Pennsylvania’s money problems go beyond its pension debt.
The commonwealth could face a $2 billion spending gap next year, a hole attributed to rising public sector pension costs and an overreliance on one-time funding sources in the budget. But the state does have a revenue problem – or rather, several problems.
Its tax policies aren’t keeping pace with demographic changes and new technologies, leaving the commonwealth with a shrinking tax base.
The Independent Fiscal Office made mention of these steady money drains in its November report on the state’s five-year economic and budget outlook.
The rise of wireless phones hasn’t been great for the state’s budget, blowing a hole in programs funded with the tax on landlines.
“Many people are eliminating their landlines, so that’s causing some tax base erosion,” said IFO director Matthew Knittel.
Online shopping is another culprit. The state gets sales tax revenue from online sellers with operations in Pennsylvania, but others don’t have to collect and send sales tax to the state, leaving it up to customers, honor system-style.
“The compliance rate for the use tax is relatively low,” said Knittel.
A technical change to the state’s famously high 9.99 percent corporate net income tax has also lowered revenue.
“It effectively reduces the corporate income tax remittance for the same level of profits,” Knittel said.
But the biggest factor leading to declining tax revenue is the state’s aging population. Older people tend to spend less on big, taxable purchases such as cars and furniture.
“They’ll spend a higher proportion of their income on health care or prescription drugs, which are non-taxable,” said Knittel. And as people age, more of their income is made up of stuff that isn’t taxed, like pensions and Social Security.
“It’s difficult to see in the next year or two,” Knittel said. “But if we were to look over a 10-year period … it would be a significant factor affecting the budget.”