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New study warns of problems with states' quick budget fixes
Reinforces importance of controlled spending and low tax rates A recent study by the Tax Foundation found that in these tough economic times, many state legislatures structurally compromised their budgets by trying to sustain spending commitments made when the economy was strong, depleting surpluses and rainy day funds, and abusing one-time and emergency budget fixes. Like Pennsylvania, many states were faced with growing budget gaps and unappealing options for closing them. Rather than cutting spending, like most individuals, families and businesses have had to do, state governments often turned to tax increases or changes to cover shortfalls. While Pennsylvania lawmakers smartly rejected some of the easy fixes that were on the table and ultimately crafted a budget that began to control spending, lessons can be learned from states that have turned to last-resort budget measures. California, for instance, has issued IOUs, borrowed, seized funds from local governments and forced businesses to increase withholding to 110 percent of what workers owed (essentially an interest-free loan to the state). Illinois floated bonds to make pension payments. Many of the taxes that states considered, as was the case in Pennsylvania, targeted specific groups – cigarette smokers and other “sin” consumers, high wage earners and corporate profits. The inherent problem with these types of revenue streams, according to the Tax Foundation, is that they can surge in good times and plunge in bad. The Tax Foundation’s findings reinforce what the business community already knows – high statutory tax rates drive away residents and businesses to more competitive states, and meaningful reform can only be achieved through controlled spending and a broad tax base with low rates. The PA Chamber continues to remind lawmakers of these basic tenets as they soon will return from recess to address transportation infrastructure funding; a state budget hole left by less-than-anticipated federal Medicaid funds; and consideration of a tax on the emerging Marcellus Shale natural gas industry. ### Founded in 1916, the Pennsylvania Chamber of Business and Industry is the state's largest broad-based business association, with its membership comprising businesses of all sizes and across all industry sectors. The PA Chamber is The Statewide Voice of Business. |
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