Corbett Continues Efforts to Keep Government Lean and Promote Business

Budget speech proposes new revenue sources and selected new programs but flat spending elsewhere

On February 5, 2013, halfway into his term of office, Pennsylvania Governor Tom Corbett presented a $28.4 billion budget for 2013-14 that pays for a 2.4% increase in spending without increasing personal income or sales taxes.

In a speech to the General Assembly, the Governor announced he would not expand Medicaid as an option for implementing the Affordable Care Act, citing concerns about its sustainability and suitability for Pennsylvanians. And he echoed his theme that “we should not spend more than we have.”

He also repeated recent proposals to:

1) Fund infrastructure improvements with phased increases to the wholesale tax that service stations pay on gasoline;

2) Privatize state-run liquor sales and use proceeds to fund K-12 education improvements;

3) Reform the state pension system; and

4) Promote business-friendly policies.

His budget keeps spending levels flat for state universities, and offers increases for K-12 public school funding as well as support for special needs individuals.

The state fiscal year begins on July 1. Some of the Governor’s proposals will require the implementation of legislation. Leech Tishman will follow the progress of the Governor’s proposals in the General Assembly, and invites clients to forward questions to the Government Relations Practice Group.

The following features of the Governor’s budget are noteworthy:

Gas Taxes and Transportation

1. The budget features a phased increase of the Oil Company Franchise Tax over five years. It uncaps the average price used to calculate the tax that service stations pay, in order to help finance a five-year, $5.3 billion transportation initiative.

• The revenue captured by this proposal is partially offset by a phased reduction of the liquid fuels tax from 12 cents a gallon to 10 cents a gallon over two years.

• Some observers say service stations will pass the tax to consumers, potentially driving up the cost of a gallon of gas by as much as 20 cents.

2. According to PennLive, if implemented, the Governor’s transportation spending plan could “pump $510 million into road and transit work immediately, and grow to $1.8 billion by 2018.”

• The Governor noted that the average Pennsylvania bridge is 51 years old, and 4000 bridges are structurally deficient.

• The Governor did not mention mass transit in his remarks.

Business Taxes and Jobs

1. Beginning in 2015, there will be a phased reduction in corporate net income tax rate from the current 9.99% to 6.99% in 2025. Also, the maximum net operating loss deduction will go from $3 million to $4 million in 2014, and to $5 million in 2015.

2. The budget envisions continued phaseout of the Capital Stock and Franchise Tax: Rates are reduced from 1.89 mills to 0.89 mills this year; the tax is eliminated altogether in 2014.

3. The budget consolidates eight existing revolving loan programs under the Pennsylvania Business Development Authority into a single pool totaling $1.1 billion. The goal is to streamline the process for businesses seeking capital.

4. Corbett would increase funding by $10 million for the PA First program, from $29.5 million to $39.5 million. This program offers grants, loans and loan guarantees to help create jobs in Pennsylvania. (Eligible participants are businesses, industrial development corporations, or municipalities on behalf of businesses who are involved in machinery, job training, infrastructure, land and building improvements, environmental assessment and remediation, acquisition of land, buildings, right-of-ways, working capital, and site preparation.)

5. The Governor did not offer energy proposals in his speech, but mentioned the importance of energy development in his opening remarks, saying the state was “close to landing” a refinery in Beaver (Western PA).

Liquor Sales and Education

The Governor stated, “Selling liquor is not a core government function.  Education is.”

1. His budget finances a proposed “Passport for Learning” block grant program for K-12 public schools with $1 billion over four years from the sale of liquor licenses.

This program promotes district-level flexibility to seek improvements in four areas:

*  “Ready by 3” (early reading and math);

* Customized learning;

* STEM instruction (Science, Technology, Engineering and Math); and

* School safety.

2. Other funding for school instruction and operations is increased by $90 million, to nearly $5.5 billion.

3. State and state-related universities would get funding equal to this year’s $1.2 billion level.

Pension Reform

The Governor insisted his proposals to reform state pensions were aimed at solvency, adding, “The longer we wait, the more disruptive the solution.”

He would maintain benefits for current retirees, but would:

1. Reduce future benefits for current state workers and school employees by reducing the “multiplier” used to calculate benefits; reduce annuity payments to employees who withdraw their contributions; and cap pensions using indicators from the Social Security system.

2. Require that new hires be automatically enrolled in a proposed 401(a) defined-contribution retirement savings plan, and that they contribute at least 6.25% of their salary.

3.  Reduce support of the state’s two major pension funds to 2.25%, yielding savings that the administration already has subtracted from 2013-14 agency budgets.

Health and Welfare

The Governor cited financial sustainability concerns as the reason he will not recommend Medicaid expansion at this time. (There is no decision deadline.) He did not offer alternatives for extending care to qualified persons under the Affordable Care Act.

1. The Governor’s budget provides nearly $40 million to expand home- and community-based services for people with intellectual and physical disabilities.

2. The budget adds $8 million to the state Children’s Health Insurance Program (CHIP).

3. To promote rural access to health care, the budget expands the primary health practitioner loan repayment program.

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