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Pennsylvania budget battle draws to a close

Proposed spending plan for 2011-12 viewed as both good and bad for business, economy

Interpretations were widespread this week as to what the 2011-12 state budget will inevitably mean for business in the commonwealth.

Midstate business leaders and Republican lawmakers said they see this as a business-friendly or neutral budget, given the GOP majority’s focus on big spending cuts and no tax increases or new taxes as temporary federal budget aid disappears.

The proposed budget uses $228 million of anticipated revenue surplus and $50 million in legislative reserves. It cuts spending by 4 percent and also lowers some business taxes, including the reinstatement of a capital stock and franchise tax phase-out through 2014.
Reinstating the phase-out of the tax would deliver more than $70 million in tax breaks to Pennsylvania businesses during the fiscal year that starts July 1.

That’s good in an environment where businesses are looking at costs across the board, both business leaders and lawmakers said.

Democratic lawmakers argued the $27.15 billion Republican-built budget — which had not been adopted by the state as of press deadline — hurts the poor and middle class through cuts to public schools, colleges, hospitals and human services, and will lead to higher local property taxes.

Republicans counter that the stimulus money was supposed to fill in budgets — not increase them — and the artificially inflated budgets are now back to pre-stimulus amounts. The state is facing a $4.2 billion budget deficit.

Democrats also argue that the proposed budget fails to implement fees on natural gas drilling in the Marcellus Shale and keeps hundreds of millions of dollars in state reserves.

In an economy that is just starting to recover, Gov. Tom Corbett and Republican leadership are “slamming the door” with this budget, said Rep. Mike Sturla, D-Lancaster County.

Business leaders said the proposed budget clearly sets the tone for the remaining years under the Corbett administration.

The governor’s no-new-tax pledge is a bit of a gamble, said Tom Baldrige, president of the Lancaster Chamber of Commerce & Industry. But it’s one he and others see as the best way to grow the economy.

“If the Pennsylvania economy grows, we all win,” he said. “It will produce more tax revenue and create job opportunities. It’s Year One of repositioning a state budget that will create a better business climate.”

For the past three years, the chamber has taken a position that the state needs to do all it can to live within its means, Baldrige said. It has not advocated for any additional programming or expenses.

“We’re encouraged by what they’re doing on stability for tax rates,” he added. “They need to also include a reduction in some mandates on local government and schools, so they, too, can operate more efficiently.”

This budget is good for Delaware loophole corporations and Marcellus Shale drillers, Sturla said. It’s not good for the mom-and-pop shops or those in the business of catering to things kids need to go to college, he said.

“When school districts are laying off thousands of teachers … family-sustaining jobs … I’m not sure how you consider that economic development or good for the economy,” Sturla said.

Overall, it’s a neutral budget for business, said Michael Smeltzer, executive director of the Manufacturers’ Association of South Central Pennsylvania.

While not pleased about the zeroing out of the state’s Industrial Partnership training program in the budget talks, Smeltzer said he is glad to see this budget regaining control of commonwealth spending and the continued elimination of the capital stock and franchise tax.

“I think what Corbett and the legislature are doing is trying to regain control,” he said. “Many of their decisions will force the tax burden down to the local governments, specifically when we talk about education. That’s where it gets hard.”

Smeltzer said he doesn’t suspect that will drive businesses out of Pennsylvania. But it might prevent some from buying new equipment or hiring new workers, he said.

“I don’t think it’s an immediate impact, but in the long term I’m very worried,” Smeltzer said.

He and others, including Rep. Stephen Bloom, R-Cumberland County, said they would have liked to see this budget go further with reductions in entitlement programs and lower corporate net income tax rates.

“Stability is at least a starting point for entrepreneurs to make a plan,” Bloom said. “A lot would prefer a declining tax rate.”

He said he is advocating for a decrease in the corporate net income tax to 6.99 percent from 9.99 percent to make Pennsylvania more competitive with other states. No reduction in this tax has been formally proposed in budget negotiations.

Streamlining the Department of Community and Economic Development also has been a part of this budget cycle. The governor proposed a 32 percent reduction, or $114 million, to the department’s budget of $337.9 million.

Corbett’s proposal substantially lessens entitlement programs and “walking-around money” for lawmakers’ pet projects, and it encourages more public-private partnerships to leverage funding for projects, said Steve Kratz, a DCED spokesman.

“This is a new age for economic development programs,” said Dave Black, president and CEO of the Harrisburg Regional Chamber & Capital Region Economic Development Corp. “This administration is saying if Pennsylvania’s overall business climate is down and we start attacking tax levels, we’ll see bigger gains than funding programs that pick winners and losers.”

It’s more out of necessity that Pennsylvania has to change the way business is being done, he said, and focus on performance-based initiatives for the limited funding that is available.

“DCED is one of the few places that could be in a discretionary funding classification,” Black added, when it comes to funding essential services. “It may be painful, but it does make sense.”

Any budget that doesn’t add regulations or taxes is generally a good budget for business, Black said, calling it both business and tax friendly.

Kratz also said this budget is very good for business because it allows DCED to focus on customer service and helping business wade through the process of operating in Pennsylvania.

“I think this budget is the beginning of the process,” he said about making Pennsylvania a more business-friendly state.

Continued interest in lowering corporate taxes could only add to the attraction for private sector companies. That interest is there, Kratz said.

Under eight years of the Rendell administration, the state never passed a budget on time, including a 101-day impasse over the 2009-10 fiscal budget. Upon taking office, Corbett pledged to have the budget done on time.

Push for shale tax

On Sunday, Senate and House Democrats came together to urge Republican leaders to support what they said would be a responsible severance fee on natural gas drilling in the Marcellus Shale as part of the 2011-12 budget.

As of press deadline Tuesday, no action had been taken to include any added fees on the industry.

The proposed Democratic amendment would:

  • Increase the base impact fee from $10,000 to $17,000 and restore the price and volume adjustment factors for natural gas.
  • Raise the effective tax rate to 5 percent. Based on a price of gas of $4.50 per Mcf, this would raise an estimated $200 million in 2011-12 and $260 million in 2012-13.
  • Provide $2 million to support training programs and equipment purchases to areas where there is shale drilling and areas that are involved in the transportation and distribution of natural gas.
  • Restore the Growing Greener type projects as an eligible use of funds.
  • Add weatherization, energy efficiency and energy conservation measures to the list of projects that are eligible for funding under statewide environmental initiatives.

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