2010-02-18 / Local & State

Tax Increase? Not In 2010, But Stay Tuned In 2011

By Marc Levy ASSOCIATED PRESS WRITER

HARRISBURG, Pa. (AP) – With another multibillion-dollar deficit thought to be just around the bend for state government, you could be forgiven for thinking that Pennsylvania legislators will approve some kind of tax increase.

But the only person talking openly about raising taxes to bridge that financial shortfall is not running for re-election – Gov. Ed Rendell.

Voters will fill 228 of 253 seats in the Legislature in November’s general election, and most legislators who are reading polling results right now would rather talk about all the ways they want to create jobs. That’s because the polls tell them that voters are most concerned about their jobs, their family’s financial future and the national economy.

“The economists may say the recession is over because we have these two consecutive quarters of GDP growth,’’ said G. Terry Madonna, the director of the Center for Opinion Research at Franklin & Marshall College in Lancaster. “But it’s not being accompanied by a lot of job growth and there is still unsettling news regularly about the fragility of the economy and what that leads into is this unsettled feeling about the economy and jobs.’’

Republican leaders are talking about cutting state spending and trying to help the private sector create jobs. Democratic leaders are talking about using state programs, such as job training or low-interest loans, to help the jobless get employment and encourage employers to hire.

But a tax increase?

Rendell, the second-term Democrat who is in his last year and cannot by law run for a third term, says his concern is about the future.

Under the governor’s somewhat unorthodox plan, none of the new money could be spent until after the end of the 2010-11 fiscal year covered by the annual budget he delivered last week to the Legislature. In it, he proposed pooling money from several new sources to help meet a projected $5.6 billion gap in 2011 and 2012 resulting from spiraling public pension costs and the expiration of federal stimulus budget aid.

The broadest of those sources is a plan to restructure the state sales tax, the state’s secondbiggest money source.

Rendell would lower the rate to 4 percent from 6 percent, but would eliminate exemptions – an idea that some call a tax increase – on transactions on 74 different goods and services, including lawyers’ fees, electric bills and personal hygiene products.

Such a plan would add more than $850 million a year to the state’s threadbare treasury, while leaving some major exemptions, including those on groceries, clothing and prescription drugs. Also, Rendell argues, it would bring fairness to a major tax riddled with exemptions that defy logic and attest to the influence of special interests.

Minutes after the governor rolled out the proposal, however, Senate President Joe Scarnati, R-Jefferson, called it “dead on arrival.’’

Democratic leaders did not endorse it, saying it was just the beginning of the discussion.

If the Legislature does anything this year, it is likely to pursue relatively pain-free political remedies, such as putting off pension obligations into the future.

It is also possible that other forces could narrow the financial gap, for example if the state’s existing revenue streams mount a stunning recovery, the federal government extends budget aid or recovering investment values soften the expected spike in pension costs.

Otherwise, what Rendell is calling a “fiscal tsunami’’ seems likely to roar into the Capitol after his replacement takes office in 11 months.

At that point, a newly elected governor and Legislature may be willing to raise taxes, since they’ll have a longer lead time before the next election. They may have no choice, especially after draining reserves and cutting spending to wipe out a multibilliondollar shortfall last year.

Pennsylvania’s rate of job losses has moderated, but the lack of hiring is troubling and the state is recovering more slowly than the most fortunate states, said economist Ryan Sweet of Moody’s Economy.com.

“Given the troubles in the labor market, consumers being conservative in spending, all indications are that this will be another difficult year for state revenues,’’ Sweet said. “Even the next fiscal year, because employment will be slow to recover in Pennsylvania, you’d expect another difficult year for revenues.’’

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