The announcement of a three-caucus budget deal involving both House and Senate Democrats and Senate Republicans represents a dramatic about face by Senate Republican leadership which at this point can only be described as a sell-out.
As details of the agreement emerge is it clear that once again the business community will bear the brunt of the budget agreement. A roll-back of phase-out of the Capital Stock and Franchise Tax (CSFT), increase in taxes on cigarettes; and the expansion of gambling to include table gaming are all expected to add revenue to the state's coffers and help balance the new budget.
It is the CSFT phase-out roll-back that is the most harmful. Most Pennsylvanians have never heard of and will never actually pay the Capital Stock and Franchise Tax. That makes it a prime target for increasing as it directly impacts a relatively small group of taxpayers. But, the tax is particularly hurtful to businesses at a time when virtually all are attempting to survive a severe economic recession. Making matters worse, the higher CSFT rate will be retroactive to the first of January. That means businesses have operated for nine months assuming one rate, but under the agreement would be forced to pay a higher rate.
Pennsylvania's business climate rates at or close to the bottom of every survey of economic competitiveness among the states. One of the chief factors making Penn's Woods an undesirable location for business is high taxes — specifically the Capital Stock and Franchise Tax (an assets tax), which is paid in addition to the Corporate Net Income Tax. After factoring in a roll-back of rates for 2009, the planned restoration of the old rates will hit business particularly hard, adding to their tax burden, consuming cash-on-hand, and slowing job creation.
Aside from the practical impact of the tax hike, Senate Republican leaders will have some explaining to do on the political front. Senate President Pro Tempore Joseph Scarnati (R-Jefferson) and Majority Leader Dominic Pileggi (R-Delaware) have railed against tax increases for months. To give in at the 11th hour to Governor Ed Rendell's insatiable spending demands represents a failure to deliver on their promises not to raise taxes. They could have done that in June and spared the commonwealth the long drawn out budget stalemate it has endured.
Recall these words from Senator Scarnati to Pittsburgh Tribune-Review columnist Brad Bumsted last December when he said if Republicans vote to raise taxes, "what's the reason to vote for us." The President Pro Tempore further drove the point home saying: "It's what happened to Republicans on the national level. What do they stand for?"
The same questions might now be asked of Scarnati. Senator, what do you stand for? Senator, what reason do we have to vote for you and your party? The answers are simple: nothing, and none.
And then there is this from a Dominic Pileggi news release: "I believe it is wrong to increase taxes at a time when so many people are losing their jobs, losing their homes, and struggling to make ends meet." Yes, senator, it is wrong. Why then are you signing off on a deal that would raise the very tax that most hinders the creation of new jobs for our citizens?
But, all it not lost. This is a three caucus budget deal. That is because the fourth caucus, House Republicans, have refused to cave in on taxes. Should Governor Rendell follow through on his promise to veto the spending plan (he thinks it doesn't spend enough), House Republicans likely would vote to sustain that veto, although they would do so because they believe it spends too much.
House GOP thinking is reflected in statements made by State Representative James Christiana who represents Beaver County, one of the economically hardest hit areas of the state. Said Christiana: "I don't think you have to have a business degree to understand that the more than 100,000 businesses across that state that pay the tax, especially mid-size and small businesses, will most likely come up with the additional funds to pay the tax by reducing their work force." He added: "The bottom line is that this plan will cripple many small businesses and lead to continued job losses during a time when we are already experiencing record unemployment rates."
At least someone in Harrisburg understands what is at stake in this budget battle. This is one time where the upper chamber might what to follow the lead of their colleagues across the rotunda. For it is House Republicans who actually have it right, and Senate Republican leadership that has, as Joe Scarnati once said about his national counterparts, forgotten what it is supposed to stand for.
(Lowman S. Henry is Chairman CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal. His e-mail address is firstname.lastname@example.org.)
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