Know that feeling a month after Christmas when the credit card statement shows you blew your holiday budget? Imagine the pain you’d experience after six consecutive years of spending beyond your means. That’s the situation facing our state government—unless the commonwealth resolves to end the spending binge and tighten its budget belt a notch or two.
The Independent Fiscal Office (IFO), the agency that assesses our state’s fiscal condition, projects a budget deficit next year of $839 million. The IFO predicts rising deficits for the foreseeable future, climbing to nearly $2.1 billion in just five years. In short, Pennsylvania will spend far more than it’s taking in.
What does this mean for taxpayers? Unfortunately, without major changes to how we budget, expect higher taxes—even though the average Pennsylvanian pays 10.2 percent of their income in state and local taxes, which is the 10th highest rate in the nation.
Unlike those holiday credit card bills, the ghosts of Christmases past haunt Pennsylvania taxpayers, too. For six consecutive years, general fund spending has exceeded state revenue. This overspending was made possible by federal stimulus funds, draining the “Rainy Day Fund,” and transferring more than $3 billion from other funds for one-time revenue.
Thanks to years of overspending, we are gifting our children and grandchildren $125 billion in state and local debt—or almost $10,000 per resident. That’s one giant lump of coal, regardless if they’ve been naughty or nice.
There are two main drivers of Pennsylvania’s structural budget deficit: welfare spending and public employee compensation. The Department of Public Welfare accounts for almost 40 percent of the entire General Fund Budget. It recently surpassed K-12 education—which is at an all-time high despite claims to the contrary—as the largest category of state spending.
In order to protect taxpayers and future generations, lawmakers must go beyond chasing one-time revenues and make meaningful, substantive reforms that will prevent future spending binges on the taxpayer’s credit card.
Privatizing the state liquor stores would be a good start. This would provide an estimated $800 million in one-time revenue, along with millions of dollars in additional revenue annually. Liquor privatization would also provide greater choice, better convenience, and lower prices.
Eliminating corporate welfare—subsidies and tax breaks to specific and targeted corporations—would save money and allow for across the board cuts to our tax rates. Real tax relief would benefit all businesses and families—fostering job creation and new businesses. Our long-term budget woes will be solved if Pennsylvania starts seeing robust economic growth rather than just growth in government spending.
Further, combating welfare fraud through measures like recovery audits (allowing private contractors to find fraud and keep a portion of what they recover) and simply enforcing eligibility requirements could save taxpayers an estimated $1 billion. Allowing Medicaid recipients to have more control over their healthcare by expanding insurer and plan options would go a long way to improve service while saving money.
But the real elephant in the room is Pennsylvania’s massive pension problem. The IFO projects state pension contributions will increase from $1.4 billion to almost $3.4 billion in five years, an increase of nearly 143 percent.
Our unsustainable, defined benefit pension system has more than $47 billion in unfunded liabilities. To stop the bleeding, state government should switch to 401(k)-type plans for all new employees, thereby protecting state workers’ retirements from chronic underfunding and political manipulation.
These suggestions are by no means exhaustive, but they are the first steps toward a more prosperous Pennsylvania. The alternative is more debt, sluggish economic growth, and a lower standard of living for future generations.
For decades, our legislators have blown their budgets with billions in overspending—now we’ve reached a dead end. In the spirit of good will, it’s time that government lives within its means so that you can live within yours.
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Bob Dick is a policy analyst for the Commonwealth Foundation (CommonwealthFoundation.org), Pennsylvania’s free market think tank.