Wolf asks lawmakers to approve billions in higher taxes for boost to school aid, tax overhaul

In an ambitious first budget plan, Gov. Tom Wolf on Tuesday proposed more than $4 billion in higher taxes on income, sales and natural gas drilling to support new spending on schools and to cut property taxes as part of an effort to overhaul the way public education is funded.

Wolf, a Democrat, is also asking the Republican-controlled Legislature to cut corporate taxes by hundreds of millions of dollars, borrow more than $4 billion to refinance pension debt and inject new money into business loans, clean energy subsidies and water and sewer system projects.

Saddled with a budget hole of more than $2 billion and a $1.6 billion increase in mandatory costs in the budget year that starts July 1, Wolf said his plans would put the state on sound financial footing after three credit downgrades last year.

If passed, it would represent the biggest revamp in state taxation in decades.

He said his budget would make the tax system fairer, improve public schools hit hard by recent cutbacks in state aid and foster a more vigorous business environment that produces more good-paying jobs. The total tax burden on average middle-class homeowners would drop by 13 percent under his plan, Wolf said.

"It includes Democratic ideas, Republican ideas and clearly ideas that exist beyond party lines," Wolf told a joint session of the Legislature. "It is rooted in the values of fairness, inclusion and common sense. It is a balanced budget, and it eliminates our $2.3 billion deficit. But above all, it recognizes that Pennsylvania will not improve until we rebuild the middle class."

All told, Wolf's spending plan would increase overall state spending through the state's main bank account by about 3 percent to $29.9 billion from the current year's approved budget. Counting $1.75 billion in pension obligation payments to the Public School Employees Retirement System and $2.1 billion in school property tax relief receipts, the increase is about 16 percent to $33.7 billion.

The biggest increase in tax revenues would come from a proposed hike in the personal income tax — the first in 11 years — to generate $2.3 billion next year.

The flat tax would increase from 3.07 percent to 3.7 percent and would be expanded to cover lottery winnings. The special poverty provision would be increased to allow more households to pay no income tax.

Wolf's proposed increase in the sales tax would be the first in nearly 50 years, lifting the rate from 6 percent to 6.6 percent and eliminating dozens of exemptions from the tax except for purchases of food, clothing and medicine. The changes would generate $1.6 billion.

He would also increase taxes on natural gas drilling, banks and cigarettes and other tobacco products.

The centerpiece of Wolf's plan is a $3.8 billion property-tax initiative that he said would mean an average reduction of more than 50 percent in homeowner and farmstead property taxes in the 2016-17 school year.

Communities with higher tax and poverty rates would receive proportionately more relief, and an estimated 270,000 senior households would see their school property taxes eliminated, according to the administration.

For education, Wolf is seeking nearly $1 billion in increases that include $400 million for public school operations, $100 million for special education and $120 million for early-childhood education. The plan also calls for increases of $160 million for higher education and $160 million in savings from proposed changes in payments to charter schools.

Spending through the Department of Human Services, which administers health care and social services programs, would rise by nearly $700 million.

To help businesses, Wolf is proposing to cut the 9.99 percent corporate net income by half, to 4.99 percent, over three years while removing loopholes that the administration says allows some profits to go untaxed. To help workers, Wolf advocates increasing the minimum wage to $10.10 and tying it to the inflation rate to maintain its buying power.

To rein in the taxpayers' growing share of state employee and teacher pensions, a priority for Republicans who control both houses of the Legislature, Wolf proposes a $3 billion bond issue to partly refinance the unfunded liability of the state employees' pension fund.

He is counting on help from his proposed modernization of the Pennsylvania Liquor Control Board, which oversees the state-run wine and liquor stores, to repay it.

Starting in 2016, $80 million in new Liquor Control Board profits would be allocated to school districts to help reduce payments for teachers' pensions. Starting in 2017, the board would kick in $185 million a year to cover debt service on the teachers' pension bond.

Wolf also proposes diverting $1.7 billion a year from the state's main bank account into a special reserve for pension payments. That shields the money from being allocated to other purposes, but also reduces the bottom line of the state budget, the administration said.

Wolf also is proposing borrowing $500 million through an existing state program for water and sewer infrastructure and an additional $675 million to recapitalize existing business loan programs and bolster subsidies for clean energy programs. The business loan and energy borrowing would be repaid by natural gas drilling tax receipts.