By Peter N. Calcara, vice president – government relations
On June 22, Gov. Tom Wolf signed into law the fiscal year 2018-2019 state budget—more than a week before the end of the fiscal year. You read that correctly. I said “June,” not August, September, or October. With little of the political acrimony that typically mars the budget negotiation process, this budget relatively breezed to completion. You must go back nearly 20 years to the time when Tom Ridge was governor for an earlier budget.
There are two factors working in the state’s favor this year. First, the economy is performing well and the forecast of the Independent Fiscal Office (IFO) calls for accelerated economic growth from 2017 into 2018. According to IFO, real GDP is up, wages and salaries are increasing, and the employment numbers in Pennsylvania are improving. Pennsylvania is on stronger financial footing than at any time over the past decade.
Second, 2018 is an election year. The governor, all 203 state House members, and 25 of 50 state Senate seats will be voted on in November. State lawmakers and the governor don’t want to be haggling over budget details in August and September. Instead, they want to be back home in their districts focused on reelection.
Total state spending in the General Appropriations budget, which is found in House Bill 2121, is $32.7 billion, an increase in spending by $560 million over the 2017-2018 budget. If you take into account supplemental appropriations for the 2017-2018 fiscal year, the increase in spending jumps to $719 million. The plan contains no tax increases, fully funds both the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) annual required contribution, continues to support the fight to eradicate heroin and opioid abuse, and transfers nearly $20 million into the state’s rainy day fund (the first such transfer in a decade).
The General Appropriations budget contains added investment in the following:
- Basic education (K-12) receives a $100 million increase. The basic education line-item is now $6.09 billion. Of that, $539 million will be distributed using the fair funding formula.
- Pre-K Counts and Head Start funding increased by $25 million to $192,284 million and $59,178 million, respectively.
- Special education receives a $15 million increase, up to $1.14 billion.
- An additional $30 million is committed for career and technical education programs to help prepare students and workers to succeed in the workforce.
- Educational Improvement Tax Credits increased by $25 million to $160,000 million. The entire $25 million increase is dedicated to scholarship organizations.
- School safety received a major investment, with more than $60 million in new funding for school resource officers, security equipment, and other methods of preventing school violence.
- Funding for the State System of Higher Education goes up by 3.3 percent. State-related universities receive a 3 percent increase, and funding for community colleges is increased by 3 percent.
- Funding to provide child care services to an additional 1,600 children is included.
- Community-based family center funding increased by $5.3 million, which includes $4.5 million to provide home-visiting services for families affected by opioid use disorder and $800,000 in increased rates for home-visiting providers.
- Provides additional investments to assist individuals with intellectual disabilities and autism, including $16 million for an additional 965 individuals with intellectual disabilities or autism to access waivers to provide support and services so they can remain in their home and community.
- Provides $2.5 million for Lyme disease awareness, prevention, and surveillance.
- Provides $6 million for the Pennsylvania State Police pilot program to purchase body-worn cameras.
- Provides $43 million for the communication and infrastructure purchases to continue the modernization of Pennsylvania’s statewide radio system and comply with federal requirements.
- Invests additional funding to train three state police cadet classes.
- Includes $3 million in new funding to increase spotted lanternfly detection, control, and eradication efforts to protect Pennsylvania agriculture.
To listen to the PICPA Legislative Update Budget webinar, click here.
For a line-by-line look at the $32.7 billion plan, click here.
On June 28, as part of the budget agreement, Wolf signed into law PICPA-backed legislation that decouples the state’s corporate net income tax law from the bonus depreciation provided in last year’s federal Tax Cuts and Jobs Act. The bill also reverses Pennsylvania Corporate Tax Bulletin 2017-02, which prohibited all depreciation of assets for which federal bonus depreciation is claimed until the assets were sold or disposed of.
Senate Bill 1056, sponsored by Sen. Michelle Brooks (R-Crawford, Erie, Mercer, Warren), disallows the federal bonus depreciation deduction from taxable income provided in Section 168(k) of the Internal Revenue Code (IRC), and provides an additional deduction equal to the depreciation as determined in accordance with IRC Section 167 (Depreciation) and IRC Section 168 (Accelerated Cost Recovery System).
The language in the bill applies to tax years beginning on or after Jan. 1, 2017, and applies to property placed into service after Sept. 27, 2017.
The budget wasn’t the only big tax development late last month. In a much-watched case, the United States Supreme Court overturned more than two decades of precedent that maintained a physical presence standard to collect sales tax, and held that states may collect state tax for purchases made online. In South Dakota v. Wayfair Inc., et al., the court in a 5-4 decision overturned the 1992 Quill Corp. v. North Dakota ruling.
Writing for the majority, Justice Anthony Kennedy explained, “Each year the physical presence rule becomes further removed from economic reality, and results in significant revenue losses to the states. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.”
The Pennsylvania Department of Revenue is reviewing the outcome, and it plans to comment on the ruling in the near future. However, according to a recent Capitolwire story, the ruling should not have a significant impact in Pennsylvania.
Stacey Knavel, the principal revenue analyst at IFO, said her office believes that any impact on the state will be modest because the legislature made similar tax changes last year.
As part of Act 43 of 2017, Pennsylvania lawmakers enacted requirements for marketplace sales tax collection, notice, and reporting. Under the law, beginning April 1, 2018, certain marketplace facilitators, remote sellers, and referrers facilitating, making, or referring sales to Pennsylvania customers must make an election to either register to collect and remit sales tax or comply with tax notification and reporting requirements.
The IFO projects the state will garner an additional $93.8 million in sales tax over several years and phases from Act 43.
“[The ruling] really does reinforce what the legislature was trying to do,” Knavel said. “The court case buttresses the state position with the legislation that was passed last year. A lot of the tax was already going to be collected under [the state’s] provisions.”
State lawmakers have the summer off and won’t return to session until mid-September. Enjoy a quiet summer, because next budget season could be a return of the good old raucous days.
Learn more in The Wayfair Decision and Its Impact on Pennsylvania Businesses