Rendell urges income tax hike

Gov. Ed Rendell's call for a "temporary" three-year increase in the state income-tax rate has shifted Harrisburg's already contentious budget battle onto new and even rockier terrain.

In a four-stop, campaign-style swing across the state yesterday, Mr. Rendell unveiled a plan for a 0.5 percentage point increase in the income tax -- putting the tax at 3.57 percent -- while arguing that rival Republican budget plans would lead to damaging cuts in economic development and education.

"I am sad to tell you today we simply can't cut our way out of this deficit," the governor said, as he stood before the still unfinished headquarters of Westinghouse Electric Co. in Cranberry.

Back at the Capitol, many legislators viewed a higher income tax as political poison, even though they won't have to face voters until next year.

"An income tax increase is just wrong," said Rep. Mike Turzai, R-Bradford Woods. "This guy needs a reality check. Families are facing difficult situations. They can't afford more taxes. The governor just wants to spend more money on his bloated programs."

Legislators said that while a deal on a 2009-10 budget is probably impossible by the June 30 deadline, this new element makes things even more difficult.

Some GOP senators said that while they oppose the higher income tax, they weren't really surprised at the governor's action. They said he seemed to have a secret desire to raise the income tax, even while calling the idea "a last resort."

"We've been waiting for the governor to come out of the closet on this tax increase," said Senate Pro Tem Joe Scarnati of Jefferson, who is also the lieutenant governor. "This isn't the time to be taking more money out of people's pockets. Working families are struggling."

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Majority Leader Dominic Pileggi, R-Delaware, didn't think any Senate Republicans would vote for an income tax increase, which would doom it. The GOP controls the Senate 30-20.

Likewise, House GOP leader Sam Smith of Punxsutawney said he doubted any of the 99 House Republicans would support it and predicted that "25 to 30" of the 104 House Democrats would oppose a higher income tax.

Rep. Daryl Metcalfe, R-Cranberry, a frequent critic of Mr. Rendell, was upset that the governor went to Cranberry to call for the higher tax. It was "too coincidental," Mr. Metcalfe said.

"He showed up like three miles from my home to announce that he's going to tax all of the citizens that live in my district," he fumed.

Matthew Brouillette, president of a conservative group called the Commonwealth Foundation, said a tax increase "is precisely the wrong prescription for our economic ills. Mr. Rendell's insatiable appetite for spending is causing this."

Kevin Shivers of the National Federation of Independent Business said a higher income tax would hurt many small businesses, which pay their state taxes under the PIT rate, not the corporate tax rate. He said it could cause firms to shave as many as 24,000 jobs.

Two House Democratic leaders did support a 3.57 percent income tax rate.

"The national economy continues to decrease our revenues," said House Majority Leader Todd Eachus of Luzerne, noting that the budget deficit has jumped to $3.2 billion, versus $2.3 billion in February, when Mr. Rendell proposed his $29 billion budget.

"I will support a higher income tax because of our eroding fiscal situation," he said. "But if we need more taxes, we also need more spending cuts."

Mr. Rendell will meet today with cabinet members to outline $500 million in additional cuts, lowering his budget plan to about $28.5 billion.

Rep. Dwight Evans, D-Philadelphia, said he supports Mr. Rendell's call for additional spending for important areas like education, economic development and energy. A tax increase "will close the budget gap," he said.

Rep. Nick Kotik, D-Robinson, a member of the "Blue Dog Democrats," who are more socially and fiscally conservative than many House Democrats, declined to say if he'll support a higher tax.

The higher PIT rate would give the state an additional $1.5 billion a year for the three years. Mr. Rendell wants to combine that with $1 billion in previously announced spending cuts, plus tapping into the state's Rainy Day reserve fund and imposing taxes on natural gas and tobacco in order to erase the state's projected $3.2 billion deficit.

In addition to the higher PIT, Mr. Rendell yesterday also called for a three-year suspension of the scheduled phaseout of the state's Capital Stock and Franchise Tax, a levy on business assets. Its current rate is 1.89 mills. The administration would bump it back to its 2008 rate of 2.89 mills and keep it at that level for the next three years. Doing so would give the state another $303 million for 2009-10.

Republicans are calling for much more severe spending cuts than are contained in Mr. Rendell's $29 billion plan. The Senate GOP has proposed an austere $27.3 billion budget for the fiscal year that starts July 1.

Yesterday's tax announcement contained some stagecraft that was calculated to highlight some of the differences between those two budget blueprints. Mr. Rendell appeared at the new Cranberry headquarters of the Westinghouse Electric Co. with its CEO, Aris Candris. The governor said the firm's decision to remain in Pennsylvania was a result of the state economic development inducements that would be cut under the Republican plan.

Joining them were three local school district administrators, Lawrence Korchnak, superintendent of Baldwin-Whitehall, David Wytiaz, acting superintendent of the Aliquippa School District and Archie D. Perrin, the Wilkinsburg superintendent.

Mr. Rendell argued that while GOP-supported cuts might reduce the state's revenue needs, it would be at the expense to cuts in school aid that would force property tax increases at the local level.

"That's the coward's way out," Mr. Rendell contended.

In subsequent stops yesterday in Erie, Scranton and Montgomery County, Mr. Rendell was again joined by school administrators and business executives whose firms had benefited from state economic development efforts.

Mr. Rendell said his income tax increase would cost a family earning $50,000 roughly $5 a week extra. He noted that the burden on taxpayers who itemize their deductions for federal tax purposes would be eased somewhat by the fact that state tax is deductible.

He said the third year of extra revenue was designed to help the state wean itself from the scheduled loss of federal stimulus funds after two years.

The last time the state income tax was increased was in 2003, the first year of the Rendell administration. Faced with an inherited deficit and a soft economy, the governor and the Legislature battled months past the July 1 budget deadline before enacting a spending plan that increased the personal income tax rate from 2.8 percent to its current level.

The governor said he had previewed his new proposals yesterday morning in calls to Senate GOP leaders.

"There are compromises to be made -- clearly," he told reporters after his remarks. "But if you look at the numbers, you simply can't have a balanced budget without [new] revenue."

James O'Toole can be reached at or 412-263-1562. Tom Barnes can be reached at or 717-787-4254. First Published June 17, 2009 4:00 AM


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