Modest PA Revenue Growth Won’t Keep Pace with Costs in Years Ahead

By Ben Zurflieh, Intern

Growth in Pennsylvania’s revenue collections over the next five fiscal years is expected to be, in a word, “modest,” according to a five-year economic and budget outlook from the Independent Fiscal Office (IFO). 

At a public briefing Thursday, analysts with the IFO said an aging Pennsylvania population, a slow-growing economy and the further erosion of the state’s corporate tax based are some of the reasons that revenue growth over the next five years is projected to be slow.

More troubling, the IFO estimates that expenditures will outpace revenue significantly in the years ahead. The forecast projects an average revenue growth rate of 2.6% per year between 2012-13 and 2017-18. Using current budget policies as a baseline, Pennsylvania’s expenditures are projected to exceed net revenues by $468 million in Fiscal Year 2013-14, and by $2.2 billion in Fiscal Year 2017-18.  

Pennsylvania’s changing demographics is one major contributor. According to the IFO’s report, the commonwealth is likely to see a significant increase in the 65+ and 95+ age cohorts, coupled with a decline in the working-aged cohort, ages 20-64. 

In other words, the baby boomers are aging and exiting the workforce, leaving a void unfilled by younger generations.  As a result, the personal income tax and sales tax bases are projected to grow slowly. On the spending side, the large increase in Pennsylvanians over 65 will drive up the cost of state-funded health care, including long-term care services covered under Medical Assistance.

Pennsylvania’s corporate tax revenue base is also declining, the IFO noted, as the state continues to phase out the capital stock and franchise tax without any plan to replace the lost revenue. The December 2011 expiration of 100% bonus depreciation, a policy that permitted businesses to write off the cost of capital expenses up front rather than over time, also provided a large technical boost to corporate revenue in 2012-13 that disappears in future years.

And, of course, there are the increasing costs of state contributions to public employee pensions over the next several years, and modest economic growth that is likely to keep revenue growth at an equally modest level in the years ahead.

The IFO report makes one thing clear: Despite the slow but steady growth projected for Pennsylvania’s economy, we can expect a difficult path for the commonwealth’s budget over the next several years.

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