Analysts: Surplus money isn’t really there

$866M tax collection windfall has already been spent, 2 think tanks report

HARRISBURG – While state leaders are heading into budget season with a projected general fund surplus of $866 million, some who follow state budgeting say the number paints a too-rosy picture.

The projection of the extra revenue came last month from the Independent Fiscal Office, which cited unanticipated major inflows of corporate net income taxes and sales-and-use taxes. The state requires that a use tax be paid when a consumer buys a taxable item from a seller who does not collect the tax.

But observers at the Pennsylvania Budget and Policy Center and the Commonwealth Foundation, generally viewed as occupying opposing ends of the political spectrum, said in separate interviews the numbers are illusory.

“I think the jury is still out on how much of a surplus we really have,” PBPC Director Marc Stier said. Foundation Director of Policy Analysis Elizabeth Stelle said, “Most of that surplus has already been spent on current year spending.”

In February, Gov. Tom Wolf announced a proposed $34.1 billion budget for 2019-2020 with spending about 4% above the current budget. In May, updated revenue projections put out by the Independent Fiscal Office included the projected $866 million surplus.

Stier and Stelle, while viewing the figure from different ideological vantage points, said it was misleading to view the figure in a vacuum.

Stier pointed out that a court has ruled against the state’s attempt to transfer into its budget some $200 million out of a fund that covers malpractice claims in excess of basic private insurance coverage and is paid for by

medical professionals and facilities, not taxpayers.

Beyond that, Medicaid costs this fiscal year have ballooned far beyond expenditures written into the budget, both Stier and Stelle said. Stelle said she has seen reports of Medicaid cost overruns this year in excess of $700 million.

Wolf ’s administration is expected to seek approval for supplemental spending to cover those costs.

Stacey Knavel, principal revenue analyst for the IFO, said its revenue projections do not reflect the medical malpractice or Medicaid money because they are covered by the expenditure side of the budget.

Regardless, big portions of the surge in projected state revenue come from corporate taxes and sales-and-use taxes.

Federal tax law gives businesses some degree of leeway regarding when they log some revenue and expenditures. Knavel said it was likely that many companies chose to log blocks of revenue in 2018 rather than 2017 — producing a surge this fiscal year in corporate taxes for the state.

The IFO projection shows revenue from corporate net income taxes $318 million greater than the amount in the

“It has bolstered the position of Act 43. It put us out ahead of the curve.” — Stacey Knavel, principal revenue analyst for the IFO

original budget.

Meanwhile, the state’s coffers also have pulled in more than anticipated from taxable items sold on the internet.

A state law, Act 43 of 2017, required vendors selling at least $10,000 of goods into Pennsylvania using the web to comply with state tax requirements. That law, Knavel said, has led to more revenue than anticipated.

In addition, a 2018 U.S. Supreme Court decision — South Dakota v. Wayfair — held that states could require outof-state, online retailers to collect sales taxes and remit them to the state.

“It has bolstered the position of Act 43,” Knavel said of the decision. “It put us out ahead of the curve.”

Her office’s May projection shows revenue from sales-anduse taxes to be $312 million greater than the original budgeted figure.

Morning Call reporter Ford Turner can be reached at 717783-7305 or fturner@mcall.com