1
COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES
APPROPRIATIONS COMMITTEE BUDGET HEARING
INDEPENDENT FISCAL OFFICE
STATE CAPITOL HARRISBURG, PENNSYLVANIA ROOM 140, MAJORITY CAUCUS ROOM
TUESDAY, FEBRUARY 19, 2013 10:00 A.M.
BEFORE:
HONORABLE WILLIAM ADOLPH, MAJORITY CHAIRMAN HONORABLE JOSEPH MARKOSEK, MINORITY CHAIRMAN HONORABLE RYAN AUMENT HONORABLE KAREN BOBACK HONORABLE JIM CHRISTIANA HONORABLE GARY DAY HONORABLE GORDON DENLINGER HONORABLE BRIAN ELLIS HONORABLE GARTH EVERETT HONORABLE MAUREE GINGRICH HONORABLE GLEN GRELL HONORABLE SETH GROVE HONORABLE TOM KILLION HONORABLE DAVE MILLARD HONORABLE DUANE MILNE HONORABLE MARK MUSTIO HONORABLE DONNA OBERLANDER HONORABLE BERNIE O'NEILL HONORABLE MIKE PEIFER HONORABLE SCOTT PETRI HONORABLE JEFF PYLE HONORABLE CURT SONNEY HONORABLE BRENDAN BOYLE HONORABLE MATTHEW BRADFORD 2
(Cont'd.) HONORABLE MICHELLE BROWNLEE HONORABLE MIKE CARROLL HONORABLE H. SCOTT CONKLIN HONORABLE MADELEINE DEAN HONORABLE DEBERAH KULA HONORABLE TIM MAHONEY HONORABLE MICHAEL O'BRIEN HONORABLE CHERELLE PARKER HONORABLE JOHN SABATINA HONORABLE STEVE SANTARSIERO HONORABLE JAKE WHEATLEY
ALSO PRESENT:
REPRESENTATIVE KEITH GREINER REPRESENTATIVE NICK KOTIK REPRESENTATIVE VANESSA BROWN REPRESENTATIVE LEE JAMES
TRACY L. MARKLE, COURT REPORTER/NOTARY PUBLIC 3
INDEX TO TESTIFIERS
NAME PAGE
DIRECTOR MATTHEW KNITTEL, 10 INDEPENDENT FISCAL OFFICE 4
1 CHAIRMAN ADOLPH: Good morning, everyone.
2 Thank you. Today we start the House Appropriations
3 Budget Hearings, and I'd just like to go over a couple
4 housekeeping rules. The number one rule is, please,
5 those in the audience, as well as members, could you
6 please turn off your cell phones and your iPhones and
7 your iPads, all that stuff that makes those funny little
8 noises when someone's trying to get ahold of you. It
9 does interfere with the testimony, and I know the
10 presenters would certainly appreciate that.
11 What we're going to do is, we're going to
12 have a brief introduction of the members. My name is
13 Bill Adolph; I'm the Republican Chair of the
14 Appropriations Committee, and I'm from the 165th
15 Legislative District in Delaware County.
16 And we'll start to my left.
17 (INTRODUCTION OF COMMITTEE MEMBERS.)
18 CHAIRMAN ADOLPH: Okay. Thank you,
19 everyone. Members will be coming and going during these
20 testimonies and, you know, I will acknowledge members as
21 they come in.
22 I want to begin by thanking the
23 Administration and, of course, my good friend, Chairman
24 Markosek, for the cooperation in preparing for these
25 hearings. 5
1 I see these Budget Hearings as an important
2 step in the budget-development process, as it allows the
3 Legislature to gather detailed information about the
4 Governor's budget proposal, which helps the Legislators
5 learn how the proposal will impact our constituencies
6 back home.
7 These hearings also provide the public with
8 the opportunity to hear more about the specifics of the
9 Governor's plan, so they can better understand how it
10 may impact the areas of state government that is most
11 important to them. The information we gather here
12 allows the Legislature to identify where there is a
13 consensus, and also gives us a chance to pinpoint
14 portions of the proposal that needs to be changed as we
15 work to land on a final spending plan.
16 These hearings also give us time to take a
17 look at the external variables which will impact the
18 state budget, variables like how federal stimulus funds
19 were used by the prior administration in previous
20 budgets. Their inclusion of over 7 billion of federal
21 stimulus funds as it was recurring revenues, distorted
22 our state budget and forced this current Administration
23 and this Legislature to correct and rebalance the state
24 budget baseline.
25 As all of you know, the Governor included 6
1 three major policy items in this budget plan: pension
2 reform, transportation funding, and liquor
3 privatization. We need to take a close look at these
4 proposals and understand what these changes would mean
5 to Pennsylvania. Pension reform, specifically, is a
6 major component of the Governor's budget proposal;
7 because the Administration uses, approximately, $175
8 million in savings generated from pension reform in
9 other areas of the budget. It will be incumbent on this
10 Legislature to see if this plan is one that will be able
11 to deliver the anticipated savings and also stand up to
12 the legal questions raised about the plan.
13 I think we need to be exceedingly cautious
14 about enacting a budget that is predicated on savings
15 that will likely be subject by the courts. We must also
16 take a close look at the impact of federal budget
17 sequestration, as it looks like a distinct possibility
18 these changes may go into effect.
19 I encourage the members of this Committee to
20 engage in these hearings with the same commitment as it
21 has in the previous years. It was the time and
22 attention that the Legislature and the Corbett
23 Administration put forward during these hearings that
24 led to the responsible decisions which brought our state
25 budget back to reality. We made decisions based on 7
1 realistic circumstances, which ultimately allowed us to
2 create a better economy here in Pennsylvania. The
3 impact of our responsible budget decisions are evident
4 by the fact that we sit here today, that there are now
5 more private-sector jobs in Pennsylvania than there was
6 when Governor Corbett was sworn in in January of 2011.
7 This point highlights the important reality,
8 that is, the private sector and the individual taxpayers
9 who provide the tax dollars to pay for state government.
10 Without a thriving private sector to make jobs for
11 Pennsylvania residents, we cannot effectively deliver
12 the state government that residents of Pennsylvania
13 deserve. We need to work to find a balance that
14 delivers a government that is sized appropriately to our
15 state's economy.
16 State government must implement innovation
17 and creativity to respond to the challenges that lie
18 ahead. Time and time again, we have seen that throwing
19 money at problems does not solve it. I challenge the
20 members of this Committee to develop solutions that
21 combine responsibility and creativity to help find the
22 answers that we face.
23 At this time, I'd like to have Chairman
24 Markosek make some opening comments for these Budget
25 Hearings. Thank you. 8
1 CHAIRMAN MARKOSEK: Thank you, Mr. Chairman.
2 And, Mr. Chairman, again, we look forward to working
3 with you and your staff, as we move on during through
4 Budget Hearings. It's been a good working relationship,
5 and I'm sure that this year will be similar.
6 Let me just say to the folks who may be
7 watching or within the sound of our voices here this
8 morning, the whole purpose of these hearings -- as we
9 all know, the Governor was in about a month ago, came to
10 the Legislature, a couple of weeks ago really, and made
11 his budget presentation. And I want folks to know, that
12 is not the budget. That's only his proposal. There
13 will be a lot said and done between now and June 30th,
14 our budget deadline, to actually establish and vote on a
15 budget for this-coming fiscal year.
16 It is the job of this Committee to bring
17 before all the folks who will be receiving state money
18 and be using state money -- and for the most part, we
19 try to be very comprehensive and bring them all in, all
20 the agencies and all the secretaries. Anybody that uses
21 state money or gets state money, they have to come
22 before us and they have to justify their state money,
23 what they have, why they're getting it, why they think
24 they can get by with it, or in some cases, why they
25 think they need more. 9
1 And in some cases, there are some very,
2 very, tough, difficult questions that the members of
3 this Committee will ask them. They will ask them to
4 justify their needs and wants based on a number of
5 things: based on the economy of Pennsylvania, based on
6 how it fits into our budget, and perhaps more than
7 anything else, what are the human costs of their budget
8 decisions and our budget decisions? And I think we
9 should never forget that we are here for the people of
10 Pennsylvania, and ultimately, this budget speaks for
11 them in determining what type of lives most of them will
12 have based on what we do here. So we have a very, very,
13 important job. It might seem like it gets a little
14 lengthy. It seems like it gets a little onerous
15 sometimes. Even gets a little testy on occasion. But
16 it is a very, very important job that we do here; and I
17 look forward to getting started and working through the
18 Budget Hearings and then, of course, getting into the
19 actual negotiations of the budget itself.
20 Thank you, Mr. Chairman; and I look forward
21 to working with you and your staff, as we move forward.
22 CHAIRMAN ADOLPH: Thank you, Chairman. Each
23 member will be given an opportunity to ask questions.
24 I'd like to keep the questions as short as possible.
25 Each member will be allowed to ask one question. 10
1 Obviously, if there's a follow-up question, that should
2 be asked at that time; that will be allowed. But if you
3 have further questions on different subjects of the
4 presentation, that will wait till the second round; and
5 we will go on as many rounds as our members see fit.
6 Also, I'd like to acknowledge the presence
7 of Representative Keith Greiner of Lancaster County, who
8 has also joined us.
9 At this time, I'd like to welcome Matthew
10 Knittel of our Independent Fiscal Office.
11 MR. KNITTEL: Good morning. Thank you.
12 CHAIRMAN ADOLPH: Good morning.
13 MR. KNITTEL: Chairman Adolph, Chairman
14 Markosek, members of the Committee, thank you for the
15 opportunity to testify before you today.
16 The Independent Fiscal Office, or the IFO,
17 recently provided background material to the Committee
18 regarding the office, the economy, and major general
19 fund revenue sources. I will not review that material
20 in the limited time for my opening remarks. Rather, I
21 would like to use the time to summarize the IFO's
22 economic and revenue outlook for FY 12-13 and FY 13-14.
23 The Office has been in operation for 15
24 months, and this will be the second budget cycle in
25 which the IFO provides revenue estimates for 11
1 consideration by the General Assembly. Our next formal
2 revenue estimate will be due on May 1st when our
3 preliminary revenue estimate is due. By June 15th, the
4 Office will release its final and official estimate for
5 FY 13-14.
6 Although, the Office will not provide a
7 formal revenue estimate until May 1st, I would like to
8 take this opportunity to outline our current thinking
9 about the state of the economy and its impact on our
10 revenue outlook.
11 Turning to the economic outlook first, the
12 national and state economies are expected to experience
13 gradual improvement through FY 13-14, but the rate of
14 growth will be weak compared to standard economic
15 recoveries. Some notable trends include the following:
16 The Pennsylvania job market should improve at a moderate
17 rate. Pennsylvania employment is expected to expand by
18 69,000 jobs in 2013 and 78,000 jobs in 2014. Those
19 rates would put us on pace to reach pre-recession
20 employment levels sometime in 2014. That level was just
21 achieved -- last achieved in 2008. Under this scenario,
22 the unemployment rate falls to 7.2 percent in 2014.
23 That is still considerably higher than historical
24 levels.
25 Moving forward, consumers are a critical 12
1 factor in the economic outlook. Due to the restrained
2 government budgets and weak overseas demand, consumers
3 must drive economic growth. For the current fiscal
4 year, sales and use tax collections have been very weak.
5 For the first seven months of the fiscal year,
6 collections are only up by 1.4 percent. The expiration
7 of the federal payroll tax cut and various federal tax
8 increases will have a significant impact on disposable
9 income.
10 The IFO estimates that these tax increases
11 will reduce Pennsylvania's disposable income by
12 approximately 7.7 billion in FY 13-14. Very recent
13 sales data suggests that the payroll tax increase has
14 already affected consumer spending, as consumers have
15 cut back on their purchases of discretionary items.
16 Uncertainty over the federal spending
17 sequester and the debt ceiling may harm consumer
18 confidence moving forward. On the positive side, since
19 the onset of the recession, Pennsylvania households have
20 been paying down debt and improving their financial
21 condition. The improving housing market should also
22 boost consumer confidence. Combined, these factors
23 could bolster consumer spending and mitigate the impact
24 of the federal tax increase later this year.
25 Turning to the revenue outlook, the revenue 13
1 outlook for this fiscal year and next will be influenced
2 by the underlying growth of the Pennsylvania economy and
3 technical factors that affect collections. At our
4 revenue conference held last month, the IFO projected
5 that General Fund revenues would be roughly 75 million
6 above its estimate published at the beginning of the
7 fiscal year; and that presentation is available at our
8 website.
9 To avoid confusion, it should be noted that
10 our original estimate published for this fiscal year was
11 about $80 million less than the estimate certified by
12 the Governor. And compared to the Administration's
13 revised estimate, we are approximately $230 million
14 lower for this fiscal year.
15 We have increased our initial estimate due
16 to the strength in corporate and personal income taxes
17 that more than offsets weakness in sales and use taxes.
18 We believe that two technical factors will enhance
19 revenues in the second half of this fiscal year. First,
20 lower-than-expected tax credit utilization and
21 higher-than-expected transfers to the General Fund from
22 tax-enforcement-related activities. Second, personal
23 income tax revenues should benefit from behavioral
24 changes that resulted in the receipt of dividends or the
25 recognition of capital gains in the latter half of 2012 14
1 that ordinarily would have been received or recognized
2 in 2013. This was due to the impending fiscal cliff and
3 the tax increases on capital gains and dividends. Some
4 of the additional revenue may have been reflected in the
5 strong quarterly estimated payments received in December
6 and January, but we expect that most of it will be
7 collected when taxpayers file their annual returns in
8 April.
9 For next fiscal year, technical factors will
10 play a significant role in our revenue projection. We
11 expect General Fund revenue growth of approximately one
12 percent. This compares to 1.3 percent in the executive
13 budget, if we exclude policy. The baseline growth in
14 revenues for FY 13-14 is slightly less than three
15 percent, and that excludes technical factors. That
16 growth rate is consistent with an economy that is slowly
17 expanding from the 2008-2009 recession.
18 However, technical factors that are
19 unrelated to the underlining economy greatly reduce the
20 projected growth rate. Approximately, $550 million of
21 revenue that we expect to collect in the current fiscal
22 year will not be available next year. Those revenue
23 reductions include 325 million from the continued
24 phase-out of the capital stock and franchise tax; 50
25 million in personal income taxes due to the pull-forward 15
1 of capital gains and dividends from 2012 to 2013, in
2 anticipation of federal tax increases; 50 million from
3 the additional impact of the complete phase-in of
4 consumer behavioral changes due to federal tax
5 increases; 75 million from the diminishing benefit of
6 timing changes that affect corporate net income tax
7 revenues. For FY 12-13, bonus depreciation is providing
8 a significant technical boost to revenues; and that will
9 quickly diminish in future years; and finally, $50
10 million from the expiration of a transfer to the General
11 Fund from the Pennsylvania Race Horse Development Fund.
12 Thank you. That concludes my presentation,
13 and I would be happy to answer any questions that you
14 might have. However, I should note that the IFO cannot
15 make any specific policy recommendations. Thank you.
16 CHAIRMAN ADOLPH: Thank you, Director. I
17 have a quick question, and then Chairman Markosek will
18 follow.
19 Last year when you came before us, you
20 requested enough appropriations to cover a staff of 11.
21 My question to you, What are your current employees at?
22 MR. KNITTEL: We're currently at a staff of
23 10.
24 CHAIRMAN ADOLPH: Okay. Does that include
25 you? 16
1 MR. KNITTEL: That includes the Director,
2 yes.
3 CHAIRMAN ADOLPH: Okay. So there's one
4 position unfilled?
5 MR. KNITTEL: That would be correct.
6 Alternatively, we may consider bringing on some interns
7 for the summer. We haven't made that decision yet.
8 CHAIRMAN KNITTEL: Okay. And do you sub any
9 of your work done?
10 MR. KNITTEL: We have not, to this point.
11 Moving forward, we may contract out some work.
12 CHAIRMAN KNITTEL: Okay. Which type of work
13 would you be subbing out?
14 MR. KNITTEL: One could see -- for example,
15 we've had some groups come in on performance measures.
16 We may contract with them. They have knowledge of that.
17 They've implemented those, both here and in other
18 states. That would probably be the prime example I'd
19 put forward on contracting out.
20 CHAIRMAN ADOLPH: Okay. Thank you.
21 Chairman Markosek.
22 CHAIRMAN MARKOSEK: Thank you, Chairman.
23 Director Knittel, question: I understand that your
24 office occasionally gets asked, requests for doing some
25 studies and whatnot. And I would like to know, have you 17
1 received a request to do a study on Medicaid expansion?
2 I know other states have commissioned very detailed
3 studies with sophisticated models and even drilled the
4 data down to the county level. Have you been asked to
5 do that? And if so, can you give us a status report on
6 that?
7 MR. KNITTEL: I can confirm that we have
8 been asked to look at the Medicaid expansion, and we
9 have undertaken that request and are working on it
10 currently. Right now, we're looking at a study across
11 the other states. As you noted, there are many of them
12 available. There's also some private studies. So we're
13 looking over them. We're also meeting with some groups
14 and getting their input on the potential impact of the
15 Medicaid.
16 When we met with the requesters, we had
17 indicated that we would take a very broad-brush
18 approach, that we would look at the impact not only on
19 the economy but on the Pennsylvania budget, as well.
20 CHAIRMAN MARKOSEK: Are you looking at the
21 human costs at all?
22 MR. KNITTEL: We are looking, in particular,
23 at the number of folks that would be taken up under the
24 Medicaid expansion, yes, the increase in the number of
25 people that would be covered by health insurance. 18
1 CHAIRMAN MARKOSEK: Okay. Do you plan on
2 using any outside expertise in helping you formulate
3 this study?
4 MR. KNITTEL: We will be meeting with
5 various groups that we think can be helpful in that
6 study; absolutely.
7 CHAIRMAN MARKOSEK: Okay. All right. Thank
8 you.
9 CHAIRMAN ADOLPH: Thank you, Chairman. The
10 next question will be by Representative Millard.
11 REPRESENTATIVE MILLARD: Thank you,
12 Mr. Chairman.
13 Director Knittel, your Independent Fiscal
14 Office issued a report this last November entitled, The
15 Economic and Budget Outlook. In that report, you did an
16 analysis of four major areas of the Commonwealth, the
17 first being demographic trends; the second, economic
18 trends; the third, revenue trends; and the fourth,
19 expenditure trends.
20 Today, in your testimony, which I listened
21 to, you touched on two of them briefly, the revenue and
22 the economic. In your report in November of last year,
23 and I quote, Assuming current policies and tax laws
24 remain constant, demographic and economic trends suggest
25 that the Commonwealth will move from a net surplus for 19
1 this current fiscal year to a net deficit five years
2 down the road, 2018. And you also stated that, on
3 balance, the projections are subject to more downside
4 than upside risks.
5 So my question to you is, What are the major
6 downside risks facing Pennsylvania over the next few
7 years, in comparison to other states? Is Pennsylvania
8 worse off, better off, or in a similar position as other
9 states are right now?
10 MR. KNITTEL: With regard to the question
11 about upside and downside risks moving forward, I don't
12 think things have changed too much. The major downside
13 risk, we thought moving forward, was the healthcare
14 inflation; because it's such a large driver of the
15 expenditures. We had assumed, I believe, a rate in the
16 mid 3's. The analysis was very sensitive to where one
17 assumed the healthcare inflation would come out.
18 Regarding the revenues, our take on the
19 revenue growth hasn't changed too much. Overall, while
20 I would still say there's a bit of a downside risk, I
21 think, perhaps, less so slightly. There are some
22 positive fundamentals in the Pennsylvania economy.
23 Certainly, consumers are much better off than they were
24 four or five years ago. They've paid down a lot of
25 their debt. The housing market is clearly improving. 20
1 So I would say there's a little more upside than there
2 was three months ago. In regard to other states, I
3 haven't looked at studies. Many states do put out
4 five-year outlook studies. I have not compared
5 Pennsylvania to their outlooks.
6 My inclination, having looked a few of them
7 very briefly, is they're finding similar results to
8 Pennsylvania. And much of the so-called structural
9 deficit moving forward, much of it is driven by
10 increased pension obligations; so Pennsylvania is
11 certainly not alone in that respect.
12 REPRESENTATIVE MILLARD: Thank you, Director
13 Knittel. Thank you, Mr. Chairman.
14 CHAIRMAN ADOLPH: Thank you. Representative
15 Wheatley.
16 REPRESENTATIVE WHEATLEY: Thank you, Mr.
17 Chairman. Good morning.
18 MR. KNITTEL: Good morning.
19 REPRESENTATIVE WHEATLEY: Very quickly. You
20 mentioned you have a staff of ten, including yourself.
21 Can you tell me what the breakdown is of women,
22 minority, and men?
23 MR. KNITTEL: Yes. We have ten staff.
24 They're evenly split. There are five women and five
25 men. There currently are no minorities. I think that 21
1 covers -- veterans, I am unaware of anybody with veteran
2 status on our staff.
3 REPRESENTATIVE WHEATLEY: You have, as part
4 of your mandatory duties, to develop and evaluate
5 program measures or performance measures of programming?
6 MR. KNITTEL: Yes, we do, moving forward.
7 REPRESENTATIVE WHEATLEY: Moving forward.
8 So your anticipation for that part of your duties when?
9 MR. KNITTEL: We hope that when we hit the
10 summer after we put out our official revenue estimate,
11 that we'll start to move forward on the so-called
12 performance measures and start developing those.
13 REPRESENTATIVE WHEATLEY: Can you tell me a
14 little bit about what you will be looking at as it
15 relates to -- is it an all-state programming, department
16 of programming; or is it, you know, saying that we'll go
17 and see how we -- our financial support of those
18 programs are meant to go?
19 MR. KNITTEL: Uh-huh. Right now, the
20 statute is very ambiguous. It doesn't give a lot of
21 detail moving forward about what shape those performance
22 measures would take. We're interpreting at a very broad
23 mandate, where we would look across all of the agencies
24 of the Commonwealth and try to develop some measures
25 which would give policymakers some information on 22
1 whether their dollars are being effectively used.
2 REPRESENTATIVE WHEATLEY: And one last
3 question is regarding -- you talked about in your
4 outlook, Pennsylvania's job market is improving at a
5 moderate rate. You also talked about the unemployment
6 rate falling.
7 Do you anticipate doing any further
8 detailing of that economy and maybe presenting to us how
9 the economy is enacting minorities in various parts of
10 the region, which region is doing healthy as it relates
11 to production of work, those that are going -- having
12 challenges, are you anticipating doing some of that
13 analysis?
14 MR. KNITTEL: We have not anticipated doing
15 so; though, certainly our office is set up to do that
16 type of analysis moving forward; and I would agree with
17 you there are very disparate affects across the state on
18 the labor market.
19 REPRESENTATIVE WHEATLEY: Thank you. Thank
20 you, Mr. Chairman.
21 CHAIRMAN ADOLPH: Thank you. Representative
22 Boback.
23 REPRESENTATIVE BOBACK: Thank you,
24 Mr. Chair.
25 Good morning, Director Knittel. When you 23
1 went over your revenue outlook, I detected some
2 optimism, albeit, very cautious; and that was in the
3 area of a technical factor that will enhance the revenue
4 for the second part of this year. It was transferred to
5 the General Fund from tax-enforcement-related
6 activities. Can you be more specific; and why now, and
7 what were we not doing in the past to recognize the
8 revenue?
9 MR. KNITTEL: Yeah, that's known as the ERCA
10 or The Enforced Revenue Collection Account, which is a
11 repository of enforcement moneys that are placed into
12 that account throughout the year. And, in June, the
13 moneys are then removed from that account and deposited
14 into the General Fund. So one may view it as the
15 Department of Revenue, they have retained certain
16 enforcement personnel; they attribute revenues to those
17 additional enforcement personnel throughout the year,
18 and they will take certain moneys and deposit it into
19 this account; and then in June, those moneys will come
20 back into the General Fund.
21 For this year, and I don't have the numbers
22 in front of me, we're anticipating a very large transfer
23 in June due to those enforcement activities. I believe
24 last year was on the order of 140 million. This year it
25 might be closer to 170 million. So that's above our 24
1 initial forecast from last year.
2 REPRESENTATIVE BOBACK: And if I may,
3 Mr. Chairman? How is it different then? Is the
4 Department of Revenue doing something differently with
5 their enforcement activity?
6 MR. KNITTEL: Yeah, that's the way I would
7 interpret it, that the additional enforcement personnel
8 that they retained are being more productive, are
9 reducing fraud. Some of this is not only the collection
10 of tax revenue; some are also the prevention of paying
11 out of refunds, so there's both elements. And so those
12 enforcement personnel are retaining more funds for the
13 Commonwealth.
14 REPRESENTATIVE BOBACK: Thank you. Thank
15 you, Mr. Chairman.
16 CHAIRMAN ADOLPH: Thank you, Representative.
17 I'd like to acknowledge the presence of Representative
18 Garth Everett and Representative Nick Kotik, who have
19 joined us.
20 Next question will be Representative Parker.
21 REPRESENTATIVE PARKER: Thank you,
22 Mr. Chair; and welcome, Director.
23 MR. KNITTEL: Good morning.
24 REPRESENTATIVE PARKER: Director, on page 6
25 of the background information that you submitted to the 25
1 Committee, you specifically talk about the impact of
2 student loan debt and you talked about it increasing;
3 and you note that the repayment of that debt actually
4 consumed resources that could otherwise be spent to
5 purchase goods and services.
6 With that in mind, I wanted to know, could
7 you talk about, sort of, where Pennsylvania fares and
8 whether or not it's a national trend? And, for us, you
9 know, we intimately sort of make a connection between
10 higher education in this budget is proposed or appears
11 to be level funding, but they're still dealing with
12 previous cuts: 10 percent to communities, 19 percent
13 state-related, and 18 percent state systems.
14 Could you talk a little bit about the
15 student loan debt phenomena, how it's been increasing
16 and where Pennsylvania falls in the national trend?
17 MR. KNITTEL: Sure, sure. I think you
18 raised a very good point. As you can see from the chart
19 on page 6, for Pennsylvania, the student loan debt has
20 increased substantially. So over the last few years
21 while Pennsylvania households although have been paying
22 down mortgage debt, the student loan debt is now coming
23 to the fore. And I believe Pennsylvania ranks first or
24 second in per capita student loan debt, so this is a
25 very serious issue moving forward. We do think it is 26
1 impacting -- certainly a personal impact on the students
2 themselves, but also on the Commonwealth in sales tax
3 collections. The students have less to spend coming
4 out. It will take them 10 or 15 years to pay off the
5 debt. Certainly those funds could've been used to
6 purchase goods; some of them would have been taxable.
7 REPRESENTATIVE PARKER: Okay. So you said
8 Pennsylvania was ranked first or second?
9 MR. KNITTEL: I can confirm that. That's my
10 recollection. I think that was based on a year ago;
11 it's very high.
12 REPRESENTATIVE PARKER: Oh, wow. Okay. If
13 I may, Mr. Chairman, for a quick follow-up, I wanted to
14 ask whether or not -- I know between September and
15 December we were sort of above the national averages as
16 it relates to our unemployment rate. Can you talk to us
17 a little bit about where you see Pennsylvania moving in
18 the future?
19 MR. KNITTEL: Sure. We do see, both at the
20 federal and the state levels, a slow decline in the
21 unemployment rate. I do think it's unusual that we
22 would have trended above the national rate, and I can't
23 exactly pin down why that occurred. I think long-term,
24 Pennsylvania will still come below the national average
25 as we move forward and the labor market recovers. 27
1 The labor market here tends to be steadier.
2 I think we'll get a bit of a better recovery moving
3 forward than the national average, so I do anticipate
4 moving forward that the Pennsylvania unemployment rate
5 would not be above the national average; that we would
6 come down below it slightly.
7 REPRESENTATIVE PARKER: Thank you, Director.
8 Thank you, Mr. Chair.
9 CHAIRMAN ADOLPH: Thank you. Representative
10 Petri.
11 REPRESENTATIVE PETRI: Thank you,
12 Mr. Chairman; and thank you for being here.
13 One of the topics that's been discussed for
14 a number of years that many of us have interest in is
15 the high corporate net income tax rate in Pennsylvania.
16 And, as you know, the Governor has contemplated, while
17 not in this year's budget, moving that corporate net
18 income down.
19 Can you talk to us briefly and provide your
20 sense of how important an issue that is for Pennsylvania
21 and what you would expect that proposal to do with
22 respect to growth rates? And then the other piece of
23 that is, generally, the idea of closing the Delaware
24 loophole and how you see that as either being positive
25 or negative towards Pennsylvania and the growth of its 28
1 business. Thank you.
2 MR. KNITTEL: Sure. As you noted, yeah,
3 there is a proposal in the budget to reduce the
4 corporate income tax rate phased in through 2025,
5 bringing the rate from 9.99 percent to 6.99 percent in
6 the first year or two, the reduction rate is .1 percent.
7 It then increases to .2 percent through 2019 and then
8 increases to .33 percent thereafter until the rate is
9 brought down to 6.99.
10 I do think it is an important issue moving
11 forward. Pennsylvania currently has the second highest
12 statutory rate in the nation, behind Iowa. It's a very
13 high rate. It is also an important consideration
14 because the differential between the corporate income
15 tax rate and the passover tax rate for partner and S
16 corporations is also the highest in the nation at
17 roughly 7 percent. And so what the tax system is
18 effectively doing is encouraging individuals not to
19 incorporate, and that's an inefficient result.
20 So I do think moving forward it is an
21 important issue. Regarding the impact on businesses,
22 in the near term with the slight reduction in the rate,
23 I would think there might be some, but it would be
24 limited moving forward once we start hitting the larger
25 rate deductions and businesses are sure that the 29
1 policy's and that the Commonwealth is committed to it,
2 we would see more of an impact at that time.
3 REPRESENTATIVE PETRI: And just a quick
4 follow-up. What has been your sense with regard to
5 growth with regard to the other tax policies where we've
6 actually implemented and made changes? Have you seen
7 the growth you expected, and would you expect continued
8 growth in this year?
9 MR. KNITTEL: The Governor's proposals or --
10 REPRESENTATIVE PETRI: Yeah.
11 MR. KNITTEL: In particular, the NOL
12 Proposal, things such as that. Yeah, moving forward,
13 again, Pennsylvania -- now, I'll just touch on the NOL
14 Proposal, because it's the next largest one behind the
15 rate deduction. Once again, Pennsylvania is unusual. I
16 believe only a handful of states cap the NOL deduction;
17 most allow federal treatment, which is a full deduction
18 for NOL's.
19 What that does, is by capping the NOL
20 deduction is that it effectively raises the corporate
21 income tax rate. It's really no different from an
22 economic standpoint. I would note that, moving forward,
23 the proposal has the same treatment for new tax losses
24 as old tax losses; and from an economic standpoint, if
25 it could be done, it would be best to focus on the new 30
1 tax losses. You have a better bang for the buck. It
2 has more of an effect if we can do it on a prospective
3 basis than changing the rules on the old tax losses.
4 REPRESENTATIVE PETRI: Thank you. Thank
5 you, Mr. Chairman.
6 CHAIRMAN ADOLPH: Thank you. Representative
7 Dean.
8 REPRESENTATIVE DEAN: Thank you, Mr.
9 Chairman. Thank you, Director Knittel. Thanks for your
10 testimony today.
11 I had the chance to be with you when your
12 office provided really valuable information on property
13 tax analysis that you did. My question today has to do
14 with the Pennsylvania Lottery. As we know, the Governor
15 would like to privatize the lottery. I'm wondering if
16 in either of your discretionary or your mandatory tasks,
17 your office has had the chance to take a look at lottery
18 revenues projected?
19 As we've seen in the past and in the current
20 year moving forward and then maybe in a parallel way,
21 have you had an analysis of a private model?
22 MR. KNITTEL: Uh-huh. Yeah, we do pay close
23 attention to them; and, in fact, we make a projection of
24 lottery fund revenues. We are tracking them on a
25 monthly basis; we are making annual projections five 31
1 years out. And we've noticed that the lottery growth
2 rate has been very strong, been very robust, in
3 particular, the instant-ticket sales. The last two
4 years, they were up by ten percent a year. I believe
5 through the first seven months of this fiscal year,
6 they're up by 7.5 percent. So the lottery's done very
7 well, and that would be consistent with an economic
8 recovery. We had a soft patch there as we moved through
9 the recession. The Lottery growth was very low. We're
10 now making up for that now and moving forward. So I can
11 say that we haven't tracked or made any comparisons to
12 the private -- the PA-made agreement with Camelot.
13 REPRESENTATIVE DEAN: Has anybody asked you
14 to look at the PMA and what that might look like, in
15 terms of numbers?
16 MR. KNITTEL: No, we have not received a
17 formal request to do so.
18 REPRESENTATIVE DEAN: And if our Committee
19 or someone else asked you to do that, would that be a
20 possibility?
21 MR. KNITTEL: It would be a possibility;
22 absolutely.
23 REPRESENTATIVE DEAN: Okay. Thank you very
24 much. Thank you, Mr. Chairman.
25 CHAIRMAN ADOLPH: Okay. Thank you, 32
1 Representative. Representative Gordon Denlinger.
2 REPRESENTATIVE DENLINGER: Thank you, Mr.
3 Chairman. Good morning, Director. Thank you for
4 joining us.
5 MR. KNITTEL: Good morning.
6 REPRESENTATIVE DENLINGER: I'm comparing the
7 numbers here between the revenue growth projections.
8 The Governor projected a 1.5 percent increase in
9 revenue, and your office had projected eight-tenths of a
10 percent, so a little more modest.
11 My question relates to this budget process
12 and how it will unfold. The question is, Has the
13 Governor been, I'm going to use the word, aggressive,
14 and I'll invite you to comment on that word, aggressive,
15 with his projection so that he can add back into the
16 budget items that are popular and well-received, but
17 that as we go through the months of revenue tracking,
18 and, of course, March and April are the two big months
19 of every year, do you have a concern that we're going to
20 start to tread water if we continue to accumulate a
21 deficit, that as we get into the final budget
22 deliberations, we're going to have to back off of some
23 of the funding that we put in place. Can you give us
24 your thoughts on that?
25 MR. KNITTEL: Sure. I think for next fiscal 33
1 year, if you compare our numbers to the Governor's,
2 again, in the executive budget, if you hold back the
3 policy, they have a General Fund growth rate of 1.3
4 percent; and we've now come up to, roughly, 1 percent;
5 so the numbers aren't that different. They're very,
6 very similar.
7 The large difference, as you noted, is for
8 the current fiscal year. We're currently $230 million
9 below the Governor, so I interpret that to mean that the
10 Governor's budget includes a bit more of an upside for
11 the current fiscal year. Of course, once that's in
12 place, then you apply the growth rate; that is then
13 carried over to the next fiscal year.
14 There are some concerns moving forward, in
15 particular, I would note with the gross receipts tax;
16 that there could be a substantial weakness there. The
17 data that we are seeing right now from the Energy
18 Information Association suggests a reduction in tax
19 liability of 8 percentage points. That would be very
20 unusual. So there could be a lot of moneys lost just in
21 that tax alone.
22 CHAIRMAN ADOLPH: Okay. I'm going to ask
23 you to back up a little bit for us. What sectors of the
24 economy drive that line; and more broadly, where are we
25 still weak, as you perceive it? 34
1 MR. KNITTEL: Well, with gross receipts, two
2 things are driving it. One is telecom and the other is
3 electric. And in telecom, one would expect a slower
4 decline in the tax base that's been occurring. We
5 expect that would occur again this year.
6 The big surprise is in the electric sector.
7 And if you look at the data, what you see is,
8 irregardless of the type of user: industrial,
9 commercial, residential, there's a broad-based decline
10 in Pennsylvania of the 8 percent. Part of that is due
11 to a reduction in demand, and part of that is due to a
12 reduction in price.
13 If we compare to the US, the reduction is
14 only 2 percent. So in Pennsylvania, a bit different
15 than the US, but still it's very unusual that those
16 sales, those tax liability would actually decline.
17 REPRESENTATIVE DENLINGER: Very good. It
18 would be interesting to know as far as if the push
19 toward the alternative energy portfolio has contributed
20 to that, but that's a question for another day; so thank
21 you. Thank you, Mr. Chairman.
22 CHAIRMAN ADOLPH: Thank you. Representative
23 Santarsiero.
24 REPRESENTATIVE SANTARSIERO: Thank you,
25 Mr. Chairman. And, Director, thank you for coming in 35
1 this morning.
2 I assume your office, in looking at the
3 unemployment situation in Pennsylvania, is looking at
4 both private and public sector, correct?
5 MR. KNITTEL: It includes both, correct.
6 REPRESENTATIVE SANTARSIERO: Right. And
7 aside from the gains in private-sector employment that
8 are pretty consistent with what's been happening
9 nationwide as a result of federal policy, what would you
10 say -- what's happened to public-sector employment over
11 the last few years here in Pennsylvania?
12 MR. KNITTEL: Clearly there's been a decline
13 in public-sector employment. I do think that broadly
14 mirrors what's happened at the national level. There
15 has been cutback both at the state and local levels and
16 public-sector employment.
17 REPRESENTATIVE DENLINGER: What specifically
18 has been driving it here in Pennsylvania?
19 MR. KNITTEL: That, I cannot pin down the
20 exact policy that might be doing so.
21 REPRESENTATIVE DENLINGER: Well, can you
22 tell us what part of the public sector? Is it teachers;
23 is it state workers; what's taken the biggest hit in the
24 last couple of years?
25 MR. KNITTEL: I suspect, but I'd have to 36
1 look at the figures. I suspect that it's fairly
2 broad-based; that it's both the sectors that you noted,
3 state government, local government, teachers.
4 REPRESENTATIVE DENLINGER: Is it possible
5 for you to get that information to us in the coming
6 week?
7 MR. KNITTEL: Yes, yes. Absolutely; we can
8 do so.
9 REPRESENTATIVE DENLINGER: That would be
10 great. Thank you.
11 MR. KNITTEL: Sure.
12 CHAIRMAN ADOLPH: Thank you. Representative
13 Seth Grove.
14 REPRESENTATIVE GROVE: Thank you very much
15 for your testimony. And I appreciate the good work your
16 office is doing. I love to see data. And I think we'll
17 make better decisions moving forward with more effective
18 data in our tool belt.
19 In looking at revenue collections to date,
20 the sales and use tax concerns me the most. Collections
21 are $184.4 million below estimate through January, and
22 only looking to grow at the rate of 1.4 percent over the
23 prior year. What really concerns me is that January,
24 2013 collections, which represent Christmas sales in
25 December, were below collections of January, 2012 by 2.1 37
1 percent. I also heard, roughly, we've seen an 18. --
2 roughly, sales for Black Friday weekend was up 18
3 percent nationally. Can you comment on what happened
4 with December sales and the tax collections, and whether
5 this is a trend that we should be concerned over the
6 next several months?
7 MR. KNITTEL: I think you raised a good
8 point. I absolutely think that we're going to pay
9 attention to one particular tax source, sales and use
10 tax is one to pay attention to. It is very weak. As
11 part of our revenue conference last month, we did look
12 across seven other states and compared them to
13 Pennsylvania. And what we found is that the
14 Pennsylvania experience was similar to those of other
15 states; that Pennsylvania, the growth rate, as you know,
16 was about 1.4 percent; and on average, the other states
17 were experiencing a similar growth in sales and use.
18 To us, that suggested that the weakness was
19 due to the signals coming out of Washington, that is,
20 the uncertainty. Consumers have taken somewhat of a
21 bunker mentality, if you will, a wait-and-see approach,
22 as we lurch from fiscal crisis to fiscal crisis. We now
23 have some more coming up shortly, due to the sequester,
24 the continuing resolution, a new federal-debt ceiling.
25 So moving forward, when you combine that 38
1 with the federal tax increases, in particular, the
2 payroll tax cut hike, which we think is about $5 billion
3 of disposable income in Pennsylvania, we do think that
4 sales and use taxes will remain weak over the next four
5 or five months.
6 REPRESENTATIVE GROVE: If I could, Chairman,
7 for follow-up? Within the sales tax, I know Department
8 of Revenue tends to look at areas of, maybe, industries.
9 Is there a certain industry that can point out that
10 we're really seeing a decline and other industries we're
11 seeing increases in revenue under the sales tax, or is
12 it just a general carte blanche decline?
13 MR. KNITTEL: I characterize -- we don't
14 have those data now, but we look at other data that are
15 put out by the US Department of Commerce; so that's on a
16 federal level, but it appears to be broad-based
17 weakness. Most recently, for January, when the payroll
18 tax cut hit, it does appear that the discretionary items
19 such as restaurant sales are taking a large hit.
20 REPRESENTATIVE GROVE: Thank you.
21 CHAIRMAN ADOLPH: Thank you. At this time,
22 I'd like to acknowledge the presence of Representative
23 Vanessa Brown and Representative Lee James. Thank you
24 for joining us.
25 Next question will be Representative 39
1 Conklin.
2 REPRESENTATIVE CONKLIN: As always, thank
3 you, Mr. Chairman.
4 And I have to apologize; Representative
5 Dean's question got my real question just a little bit
6 off track. She was asking about the Lottery system and
7 the rate of growth. As a fiscal analyst, would you
8 consider that, historically, when you look at a
9 company's growth, you look at past performance to
10 somehow estimate future performance?
11 MR. KNITTEL: Yeah, that would be one
12 consideration.
13 REPRESENTATIVE CONKLIN: That's it. And
14 forgive me. My real question was, When you were talking
15 earlier about the corporate income tax in Pennsylvania
16 and we're talking about, in the long-term, lowering that
17 tax; and I agree with actually having a resolution in to
18 study that.
19 When you look at companies paying corporate
20 tax in Pennsylvania today, would you have any idea at
21 the top of your head exactly the amount of companies
22 operating in Pennsylvania, how many of those companies
23 actually paid a corporate tax or they used combined
24 reporting or housing their business in Delaware? Do you
25 have any idea? 40
1 MR. KNITTEL: That, I don't know. In regard
2 to the share of corporations that remit tax in any year,
3 I believe it's -- or excuse me -- do not remit tax, it's
4 fairly high, I believe on the order of 60 percent,
5 thereabouts. That would be consistent with what we
6 observe in other states and at the federal level as
7 well.
8 REPRESENTATIVE CONKLIN: Well, could you do
9 me a favor? In your time, could you research that and
10 give the whole Committee exactly a percentage of
11 corporations that are not paying the 9.9 percent but are
12 doing business in Pennsylvania?
13 MR. KNITTEL: Yes, we can do that.
14 REPRESENTATIVE CONKLIN: Thank you very
15 much. Thank you, Chair.
16 CHAIRMAN ADOLPH: Thank you. Representative
17 Mustio.
18 REPRESENTATIVE MUSTIO: Thank you, Mr.
19 Chairman. I'd like to just, before I ask my question,
20 follow up on what Representative Conklin was asking as
21 it relates to the number of corporations. Sometimes we
22 hear that there are several hundred thousand
23 corporations in Pennsylvania. Is there a way to
24 determine the activity that those are actually active?
25 I know there are several, many I guess, that are 41
1 dormant, for a lack of a better word, in Pennsylvania.
2 And sometimes those get thrown into the numbers, and we
3 hear a significant percentage aren't paying -- somebody
4 said 60 percent. Now, were you including all active
5 corporations when you said that?
6 MR. KNITTEL: That that would be anybody
7 that files a return. And I'd have to confirm that
8 number. I need to check on it. Regarding the number of
9 dormant corporations, I am unsure whether we can make
10 that determination. I think we would need to see the
11 federal tax return that lies behind the Pennsylvania tax
12 return, from which a portion of income is drawn from.
13 REPRESENTATIVE MUSTIO: So the information
14 that you would be providing to the Committee, that will
15 be only addressing those that are active?
16 MR. KNITTEL: Anybody that would file an
17 income tax return, right.
18 REPRESENTATIVE MUSTIO: Okay. Kind of
19 getting into the weeds a little bit, I'd like to follow
20 up a little on Representative Grove's question along the
21 lines of the sales tax. That is certainly a concern.
22 In your comments, you had mentioned that, you know, the
23 phaseout of some of the other taxes, the capital stock
24 and franchise tax, but you also mentioned the $50
25 million potential loss in personal income taxes because 42
1 of the pull-forward of dividends because of the tax
2 increase out of Washington, D.C. this year. So that
3 certainly puts a lot of money into the economy in
4 Pennsylvania at the end of last year; but it sounds to
5 me like the other negatives, as far as the
6 uncertainties, you're saying that money's going to stay
7 in people's pockets as opposed to spending it in the
8 economy. Am I hearing you correctly?
9 MR. KNITTEL: No. We do think that most of
10 that, what we would call a pull-forward of $50 million,
11 a large percentage of it -- well, excuse me --
12 REPRESENTATIVE MUSTIO: That's actually just
13 the tax on --
14 MR. KNITTEL: That's the tax, correct. We
15 had --
16 REPRESENTATIVE MUSTIO: And it was almost $2
17 billion --
18 MR. KNITTEL: You'd have to gross that up by
19 the tax rate to get the income. In our assumption,
20 because of those are going to upper-income individuals,
21 we have assumed that most of it would not be spent, that
22 it would remain -- or it would be saved at the margin;
23 because they're upper-income individuals. However, the
24 payroll tax cut, because it's going to wage earners, we
25 would assume that most of that would have been spent; so 43
1 it all depends on their income level.
2 REPRESENTATIVE MUSTIO: And the internet
3 sales, could you kind of provide some forecasting along
4 those lines, as far as it relates to capturing internet
5 sales tax?
6 MR. KNITTEL: Right now -- we had included
7 for the policy on the remote sellers in our sales and
8 use tax projections, we had included an estimate of $40
9 million to pick up some of the internet sales. We're
10 working with the Department of Revenue to determine
11 whether that number is still accurate as we move
12 forward. I think they're just getting the returns in
13 right now so that they can estimate whether that figure
14 is accurate.
15 Moving forward, much like we observed in the
16 recent past, we do expect that internet sales will
17 continue to grow faster than brick-and-mortar sales; and
18 then if those sales are not taxed, it would lead to
19 further erosion of the sales and use tax base.
20 REPRESENTATIVE MUSTIO: Thank you. Thank
21 you, Mr. Chairman.
22 CHAIRMAN ADOLPH: Thank you, Representative.
23 I've also been informed that Representative Duane Milne
24 of Chester County has arrived. Thank you for joining
25 us. 44
1 And the next question will be from
2 Representative Mauree Gingrich.
3 REPRESENTATIVE GINGRICH: Thank you, Mr.
4 Chairman. It's like a maze over here. We have to climb
5 uphill and downhill to kind of somewhat get to the
6 podium. Thank you so much for being here today, and I
7 see your able staff behind you; and I really respect and
8 appreciate the work you do.
9 MR. KNITTEL: Thank you.
10 REPRESENTATIVE GINGRICH: Mine is sort of a
11 curiosity question based on the state and local tax
12 comparison that you did. And this happens to relate --
13 because I have a lot of interest in the aging population
14 and some of their challenges, and that led me to look at
15 the property tax piece that you had done. And, of
16 course, looking at Pennsylvania, all those taxes which
17 other states may be split at various levels are pretty
18 much all local in Pennsylvania.
19 I thought it was interesting when I looked
20 at the study and I saw where we ranked. I mean, if you
21 gauge the calls coming into my office or what I hear
22 from my own constituents, I would never think that we
23 rank 31st. So we're really in the bottom half of range
24 in rates for property tax, which I found interesting.
25 So my question is, If you look at other 45
1 comparisons, other research organizations or other
2 studies that are done, are they pretty much the same
3 result?
4 MR. KNITTEL: Yeah, they should be; because
5 the methodology that we use is pretty standard. You
6 take the taxes reported by the Census Bureau and you
7 simply take that over personal income or state gross --
8 state profit.
9 REPRESENTATIVE GINGRICH: I think it's
10 interesting, and it's healthier than I thought,
11 certainly; because we're looking at a population here in
12 Pennsylvania that -- we talked about the Lottery a
13 couple of times, you know, in small bits here. But when
14 we look at serving the seniors, we're looking at a lot
15 of seniors on fixed incomes. So I'm pleased to see that
16 your study and others have us at least ranked that way.
17 There are things we need to do with fixed incomes; and,
18 you know, balancing that with property values, it's
19 always a challenge. But it's good to know that you did
20 it and that we're seeing the same thing, and that gives
21 us a good base to work from. I really appreciate that.
22 Keep up the good work. We need this data.
23 MR. KNITTEL: Thank you.
24 CHAIRMAN ADOLPH: Thank you. Representative
25 Jim Christiana. 46
1 REPRESENTATIVE CHRISTIANA: Thank you, Mr.
2 Chairman. And thank you for being here this morning. I
3 think everything with the next year's budget hinges on
4 revenue projections. And you, obviously, are a little
5 more cautious than the Governor's projection. But
6 you -- I believe last year you were a little bit less
7 aggressive than he was in his budget projections going
8 into this current fiscal year, correct? I believe your
9 estimates were below the Governor's projection this
10 current fiscal year?
11 MR. KNITTEL: That is correct. Back in June
12 when we both published our final revenue estimates, we
13 were $80 million below the Administration.
14 REPRESENTATIVE CHRISTIANA: So -- and now I
15 think you and the Governor's office are preparing to be
16 above his expectations for this current fiscal year.
17 There's a disagreement on how much or coming in right at
18 that number. But that is correct; you're not
19 anticipating as much of a surplus or any surplus
20 compared to his projection, correct, for ending this
21 current fiscal year?
22 MR. KNITTEL: For this fiscal year, we
23 increased our estimate by $75 million, which would bring
24 us in line to the original estimate last June; and they
25 have added 230 million to their original estimate. 47
1 REPRESENTATIVE CHRISTIANA: Okay. So in
2 those nine months, where would you credit the increase
3 in revenue for coming up even to the $80 million or $78
4 million? What revenue would you credit for that change
5 from last year?
6 MR. KNITTEL: From our perspective, the
7 revenue source that has come in stronger than we
8 expected was personal income tax and corporate income
9 tax. We had strong growth in corporate income tax, but
10 it exceeded even that; and that was counterbalanced by
11 the weakness in the sales and use tax.
12 REPRESENTATIVE CHRISTIANA: From your
13 studies, would you point to the hundred thousand new
14 jobs that have been created over the last 20 months, or
15 would you credit increased salaries? Where would you
16 point to?
17 MR. KNITTEL: On the PIT, I think we were
18 especially impressed with what the growth and the
19 quarterly estimated payments; and that would be due to,
20 generally, business income, partnerships,
21 S-corporations, things such as that. It might be due to
22 taxable income, such as dividends and capital gains. So
23 that has been particularly strong. The withholding
24 taxes on the wages have been right in line with what we
25 expected. 48
1 REPRESENTATIVE CHRISTIANA: And then just to
2 refresh -- I think I heard you earlier, the skepticism
3 that folks have in Pennsylvania and most of the country
4 is because of Washington D.C.'s policy is, in your
5 opinion, a direct correlation to the antics of
6 Washington D.C. Because I think I heard my colleague on
7 the other side credit the federal policy of why
8 Pennsylvania's doing a little bit better than we
9 anticipated. But it's your opinion that the antics in
10 Washington are creating some concern for our folks in
11 Pennsylvania and the nation?
12 MR. KNITTEL: Absolutely. I think if you
13 look back in history, the last time we went through the
14 debt-ceiling debate, you saw our sales and use tax
15 collections plummet. And as soon as we came up out of
16 it, they came back up again; so I think there's a direct
17 causation.
18 REPRESENTATIVE CHRISTIANA: And thank you,
19 Mr. Chairman. Just to point out, Mr. Chairman, I think
20 it's important to note that in the last two years,
21 Pennsylvania's General Fund has gone through historic
22 deficits to now talking about a minimal to a slight
23 surplus; and I think that's a credit of not Washington,
24 D.C. but the policy done here in Harrisburg. And I look
25 forward to continuing that. 49
1 Thank you, Mr. Chairman.
2 CHAIRMAN ADOLPH: Thank you, Representative.
3 Representative Bernie O'Neill.
4 REPRESENTATIVE O'NEILL: Thank you, Mr.
5 Chairman; and good morning. Thank you for being with us
6 today.
7 MR. KNITTEL: Good morning.
8 REPRESENTATIVE O'NEILL: Just real quick, I
9 wanted to follow up on Representative Gingrich's
10 questions and comments concerning the property tax
11 study. Would you be able to provide to this Committee a
12 breakdown of the study, in relation to how Pennsylvania
13 fares with school property taxes, personal property
14 taxes versus other states, instead of all property
15 taxes?
16 MR. KNITTEL: Correct. I would need to
17 confirm this, but I don't think those data are available
18 across all states. They don't draw distinction between
19 the final use of the levy.
20 REPRESENTATIVE O'NEILL: Okay.
21 MR. KNITTEL: I can confirm that though.
22 REPRESENTATIVE O'NEILL: Okay. I appreciate
23 it.
24 MR. KNITTEL: Sure.
25 REPRESENTATIVE O'NEILL: Thank you. 50
1 CHAIRMAN ADOLPH: Thank you. Representative
2 Mike Carroll.
3 REPRESENTATIVE CARROLL: Thank you, Mr.
4 Chairman. Thank you, Director Knittel, for your
5 testimony.
6 As I listened to the debate related to the
7 estimates from the Independent Fiscal Office and the
8 conflicting estimates from the Governor's office, I was
9 reminded of the reason for the creation of the
10 Independent Fiscal Office in the first place, which was
11 to try and have a third party provide what was described
12 then as accurate information to the General Assembly so
13 we could make fair and balanced budget decisions. And
14 so now I hear the Independent Fiscal Office has a
15 different opinion on what the revenue estimates will be
16 compared to what the actual will be between now and the
17 end of the fiscal year. And I'm wondering, as I sit
18 here, you know, what is the point? You know, if the
19 Administration, any administration is going to have a,
20 you know, budget estimate or revenue estimate that
21 conflicts with the Independent Fiscal Office, what would
22 be the Independent Fiscal Office's role if -- you know
23 what I mean, in the event -- well, at least in this
24 event when we have a conflict, but even in a more
25 exaggerated scenario where the conflict would be 51
1 exaggerated even beyond what this current conflict is.
2 MR. KNITTEL: Well, I think the benefit of
3 having two sets of numbers, even if they don't agree, is
4 that it lends transparency to the process. So if we
5 have a number that's very different from the
6 Administration's, of course we'd want to know what's
7 driving that and we'd want to pin down the differences.
8 It could be economic differences; it could be technical
9 differences. But, in my opinion, it lends transparency
10 to the process.
11 REPRESENTATIVE CARROLL: And then just one
12 quick follow-up. Can you describe for me what the
13 nature of the conflict is in this scenario with the
14 current numbers? How is it that the Independent Fiscal
15 Office arrived at such a different number compared to
16 the Budget Office?
17 MR. KNITTEL: Moving forward, there are two
18 or three items that we disagree on. One is corporate
19 net income taxes. So the Administration believes the
20 strength that we've seen recently will be carried
21 forward, but we do not think that will happen; because
22 we think a technical factor known as bonus depreciation
23 is driving the significant growth we're seeing this
24 year. Moreover, they're expecting a little bit of a
25 better final payment. They're on the upside, on the 52
1 upper end of an estimate, we think, and we have a more
2 modest final payment coming in for the personal income
3 tax.
4 REPRESENTATIVE CARROLL: I guess we're left
5 wondering whether we -- which model we should subscribe
6 to as we move forward with respect to trying to develop
7 a budget. It's an interesting dilemma for the members
8 of this Committee, because here you have the very entity
9 that was created to help guide us with respect to
10 revenues in conflict with the Administration with
11 respect to how much money we'll have at our disposal for
12 programs. So thank you.
13 CHAIRMAN ADOLPH: Thank you. Just a couple
14 facts that my Committee staff has been able to supply me
15 regarding some of the questions that were asked of the
16 Director. It appears to me that we do trace
17 government-sector jobs. Okay. And from January of 2011
18 to December of 2012, we lost 21,000 jobs, 2.8 percent.
19 In private-sector jobs for that same period of time,
20 private-sector jobs increased almost 106,000, for a net
21 increase in the jobs in Pennsylvania of 85,000. I
22 thought I'd add that to the record.
23 You know, first of all, I appreciate all the
24 members' questions. And one of the facts that you
25 brought forward to us today is that, and I think the 53
1 members and the public need to understand this, that
2 with the job growth that we're having and what you are
3 projecting over the next two years, even with that
4 job-growth projection, we'll finally have reached the
5 number of jobs that we had pre-recession. And this is
6 the first budget since that Great Recession that our
7 revenues are projected higher than they were from almost
8 six, seven years ago.
9 So I'm sure Mr. Knittel would've been the
10 first one to declare that we're out of the recession,
11 and the economists across the nation would be happy to
12 say that; but we have to be cautious in our projections
13 and cautious in our policies, and I'm sure history will
14 prove that these economic times that we've experienced
15 the last six or seven years is one of the most difficult
16 times that we in this nation have ever experienced.
17 Any closing comments, Mr. Knittel?
18 MR. KNITTEL: No. I appreciate the
19 opportunity to testify before you today. Thank you.
20 CHAIRMAN ADOLPH: Okay. Thank you. This
21 Committee will meet again at 1:00. Our next testifier
22 is the Secretary of Revenue; 1:00. This hearing is in
23 recess.
24 (Whereupon, the hearing concluded.)
25 54
1 CERTIFICATE
2
3 I hereby certify that the proceedings and
4 evidence are contained fully and accurately in the notes
5 taken by me on the within proceedings and that this is a
6 correct transcript of the same.
7
8 ______
9 Tracy L. Markle, Court Reporter/Notary 10
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