(The Center Square) – Pennsylvania’s buudget hearings began on Tuesday in the state Capitol as legislators in the General Assembly start to review Gov. Josh Shapiro’s $51.5 billion proposed state spending plan for the upcoming fiscal year that begins on July 1.
In the leadoff spot for the Shapiro administration was Revenue Secretary Pat Browne, who had plenty of questions to answer about the governor’s ambitious proposal to increase spending by $3.6 billion, which is roughly 7.5% more than the current fiscal year’s spending. Shapiro’s plan would represent the second-largest percentage increase during the past eight years, which have all seen sizable increases in state spending.
How the governor proposes to pay for those expenditures was a top discussion point during the Revenue Department’s two budget hearings before the appropriations committees of the Senate and House of Representatives.
“We are confident that the commonwealth will produce in total revenue the amount that we have, the amount that the governor has certified and put into his budget,” Browne told legislators during his afternoon testimony in the House.
The state Independent Fiscal Office, or IFO, has estimated the current fiscal year will end with a nearly $3.4 billion structural deficit, which is the difference between what the state spends and what the state collects in revenue. Fortunately, the state’s checking account had more than $6.6 billion dollars at the start of the current fiscal year, though overspending will drain it to roughly $2.9 billion.
For the coming year, the IFO projects revenue will grow by 1.7%, increasing to approximately $46.8 billion. This does not factor in any additional revenue streams created by policy changes, such as taxing skill games, legalizing recreational marijuana or changing Pennsylvania business tax law.
The Shapiro administration estimates revenues will come in higher at $48.4 billion, before carrying over the $2.9 billion and adjusting for tax refunds and fund lapses; of that, a bit more than $903 million comes from proposed tax and revenue policy changes.
“The Independent Fiscal Office paints a very different picture than what your department is projecting for the future fiscal outlook of the commonwealth,” Sen. Kristin Phillips-Hill, R-Jacobus, said to Browne during the hearing. Referencing IFO projections for future years, she said there’s a $5.1 billion gap between the office’s analysis and the Revenue Department.
“How can your team and the Independent Fiscal Office be so far apart?” asked Phillips-Hill.
“Just to be clear, senator, the $4.5 billion number is over a five-year fiscal period and the base of receipts during that period is over $300 million,” responded Browne, adding that’s well within the accepted variance for revenue estimates during such a time frame. He noted the revenue estimate difference between the IFO and the Shapiro administration is roughly $500 million.
Later during the hearing, Sen. Amanda Cappelletti, D-Norristown, questioned if the IFO’s estimates should be given much weight during budget discussions.
“I don’t mean to denigrate the IFO because it’s important and I do think they highlight the importance of the fact that we do have a structural revenue issue in Pennsylvania – which I think you have talked about how we might be able to bring in some new revenue streams with skills games and legalizing marijuana – I just want to note, though, that the IFO … their deficits have not come to fruition and we shouldn’t take them for gospel,” she said.
That drew a fairly stern response from Senate Appropriations Committee Majority Chair Scott Martin, R-Strasburg.
“Speaking of gospel… our current structural deficit is about $3.2 billion, meaning we’re spending $3.2 billion more annually – right now, present time – than what we’re taking in in revenue,” he said before indicating he didn’t want that situation to be downplayed, and promising there would be many discussions with other departments about their planned spending.
While the IFO has projected structural deficits for many of the prior fiscal years, some of those gaps did not appear as originally projected because of unanticipated federal spending – such as the sizable stimulus spending during and following COVID-19 – used to offset the ongoing imbalance between incoming commonwealth revenues and outgoing expenses.
Several Republicans raised concerns during both hearings about the accuracy of out-year spending forecasts and the likelihood that proposals, such as regulation and taxation of skill games and recreational marijuana, will be accomplished so revenues will be realized during the next fiscal year.
Browne explained that for some line items, particularly those associated with tax credits, it can be difficult to book costs in future years because there are too many unknowns to develop accurate figures. As for the skills games and recreational marijuana, the secretary explained Pennsylvania already has frameworks in place for both video game terminal gambling and medical marijuana, so neither proposal would be “starting from scratch” and could be accomplished in the time frame assumed by the governor’s proposed budget.
In addition to concerns expressed about unanticipated costs not factored into recreational marijuana legalization revenue assumptions, questions were raised about the potential for recreational marijuana to produce significant revenues since the Shapiro administration’s estimates are based on Colorado’s experience, adjusted for population.
Colorado was an early adopter of recreational marijuana and had little competition in a legalized marketplace. Pennsylvania would not be an early adopter, with many of its neighbors – New York, New Jersey, Maryland, Delaware and Ohio – having already legalized the drug. It was argued during Tuesday’s hearings that legalization in Pennsylvania would allow the commonwealth to capture the cannabis spending by residents currently being done at out-of-state businesses.
To generate needed new revenue, Democrats emphasized the importance of the skill games and marijuana proposals, as well as implementing combined reporting, something Browne said he initially resisted when Pennsylvania had a corporate net income tax that was the second highest in the nation.
“In the past I had some concerns about the [CNIT] rate – the rate was very high – and adding more complexity [with combined reporting] and a high rate would have been more of a challenge,” said Browne, explaining that with the ongoing CNIT rate reduction, making the rate “very, very competitive,” a combined reporting system “is something we should move forward on.” He said the new system would reflect how businesses now operate and “promote fairness.”