Rendell calls for increase in Pa. income tax

Gov. Rendell's proposal to increase the state income tax to cover a gaping deficit ran headlong into a Republican wall of opposition, proving quickly to be a new flash point in an already contentious budget process.

The governor yesterday asked the legislature to approve a temporary 16.5 percent hike in the personal income-tax rate to help manage a continued decline in revenues and a projected budget deficit of $3.2 billion.

"The simple truth is, we have no good choices," said Rendell, who hopscotched across the state to highlight economic development efforts that would be cut under the Senate Republicans' budget proposal. "There are no shortcuts out of this crisis, no magic bullets, no painless path out of this morass. We can do the easy thing for the moment or the right thing for Pennsylvania's future. The fairest plan is to spread the pain across the board."

At a morning stop in Cranberry, a Pittsburgh suburb, Rendell - who has called an emergency cabinet meeting today to discuss the budget crisis - announced that he would propose raising the income tax rate to 3.57 percent from 3.07 percent for three years to raise about $1.5 billion per year in new revenue.

One expert estimated that would total about $5 a week for a family making $50,000.

Senate Republicans, who passed their own $27.3 billion no-tax budget, which was defeated in a House committee last week, said they were not surprised by Rendell's announcement, but swiftly denounced it as a raid on the paychecks of working-class families.

"This is not the time to take more money out of working families' pockets," said President Pro Tempore Joe Scarnati (R., Jefferson). "He has proposed almost a 17 percent increase in the income tax when working families are struggling to stay at zero percent increase in wages and benefits in this economic downturn."

Senate Majority Leader Dominic Pileggi (R., Delaware) said he believed Rendell's tax proposal ends any prospect of the budget's being finished by the June 30 deadline.

"There is no support in our caucus for an increase in the personal-income tax," he added. "To the extent that that's the foundation of the governor's proposal, it's going to be very difficult to advance in any way."

At an afternoon stop in Montgomery County, Rendell told reporters that despite what Republicans say, a tax hike is "inevitable."

"They're going to have to come to grips with the fact that no matter how much we cut, we still have to raise revenues," said Rendell, speaking at the North American headquarters of Almac Group, an Irish pharmaceutical supply company, in Audubon.

Rendell has cut $250 million from his $29 billion spending plan for 2009-10, with an estimated $400 million more to come. He long said that raising the income tax was "the last resort." But yesterday, Rendell conceded that with a deficit $1 billion larger than anticipated in his budget address four months ago and gloomy revenue pictures for the rest of the year, he had reached that point.

House Minority Leader Sam Smith (R., Jefferson) said he had yet to see Rendell propose any real cuts in spending.

"He's not looking at a tax increase as a last resort, he's looking at it to continue the excessive spending," said Smith.

Political analyst Chris Borick said that Rendell's gambit may prove an effective negotiating tool with Senate Republicans, but that it also will touch off an eardrum-bursting level of outrage from the public.

"Of all the tax increases, income tax is the most disliked, the one people find the most offensive," said Borick, a professor at Muhlenberg College. "But it forces the Republicans to come up with a legitimate revenue alternative."

Matthew Brouillette, president of the conservative Commonwealth Foundation, said that Rendell was employing a "failed tax-and-spend" strategy and that higher income taxes could mean the loss of as many as 24,000 jobs as residents have less to spend and businesses depart for lower-tax states.

"Today, Gov. Rendell revealed that he cares more about growing government than ensuring Pennsylvanians have good-paying jobs," said Brouillette. "As every respected economist knows, a recession is the worst time to increase taxes. Doing so now would add thousands more Pennsylvanians to the unemployed ranks."

Sharon Ward, director of the Pennsylvania Budget and Policy Center, said additional revenue was the only option to prevent further cuts that would spell disaster for schools and health care, among other programs.

"You've got have a balanced solution to the budget, and revenue is part of that," said Ward, whose liberal-leaning organization supports most Rendell initiatives.

She said that without a statewide increase, local property taxes would go up and people would pay a lot more for services. Ward, who estimated the $5 a week increase for a family making $50,000, said the tax increase would not apply to nonworking seniors - because neither Social Security nor pensions is taxed by the state - or to families of four making less than $34,000.

Rendell said he still favored hiking the tax on tobacco and starting to tax natural-gas extraction as a way to raise an estimated $200 million, along with using $625 million from the state's Rainy Day Fund and $2 billion in federal stimulus funds. The Senate Republicans have said they are opposed to the limited tax and Rainy Day Fund use proposals as well.

In 2003, Rendell's first year as governor, his administration persuaded the legislature to raise the income tax from 2.80 percent to 3.07 percent to fill a budget hole.

December 2008: Gov. Rendell tells reporters the state is facing a projected $1.6 billion shortfall, but insists that he believes his administration can plug that gap at least for the current fiscal year, which ends June 30, without any increases in broad-based taxes - such as the sales and income taxes - and without any further cuts to state programs. But he does not rule out tax increases in the fiscal 2009-10 budget.

January 2009: Rendell tells reporters he will not propose any increases in the state's sales or personal-income taxes in the 2009-10 budget, despite a worsening financial outlook for Pennsylvania. He promises to hold the line on such broad-based taxes, but says his administration is planning painful spending cuts and likely government layoffs.

February 2009: Rendell presents his 2009-10 budget and touts no increase in sales or income taxes: "I want to start by telling you one thing this budget doesn't do," Rendell says. "It does not require a tax increase on hardworking Pennsylvania families. It does not require a personal-income tax, state sales tax, or any business-tax increase."

April 2009: As revenue collections continue to fall well below projections – even after April tax returns - and the state's projected deficit balloons, a few Democrats in the legislature begin privately floating the idea of an income-tax hike. Rendell and other members of his administration begin saying they don't want one, but cannot rule it out.

May 2009: Even as House Democratic leaders begin to publicly push the idea of an income-tax increase, Rendell says he views it as a "last resort." Still, when asked by the Pittsburgh Post-Gazette whether an income-tax hike is possible, Rendell responds: "Right now, I don't think so."

Early June 2009: Rendell tells reporters he would favor a temporary increase in the income tax, of up to three years. But he refuses to give any details on how much it would rise or how much money he would want to raise through it.

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