Business Tax Breaks are Burning the PA Budget Pie

Deep cuts to critical human services, health care, and education loom in 2014-15 as lawmakers attempt to bridge a $1.5 billion and growing funding gap.

Despite an improving economy, tax collections have fallen far short of revenue targets in 2013-14. The Governor’s initial projections revenue growth have proven to be overly optimistic for this year and for 2014-15.

A key factor in the revenue gap is the impact of cuts to state business taxes. Over the past decade and a half, in good times and bad, business tax cuts continue to be enacted by the General Assembly. In order to make the budget balance and have additional needed resources, the growth rates of other taxes – in particular, sales tax and personal income taxes on wages, have been quite rosy. When they fail to meet these growth expectations, mid-year budget gaps appear.

General Fund collections are $250 million less in 2013-14 than the year before through May, fueled by a decrease in corporate taxes of more than $320 million. This is in sharp contrast the expected $560 million tax revenue was projected to grow in 2013-14. Because of this loss of revenue, increases in education, early childhood, and other critical investments in the 2014-15 budget are on the chopping block.

More automatic cuts are on the docket, triggered January 1, 2015, unless the General Assembly acts to stop them – further cuts to the capital stock and franchise tax rate and the expansion of net operating loss deductions.

These tax cuts have been a critical reason corporate taxes haven’t yet recovered from pre-Recession levels (see below). The most recent Independent Fiscal Office estimates peg 2014-15’s total corporate collections as being $711 million less than they were in 2006-07. Even more troublesome is that corporate tax collections are expected to fall over the next several years. As corporate taxes shrink, more of the responsibility for paying for the budget gets shifted to personal income and sales tax payers.

These tax cuts are costly and impact on our ability to fund critical services, and they haven’t produced the jobs that were promised. As it finalizes the budget, the General Assembly should take a balanced approach – including new and recurring revenue sources. They certainly should stop making matters worse and suspend currently scheduled business tax cuts.

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