October Tax Retrospective: Two Down, One to Go

After months of work, two states have finalized their outstanding budgets. In the last few days, lawmakers in Connecticut and Pennsylvania have set out long-term revenue plans for their states. It was a lot of sturm und drang to get here, but the battle is over for these two states, at least for now. Oklahoma, unfortunately, is another story, so we'll cover its situation in a separate post. 

Connecticut

Although it has not been officially enacted, there is every indication that Connecticut has brought its more than three-month budget stalemate to an end and, if some lawmakers are to be believed, heralded a new era of fiscal sustainability.

Late last month, Governor Dannel Malloy (D) vetoed the bipartisan budget bill that had shockingly passed the legislature two weeks earlier. Following this setback, legislators from both parties began talking behind closed doors in an attempt to work out a new solution to the budget impasse. Over the next several weeks, negotiators worked with little indications about what policies they were considering. Effectively locked out of these negotiations, the governor tried to weigh-in by offering up his own proposal, but the negotiators rejected it out of hand.

After missing one self-imposed budget deadline, the breakthrough finally came on October 18, when word began to spread that the parties had reached an agreement. Details were sketchy at first, but it was clear that the final budget would lack any of the big revenue changes that Democrats had been pursuing all year (such as hikes to the sales or income taxes). Indeed the only major tax changes included in the final bill (CT SB 1502) were new taxes on a range of tobacco products, expanded sales tax collection rules for internet sellers, and the long-agreed-upon hospital tax hike (rumors about a possible repeal of the car tax turned out to be unsubstantiated).

While it did not seek much in the way of new tax revenue, the bill included a number of proposals aimed at taming the state's recurring deficits. These include new limits on state borrowing, a 1 percent increase in teachers' contributions towards their pensions, and a requirement that the legislature approve any new public employee union contracts.

While he was concerned about some of the technical aspects of the new hospital tax language, Governor Malloy signed off on the budget proposal on October 31. He urged the legislature to reconvene to work on the issues, saying that, left unresolved, the error could put state taxpayers on the hook for hundreds of millions of dollars. Legislative analysts and industry stakeholders insist that the problem doesn't exist, but Speaker Aresimowicz (D) has expressed willingness to work with the governor to resolve any potential issues.

After lawmakers crossed the aisle to approve the GOP budget, they said that they thought things had to change because the state could no longer afford to continue with business as usual. Advocates for this compromise budget are saying that this is their plan's primary accomplishment. Time will tell.

Pennsylvania

On October 31, Pennsylvania Governor Tom Wolf (D) saw the writing on the wall and signed off on most of the bills necessary to pay for the $32 billion budget that the legislature adopted in July. His signature ends a bitter conflict that has been raging for months between the House, who wanted a revenue deal without any new taxes, the Senate, who was open to tax compromise, and Governor Wolf, who wanted at least $400 million in new annual revenues. While the fight is over for now, no one is very happy with the final deal and there are no indications that the state has done much to address its systemic fiscal problems.

Spread out over several bills, this final revenue package balances the state's books by means of three main policies:

1. Expanding the state gaming by, among other things, expanding (for the first time since 2004) the number of licensed casinos and racetracks, legalizing internet gambling, and allowing gambling at state truck stops and airports;
2. Borrowing $1.5 billion against Pennsylvania's tobacco settlement funds; and
3. Transferring $500 million from specials funds, including $200 million from the state medical malpractice insurer and $300 million in transfers to be specified by the State Treasurer.

While these represent the bulk of the budgetary pay-fors, there are a few other notable tax issues. These include an expansion of sales tax nexus laws to require out of state retailers to collect the sales tax if they utilize an in-state marketplace provider, increasing the net operating loss cap to 40 percent by 2019, and imposing a new 12 percent tax on fireworks. The relative modesty of these policies demonstrates that if there was a political winner in this year's budget debate, it was the Pennsylvania House, who had been stonewalling any proposed tax changes, such as the Senate's move to tax digital products and the governor's still fervent desire to levy a new severance tax.

The feeling in Harrisburg at finally getting the budget through was perhaps best expressed by Senate Majority Leader Corman (R), who said "Being done had a lot of value, and so we moved forward with it.” Since passing the spending bill, Pennsylvania saw Standard & Poors' downgrade the state credit rating and the governor forced to delay $1.2 billion in debt payments and borrow $1 billion against state liquor revenue. After all this turmoil lawmakers decided that this was the best deal they were going to get so they begrudgingly accepted it.

While lawmakers are breathing a sigh of relief today for being done, like with Illinois, one time revenues and modest tax changes are not going to be sufficient to stabilize the state's finances, so this budget is likely more of a respite than a long-term solution.