Rendell budget relies on economic growth

The governor has already raised the Pennsylvania income tax 10 percent.

HARRISBURG, Pa. (AP) — With the Pennsylvania economy in a tailspin, Gov. Ed Rendell is predicting his toughest budget season since his first year in office.

However, he’s still counting on economic growth in the coming year, though at a slower pace than the previous three years, and isn’t ready to pull any austerity measures out of his toolbox.

Budget-makers and economists say it’s too early to know whether Pennsylvania’s financial situation will turn dire.

A $1.5 billion shortfall is not out of the question in the year starting July 1, Senate Republican budget analysts say. But administration officials counter that everything would have to go wrong for such a scenario to occur.

In Pennsylvania, which has a budget this year of $27.2 billion, the latest revenue figures, from Dec. 31, show the state with a $176 million surplus.

The governor has dismissed the idea of proposing a tax increase when he delivers a 2008-09 spending plan to the Legislature on Feb. 5, but said spending on initiatives such as public schools grants will have to reflect a more modest outlook.

“We’re still going to have growth next year, the forecast is, but it’s going to be much slower,” Rendell said, citing a forecast by economic firm Global Insight Inc.

At the same time, costs will be rising, in particular, the tab to provide medical care for the state’s growing elderly population, he said.

Pension costs are also on the mind of budget-makers, with the state’s expected contribution of about $675 million this year projected to more than double in five years. More people are expected to join Medicaid rolls, which provides health care to welfare recipients and other low-income people. And the state’s prison population is growing by more than 1,000 a year at an annual cost of about $34,000 per inmate.

Rendell’s budget secretary, Mike Masch, said most of the nation’s economic fundamentals look pretty good despite the slowing trend, and he called any prediction of a $1.5 billion shortfall a worst-case scenario.

Rendell’s arrival in office in 2003 came after the state began feeling the impact of the bursting tech bubble and the terrorist attacks of Sept. 11, 2001. Tourism tanked, Internet startups fizzled, companies slashed jobs and tax collections stagnated.

To balance the budget, Rendell’s predecessor, Republican Mark Schweiker, had already raised more than $1.7 billion by tripling the tax rate on cigarette sales, draining much of the state’s budget reserves, increasing landfill fees and borrowing from a state industrial development financing agency.

Rendell raised taxes by $1 billion through a 10 percent personal income tax increase, a one-third bump in cigarette taxes and new taxes on telephone usage. In the meantime, both governors found places to cut spending, including libraries and environmental programs.

The latest figures from December show that overall hiring in Pennsylvania slowed in 2007, inflation picked up and revenue collection softened.

Collection of corporate net income tax revenue is almost 10 percent behind and sales tax revenue is up by just a half percent. Meanwhile, inflation in the northeastern states this past year was pegged at 3.8 percent.

Still, personal income tax revenue, which the state government leans on more than any other single tax, is up more than 5 percent. And lottery revenue is up 4 percent.

For now, economists say Pennsylvania’s financial situation looks stable, and the worst effects of the housing bubble, construction slowdown and automobile industry upheaval are not being felt in the Keystone State.