Dear Members of the Pennsylvania General Assembly,
On behalf of National Taxpayers Union’s (NTU) members in Pennsylvania, I urge you to reject Governor Wolf’s tax and spend plan to resolve the budget standoff. The budget you presented to the Governor in June was an imperfect yet responsible plan to fund government for the next fiscal year – it added an extra $370 million in education spending without raising taxes. Citing insufficient spending, the Governor regrettably vetoed the plan as well as a meritorious bill to modernize the state’s antiquated liquor laws.
Earlier this week, the Governor doubled down on his misguided fiscal policies and indicated he would veto a stopgap budget. While the Governor’s plan is riddled with bad policy, NTU believes it important to highlight just a few issues for you to consider as you debate a path forward. With the 10th highest combined state and local tax rate according to the Tax Foundation, Pennsylvanians cannot afford Gov. Wolf’s rapacious spending agenda.
Severance Tax
As part of his plan, the Governor proposed a roughly 5 percent severance tax on natural gas extraction. The Governor claims oil and gas companies need to “pay their fair share.” This is misguided economics cloaked in tired class warfare rhetoric.
As Nathan Benefield of the Commonwealth Foundation stated during testimony before the Senate Environmental Resources Energy Committee and Finance Committee, “gas drillers have paid more than $600 million in impact fee taxes from 2011 to 2013. ... On top of this, gas drillers pay taxes common to every business operating in Pennsylvania, including corporate income tax, personal income tax, and sales tax.” Mr. Benefield estimates that the state received almost $320 million in state taxes from gas drillers since 2009. Finally, the Department of Revenue estimated that individuals paid more than $235 million on royalties paid to landowners in the five-year period between 2007-2012. It’s simply not true that drillers are not paying their “fair share.”
In addition, the proposal would lead to job loss in the energy production sector at a time when Pennsylvania’s neighbor to the west, Ohio, is ramping up natural gas drilling. Likewise, it would raise the energy costs of all Pennsylvanians.
Cigarette Taxes
Governor Wolf further proposed a $1 per pack increase in the cigarette tax to $2.60. Cigarette tax hikes are budgetary gimmickry of the worst kind. For starters, a $2.60 per pack tax would mean Ohio and West Virginia have considerably lower cigarette taxes, which creates a strong incentive for black market purchases or for cross-border sales from the Keystone State’s neighbors.
Next, cigarette taxes are decidedly regressive, affecting low-income earners far more than high-income earners. According to the Pennsylvania Independent Fiscal Office, the tobacco hike would be a net tax increase of $149 a year for families with annual incomes between $25,000 and $49,999 by the 2018-19 fiscal year, versus a $26 a year increase for families with incomes of more than $250,000. In addition, tobacco product sales are extremely important to certain small businesses; the National Association of Convenience Stores estimates that tobacco sales account for approximately one-third of all sales at convenience stores. Given that Pennsylvania’s unemployment rate remains above the national average, it makes little sense to hammer small businesses with additional taxes.
Finally, cigarette taxes usually yield far less revenue than initially projected. A 2013 study by National Taxpayers Union Foundation, NTU’s research arm, found that revenue projections were met in only 29 of 101 cases where cigarette and tobacco taxes were increased between 2001 and 2011. The same study concluded that over the same period, tobacco tax hikes were followed by other tax hikes nearly 70 percent of the time – after initial projections fell short. As the National Conference of State Legislatures concisely stated, “cigarette taxes are not a stable source of revenue.”
Liquor Monopoly
After multiple privatization efforts stalled, House Bill 466 represented a significant opportunity for Pennsylvania to modernize its antiquated liquor laws. The Governor’s ill-advised veto was an effort to protect a status quo that results in higher prices and fewer options for consumers. When the government monopoly was established in 1933, then-Governor Gifford Pinchot declared the arrangement would, “discourage the purchase of alcoholic beverages by making it as inconvenient and expensive as possible.” It is hard to argue that much has changed since 1933, given estimates that the current monopoly increases costs by up to 50 percent for consumers. Despite Governor Wolf’s claims, anyone with even a basic understanding of economics knows that competition will lead to lower prices and more choices for consumers.
As part of his so-called budget “compromise,” the Governor proposed to outsource the management of the government monopoly to a private sector company. This is reform in name only. The General Assembly should reject this crony capitalist offer and either pass true privatization again or override the Governor’s veto of House Bill 466. Doing so would lead to lower prices, greater selection, and less rent-seeking.
During his campaign, Governor Wolf promised to embrace a modern, reform-based agenda. Upon taking office, however, it has become clear that was empty campaign rhetoric – he has retreated to failed policies of the past. If the Governor continues to pursue failed policies of the past, it is incumbent upon you to lead in a taxpayer-friendly manner.
Sincerely,
Clark Packard
Policy and Government Affairs Manager