Federal Tax Hikes put Squeeze on Consumer Spending in Pennsylvania

By Melissa Daniels | PA Independent

HARRISBURG — Pennsylvania government kicked off budget hearings this week, setting up a three-week process of number crunching and policy showdowns meant to help lawmakers shape the spending plan for the coming year.

The talks commence against the economic backdrop of federal decisions that are putting a pinch on state revenues.

In January, the federal payroll tax paid by wage earners went from 4.2 percent to 6.2 percent. A 2-percent exemption previously in place was allowed to expire as part of the so-called “fiscal cliff” negotiations.

Analysts in Pennsylvania say the hike has already affected the state’s overall economy, including tax revenues.

Secretary of Revenue Dan Meuser said the expiration of the payroll tax exemption has hurt consumer spending, overall projections and consumer confidence.

“We certainly think it had a fair amount to do with our January collections, as did just the whole issue of approaching the fiscal cliff,” Meuser said.

The latest Department of Revenue figures put year-to-date sales tax collections at $5.3 billion, which is 3.4 percent less than anticipated.

Matthew Knittel, executive director of the Independent Fiscal Office, said the payroll tax hike will reduce Pennsylvanians’ disposable income by about $5 billion this year.

Combined with other federal tax increases, Pennsylvanians’ disposable income will take about a $7.7 billion hit.

So they’re shopping and eating out less.

“It does appear discretionary items, such as restaurant sales, are the hardest hit,” Knittel said.

The last round of debt ceiling talks a year-and-a-half ago caused consumer confidence to fall, Knittel said. The ongoing debt and budget wrangling could trigger another slow-down.

“It’s unclear what form that will take, but it will definitely filter down to Pennsylvania,” Knittel said.

Last fall, projected “fiscal cliff” cuts in Pennsylvania were estimated at about $300 million, Office of the Budget spokesman Jay Pagni said, spanning areas from public welfare to education to economic development.

But Washington lawmakers put off those cuts until March. Pagni estimates the effect, right now, could be about $241 million if the automatic cuts known as sequestration go into effect.

One example: An $8.5 million reduction to workforce development initiatives in Pennsylvania could affect as many as 1,300 people who benefit from those programs.

State agencies were told any loss of federal dollars wouldn’t be replaced by the state, and that’s still the case, Pagni said.

“The General Assembly, as well as the administration, are keenly aware of the impact that federal cuts, changes in law and really the federal economic outlook as a whole plays in the development of the budget,” Pagni said.

Gov. Tom Corbett’s proposed spending plan for 2013-2014 is $28.4 billion.

Despite the reality of what the Washington impasse can do to the state’s economy, there are encouraging signs of recovery. Pennsylvania residents are paying down debt, and the housing market continues to recover, Knittel said.

“Combined, these factors could bolster consumer spending and mitigate the impact of the federal tax increases later this year,” he said.

Knittel also said Pennsylvania’s job market should improve at “a moderate rate” over the next two years. The unemployment rate could reach pre-recession levels, or about 7.2 percent, sometime in 2014.

However, that’s still “considerably higher than historical levels,” Knittel said, which might be closer to 5.5 percent.

Contact Melissa Daniels at melissa@paindependent.com.