A day after Gov. Ed Rendell announced $311 million in spending cuts inresponse to a first-quarter state revenue shortfall, Ward said that budgetdiscussions must be broadened to include new revenue options. October'srevenue numbers are scheduled to be released today.

If state revenue collections for the 2008-09 fiscal year decline by 2.4percent over last year, as they did between 2000-01 and 2001-02 during thelast recession, Pennsylvania could be looking at a deficit of $1.5 billion.

"Such a gap cannot be bridged by spending cuts alone," Ward said. "Publicinvestments play a critical role in the health of the Pennsylvania economy,meaning state spending cuts will result in a dollar-for-dollar reduction instate economic activity."

As policymakers work to balance the budget, policymakers should keep inmind the following key points:

-- The state budget deficit is a revenue problem that is being driven by aweak economy. Pennsylvania's level of spending and taxes as a share ofpersonal income has remained stable at roughly 5.6 percent over the last 20years.

-- Pennsylvania has a Rainy Day Fund of more than $740 million to help thestate weather an economic storm like this one.

-- Federal policymakers are considering and should quickly adopt a "MainStreet" economic stimulus plan that includes additional funding to the statesfor infrastructure projects and a temporary increase in the federal Medicaidcontribution. Economists, such as Nobel Prize winner Joseph Stiglitz,generally agree that counter-cyclical public investments in infrastructure andother services are important when responding to a recession. And with manystates already targeting Medicaid for cuts, the additional federal funding isnecessary to prevent a swelling of the ranks of the uninsured.

-- The Clean Water Referendum on the Pennsylvania ballot in next week'selection, if approved, will provide an infusion of funds into the Pennsylvaniaeconomy. It would authorize state officials to issue a $400 million bond toupgrade and repair drinking water and wastewater treatment systems. TheDepartment of Environmental Protection estimates the new funding will support12,000 jobs.

-- Policymakers should temporarily defer the planned reduction in theCapital Stock and Franchise Tax rate for 2009, as they did in 2002. This couldsave the state $125 million.

-- Pennsylvania could increase its revenue collections by adoptingcombined reporting. It would close a loophole in the Corporate Net Income TaxSystem that allows multistate and multinational companies to avoid payingtaxes on earnings in Pennsylvania by hiding them in other lower-tax states.That would bring in $400 million in new revenue annually.

-- New revenue options should also be explored, such as a severance tax onnatural resources. Estimates show that such a levy on natural gas drillingcould raise $200 million in new revenue annually.

-- Furthermore, policymakers should review tax expenditures to determineif existing tax credit programs are still necessary. For example, theeffectiveness of the Emergency Tax Credit, enacted in 1974 for Pennsylvaniabrewers and scheduled to expire this year, should be analyzed.

"The bottom line is that all options should be on the table aspolicymakers craft a plan to address the state budget deficit," Ward said.

The Pennsylvania Budget and Policy Center is a non-partisan policyresearch project that provides independent, credible analysis on state tax,budget, and related policy matters, with attention to the impact of current orproposed policies on working families. To learn more, go to www.pennbpc.org.

SOURCE Pennsylvania Budget and Policy Center