Peter N. Calcara, vice president - government relations

The appropriations committees of the Pennsylvania House and Senate have concluded their hearings regarding Gov. Tom Wolf’s proposed state budget. The hearings provide state lawmakers, organizations like the PICPA, and the public with a wealth of information about how taxpayer dollars are to be spent and how programs and services will be paid for. After three long weeks of hearings, what did we learn about Gov. Wolf’s proposed budget for the new fiscal year that begins July 1, 2017?

Before we get to that, here’s a quick recap of Wolf’s plan.

The $32.3 billion budget increases overall spending by more than $570 million, or 1.8 percent, above the 2016-2017 budget. The proposal includes increases in spending for public education ($100 million), special education ($25 million), early childhood education ($75 million), and higher education ($9 million); creates a new, unified Department of Health and Human Services; expands efforts to address the heroin and opioid epidemic; and provides for new economic development initiatives, including increasing the state minimum wage from $7.25 to $12 per hour.

Wolf’s plan also identifies more than $2 billion in cuts and cost savings across seven broad categories: prioritizing agency expenditures and cost efficiencies; prudent fiscal management; revenue enhancements; eliminating and reducing programs outside the state’s core mission; complement controls; consolidation and coordination; and facility closures, lease management, and facility downsizing.

The plan contains no new broad-based taxes, but does include $1 billion in new, recurring revenues. Wolf’s budget calls for phasing down the corporate net income tax from 9.99 percent to 6.49 percent by 2022. The plan also calls for the adoption of combined reporting for corporate taxpayers in tax year 2019, enactment of a 6.5 percent severance tax on the value of natural gas severed at the wellhead, and elimination of certain exemptions from the insurance premiums tax law for health maintenance organizations, preferred provider organizations, nonprofit hospital plans and health service plans, and entities organized as risk-assuming, nonlicensed insurers.

So, back to my original question: What did we learn from the budget hearings?

We learned that Pennsylvania not only has a structural financial deficit of between $2 billion and $3 billion, but that the commonwealth has perhaps a more important deficit – a shrinking workforce. According to testimony provided by the Independent Fiscal Office (IFO), Pennsylvania’s working-age population – those between 20 and 64 – will contract by 181,000 residents over the next seven years. During that time, IFO expects the number of retirees to increase by 31 percent, or 677,000 residents.

We learned that Pennsylvania’s unfunded pension liability continues to grow (it is now approaching $65 billion) and will drain more new tax dollars. For fiscal year 2017-2018, the employer’s share of pension cost for the Public School Employees Retirement System (PSERS) is projected at 32.6 percent of payroll, while the State Employees Retirement System (SERS) is estimated to be 31.7 percent. The systems are economically unsustainable in their current form and need to be changed. State pension reform must be a priority for this General Assembly.

We learned that the merger of the departments of Human Services, Aging, Health, and Drug and Alcohol Programs into a new Department of Health and Human Services is far from certain. The creation of this “super agency” concerns some lawmakers that vital programs will get lost in a new bureaucracy, while others question whether there will be any real cost-savings resulting from consolidation.

The hearings provided more specifics about the Department of Revenue’s (DOR) budget and enhanced enforcement objectives. In her hearings before the House and Senate appropriations committee, Eileen McNulty, outgoing secretary of revenue, noted that her department is “continuously working to improve services to individual and business taxpayers in Pennsylvania.”

The 2017-2018 budget proposes a 6.5 percent increase in DOR’s general government operations line-item ($132.965 million to $141.632 million), including another $25 million for the enhanced revenue collections (RCA) efforts. RCA funding has enabled DOR to increase its scrutiny of returns requesting refunds, as well as to initiate additional audits and enhanced compliance and collections activities.

We learned that the DOR is optimistic that it will meet the $100 million in net revenue projected in the current 2016-2017 budget from tax amnesty. The program begins on June 19.

We learned that Wolf’s budget would enable the DOR to enhance its enforcement capabilities to collect delinquent taxes. The core of this plan is to accelerate the transfer of delinquent tax accounts to private collection agencies contracted by the state attorney general’s office. Taxpayers with $50,000 or more in unpaid tax and who meet other criteria will be prioritized.

We learned that the DOR will seek legislative authority to require companies that bring out-of-state contractors into Pennsylvania for work to withhold the Pennsylvania personal income tax, as well as companies making commercial rent or lease payment to nonresidents on nonresidential property in the state.

We learned that DOR wants new powers to go after businesses that habitually collect employer withholding and sales tax in trust without remitting to the state as required by law. Under the plan, the DOR would work with credit card processors to levy a payment to the delinquent taxpayer before it is transferred to them.

Lastly, we learned about DOR’s proposed changes to the tax appeal process. DOR will seek legislation to streamline the appeals process by requiring taxpayers to provide all legal arguments and factual evidence to the department at both the Board of Appeals and the Board of Finance and Revenue (BFR), change the time to appeal an assessment from 90 days to 30 days, and create a small claims appeal process at the BFR.

So now what happens? Budget hearings are a starting point in the legislative dance to secure 102 votes in the House and 26 votes in the Senate on spending $32.3 billion (or whatever the final number is) on state programs and services for the fiscal year. It’s clear that no one wants a repeat of the protracted 2015 state budget process that carried into 2016, so in the coming days and weeks ahead, the process will move forward – sometimes painstakingly slow – to an agreement.

The PICPA and its government relations team is prepared to work with the administration, state lawmakers, and other stakeholders to provide our unique perspective on the budget components that affect the CPA community and the clients it serves.