Governor Tom Wolf Releases First Budget (2015-2016)

Proposes tax changes and more funding for education and training

By: Steven D. Irwin, Esq.

Today, March 3, Pennsylvania Governor Tom Wolf presented the General Assembly with his first budget.  Wolf’s plan plugs a $2B hole in the state’s finances while boosting support to education and reducing taxes on businesses and property owners.   Tax increases on natural gas extraction and the income of more affluent Pennsylvanians would help generate revenue to balance the $33.8B budget.

Governor Wolf proposes to eliminate the capital stock and franchise tax.  He also proposes to cut in half, over time, the state’s 9.9% corporate net income tax, one of the highest in the nation.  If the state legislature agrees, the corporate net income tax would drop to 5.99%, and then in two years to 4.99%, a rate that would be the fourth lowest among the states.  Wolf would trade a lower rate for elimination of the “Delaware loophole.”  This means businesses would have to use “combined reporting” of profits generated in other states instead of shifting profits to other states to avoid taxation.  Wolf said that even with combined reporting, the overall tax burden on Pennsylvania businesses would be lowered.

Highlights:

Severance tax:

The budget follows through on a campaign pledge to impose a tax on natural gas drilling at a rate of 5% of the value of the gas at the wellhead, plus 4.7 cents per thousand cubic feet of volume extracted.  Although a portion of the revenue from this tax would go to alleviate the local impact of drilling activity, the severance tax would replace the current impact fee and is expected to raise $1B per year.  In contrast, impact fees during the Corbett administration raised $630 million from 2008 to 2014.

Education and property taxes:

Wolf plans to shift more funding responsibility to the state in order to reduce reliance on property taxes to support public education.  Currently, property taxes pay for about 40% of public education and the state support covers about 35% of such costs.  Wolf wants to make the state responsible for 50% of the total.  Property tax cuts would be offset by increased personal income taxes and an increase in the current 6% state sales tax to 6.6%.

– Under Wolf’s plan, some school districts would see their property taxes drastically reduced or eliminated.

– The plan also requires school districts in some instances to extend property tax relief to local businesses.

Income tax:

The state tax rate on personal income would increase from 3.07%, which generates about $12B a year, to 3.7%.  Households making $36,400 or less would be exempted from the personal income tax.  These changes are expected to raise an added $2.3B in revenue.

Health:

Wolf proposes to abandon the “Healthy PA” plan of his predecessor and move certain Pennsylvanians to the Medicaid program, which was expanded by the Affordable Care Act to include persons with incomes that are higher than those of past Medicaid recipients.  This would generate substantially expanded federal health care subsidies for the initial years of state participation, which eventually must be assumed by the state.

Other items of note include:

  • An increase in the minimum wage for $10.10 per hour.
  • An increase in education funding for pre-K to college.  Wolf calls for a freeze of tuition for state institutions of higher learning.
  • Although in his address the Governor did not delve into detail on liquor privatization and pension reform, he indicated in the budget document his intention to modernize the wine and spirits system and achieve pension savings through investment management changes.
  • Products and services that would no longer be exempt from sales tax include engineering, architectural and legal fees, candy, amusements and recreation.  Food, clothing and prescription drugs would retain their protected status.

In his address, Governor Wolf made a spirited plea for bipartisan participation in the budget process and invited dissenters to bring forth their own constructive ideas.  Since taking office he has met informally with many legislators in the General Assembly, whose approval will be required to change Pennsylvania’s current tax structure and education funding approach, as well as to pass an overall general fund budget by the deadline of July 1.

Leech Tishman’s Government Relations Practice Group will continue to closely monitor developments during consideration of the budget.  For more information at any time, please contact Steve Irwin at 412.261.1600 or sirwin@leechtishman.com.

About the General Fund: The General Fund is the Commonwealth’s largest operating budget.  It receives all tax revenue, non-tax revenue and federal grants and entitlements not specified by law to be deposited elsewhere.

Revenue: Four taxes account for about 80 percent of General Fund tax revenue: 1) The personal income tax, 2) The sales and use tax, 3) The corporate net income tax, and 4) The capital stock and franchise tax.  The largest sources of non-tax revenue are from the Pennsylvania Liquor Control Board, licenses and fees, and sales of unclaimed property.

Spending: Three spending areas comprise about 80 percent of total General Fund obligations: 1) Health and social services (39%); 2) Pre-K to Grade 12 education (35%); and 3) Corrections (7.5%).

Commonwealth annual spending: Pennsylvania revenues originate not only from the General Fund but also from other funds.  Total revenue earned during the last budget cycle  (and mostly spent) was about $71 billion, comprised of:

General Fund: $29.4B

Federal Contributions: $24.2B

Motor Vehicle License Fund: $02.7B

Lottery: $02.0B

Fees: $03.2B

TOTAL: $71.8B