As budget impasse starts new year, business community braces for consequences

Of all the things Pennsylvania's divided government failed to fix in 2015 - the budget, pensions, schools, liquor sales - the one that leaves the business community feeling extra bemused is taxes.

So many proposals: A natural gas extraction tax! An end to local property taxes, balanced by higher income taxes or broader sales taxes! Liquor-sale reform, to fund the cash-starved pensions! Special rates for business buildings!

So far, it's none of the above. Gov. Wolf's selective vetoes of the budget, his demands for more school funds, Republican insistence that new spending be paid for, and the lack of consensus on who should pay have business guessing.

Kenneth Levine and Christine Hanhausen, tax lawyers in the Philadelphia office of Reed Smith, waylaid me last week to talk about what their clients are bracing for as Pennsylvania government grinds ways against means.

"Everything is still in limbo," Hanhausen told me. "Gov. Wolf still wants an increase in spending. The General Assembly will have to do something to generate that revenue."

A few weeks back, when the governor and Republican leaders were mulling a compromise budget, sales-tax proposals exploded across Harrisburg, alarming special interests and mobilizing lobbyists.

"For example, on digital downloads and New Economy stuff," Levine recalled, "Wolf proposed taxes on 45 new services. They prepared pages and pages of legislation. And now it's anybody's guess what of that could be in the plan."

An alternative - higher personal income taxes - "would affect sole proprietorships and pass-through entities who are not paying the corporate income tax," Levine noted. A squeeze on small businesses.

The gas tax has gone away with the gas drillers and cheap energy. What happened to school, police, and municipal pension-funding reform? And State Store reorganization, which was supposed to bail out the state pension plan?

Those were "things that some of the legislature tied to the budget." As soon as it was clear pension reform didn't have the votes, those proposals went down, too, Levine noted.

"So now Wolf's agenda items - like education spending - are linked to pension and liquor reform," Hanhausen said. "The Republicans can hold out on tax reform. There is no tax bill circulating. That makes it hard for anyone to commit."

Pensions here are badly enough funded that Moody's and Standard & Poor's rate Pennsylvania among the states most likely to default on their bonds - only New Jersey and Illinois are rated worse. So Pennsylvania taxpayers pay millions in extra financing costs.

Does business care? Does poor fiscal management make anyone less willing to locate or employ people here?

"I haven't heard about clients talking about the pension situation in Pennsylvania as a dragging force in their decision-making," Levine said.

He does hear from bankers worried that Wolf may boost the state's bank-equity tax, which was cut under his predecessor, Tom Corbett, but also broadened to apply to more out-of-state banks.

"There was a feeling that they made a deal," Hanhausen said. "Gov. Wolf's proposal would be going back on that agreement."

Levine said Wolf's barbed comments blaming Republican intransigence seem to have cleared the air and moved legislators to negotiate again: "If they can get past the bickering, there might be a road to a final resolution."

But the costs - the tax proposals - are still being debated "behind closed doors," Hanhausen added.

"The public hasn't seen a tax bill that will accompany the appropriations." People want to know.

JoeD@phillynews.com

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