonably close to the constitutionally mandated June 30th deadline, the revenue component followed several weeks later.

But is this just the eye of the storm?

In capitulating to too many of Governor Tom Wolf’s spending demands the state legislature larded up the budget with nearly $1.4 billion in new expenditures. This despite claims of a $1.5 billion dollar “structural deficit” the governor claimed needed to be addressed. Even those using Common Core math can calculate that left the state nearly $3 billion in the hole.

To pay for this spending orgy some $650 million in new taxes were cobbled together, and accounting gimmicks employed, to produce a “balanced” budget. But the budget isn’t really balanced and even that $650 million contains projected revenue that will never actually materialize. For example, lawmakers planned to charge the state’s casinos $1 million each to purchase 24-hour liquor licenses. Apparently nobody thought to ask if the casinos wanted such licenses, as there now appears to be no takers.

The budget also includes revenue from on-line gambling. The problem is legislation has yet to be passed authorizing on-line gambling. After adopting the budget, the General Assembly adjourned for a two month recess delaying any possible revenue from that source deep into the fiscal year.

And, predictably, the taxes that were hiked on existing businesses are having a dramatic negative impact. A 40-percent tax imposed on vaping supplies is driving many vaping stores - almost all of which are small businesses - out of business. That means not only will projected revenue from the tax fall short, but the state will also lose out on sales tax revenue as the stores shutter their doors.

That Republicans in the legislature caved into $1.4 billion in new spending defied logic. The GOP had fought an epic budget battle with the governor the previous fiscal year and won. Not only did they win, but not a single lawmaker seeking re-election was denied by voters due to the budget fight. After posting a historic win, Republicans essentially forfeited the next game.

All of these elements are coming together to produce the perfect fiscal storm as budget talks begin for next year. Don’t forget that “structural deficit” of $1.4 billion hasn’t been addressed. A significant portion of the new taxes enacted this year will fail to materialize. And, Governor Wolf continues to demand a lengthy menu of spending hikes - and the taxes to pay for them.

Making matters worse the governor and the legislature have not been able to agree on how to deal with cost drivers, particularly the skyrocketing cost of public employee pensions. Pension costs are gobbling up the lion’s share of any new revenue produced by a still slow-growing state economy. Republicans have passed pension reform only to see it vetoed by Governor Wolf. There are new legislative proposals on the drawing board, but they fall woefully short of resolving the problem. Even if some reform is enacted it will likely have minimal impact on the upcoming 2017-18 state budget.

Given all of this, will Republicans stick to their pledge that without addressing cost drivers they will not enact broad-based tax hikes - such as raising the personal income tax, expanding and/ or raising sales taxes - or will they again cave into the governor’s tax and spending demands? Much rides on the outcome of this looming budget fight, primarily the fiscal health of the commonwealth.

But, 2018 is a gubernatorial election year and this budget will be enacted as the campaign heats up. Governor Wolf, if he seeks reelection, will want to show his base voters that he delivered the goods of higher spending. Republican voters will judge the GOP controlled legislature by their ability to resist higher spending and more taxes. Add these competing political imperatives to the state’s perilous fiscal circumstances and we should brace ourselves for the second wave of the hurricane.