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HARRISBURG -- Pennsylvania's finances are in far better shape than they were at this time last year thanks in large part to strong wage growth, the state Independent Fiscal Office said Tuesday.
Pennsylvania is on track to finish this fiscal year with $34.5 billion, before tax refunds (which could deduct up to $1.385 billion) and any fiscal lapses (about $200 million added to the total) are applied to that figure, IFO officials said.
Given the state's spending is supposed to total roughly $32 billion this fiscal year, that means the state, at worst, is currently looking at a budget hole of about $200 million, assuming the General Fund revenues for May and June come in as expected.
That's a far cry from the $2 billion shortfall that was being projected for the Fiscal Year 2016-17 budget in May 2017 and the $1.5 billion hole the state eventually had to fill.
The improving revenue situation for Pennsylvania is being driven by significant wage growth, said IFO Director Matt Knittel.
"One of the main stories ... is just how good wage growth is doing, and that's such a key element to the forecast," Knittel said. "Not only does it drive most of our Personal Income Tax revenues, but it also drives consumer spending, and of course that drives our Sales (and Use) Tax revenues."
Wages are projected to grow by 4.3 percent in 2018 and by 4.2 percent in 2019, and the IFO forecasts PIT revenues to grow by 4.6 percent and overall sales tax revenues to grow by 3.7 percent for FY2018-19.
Income and sales taxes account for more than 74 percent of the state's tax revenue.
"Wage growth has been strong, and now consumer spending has rebounded -- over the last six months, we've seen sales tax growth approaching 5 percent, on a year-over-year basis, and we think that's directly related to the fact that wage growth has been up by 4.5 percent to 5 percent as well," said Knittel.
Knittel said one of the primary reasons for the IFO's continued expectation for "fairly strong tax revenue growth" is the $6 billion to $7 billion the IFO projects that the recent federal tax reform will inject into Pennsylvania's economy.
"Most of that has not flowed in yet. It will continue to flow in throughout the calendar year," explained Knittel. "We think those tax cuts will bolster consumer spending and business spending."
Knittel said this year's $200 million shortfall appears to be because a planned transfer of $200 million from the Pennsylvania Professional Liability Joint Underwriting Association, which provides liability insurance to physicians, is tied up in litigation.
Looking ahead to the FY2018-19 state budget, the IFO forecasts revenues will be $33.9 billion, which is the same baseline figure projected by the Wolf administration.
If the FY2018-19 refunds figure remains as currently assumed ($1.359 billion) and $100 million of lapses are made as part of the budget-balancing effort, state lawmakers will have roughly $32.64 billion to spend, or $640 million more than this year.
If there's a $200 million shortfall at the end of the current fiscal year, then lawmakers would have $440 million more to spend.
One problem is that Gov. Tom Wolf's proposed budget would spend $32.987 billion, about $550 million more than would be available.
According to the Wolf administration, Wolf's FY2018-19 budget proposal includes roughly $400 million in new discretionary spending increases, with much of that, $225 million, earmarked for education.
As part of his budget, the governor has proposed a severance tax on natural gas production in Pennsylvania, which the IFO has estimated would produce about
$210 million in new revenue for FY2018-19. This is the only additional revenue included in the governor's proposed budget.