Tax-Hike Plan Fuels Pa. Budget Standoff

California Gov. Arnold Schwarzenegger (R) this week put his signature on a controversial plan to close the Golden State's staggering $24 billion budget shortfall by slashing basic services, including K-12 education and health care for the poor.

But in a handful of other state capitals, like this one two hours west of Philadelphia, deeply unpopular fiscal choices still loom for lawmakers who have failed to pass long-overdue budgets - with the pressure to act mounting by the day.

Hundreds of angry Pennsylvania state workers converged on the Capitol here Tuesday (July 28) to demand that Gov. Ed Rendell (D) and the politically divided General Assembly end a month-long impasse that has held up the state budget and cut off paychecks for nearly 78,000 state employees. That includes 33,000 who were due to receive paychecks today (July 31) but instead will receive I.O.U.'s.

More than a thousand state workers last week sought emergency help from a food bank here to tide them over until a budget passes, and the U.S. Department of Labor is investigating whether the state is illegally withholding employees' pay. Even if an interim budget proposed by Rendell on Wednesday (July 29) becomes law, thousands of state workers could face layoffs under a spending plan pushed by Republicans in the state Senate and now being negotiated by a six-member, bipartisan legislative panel.

Meanwhile, Rendell's spokesman of seven years announced his resignation, citing the stress of "spending all day, every day for the last 90 days, explaining to people what we're going to take away from them," according to the (Allentown, Pa.) Morning Call . Rendell himself, twice elected to the governor's mansion by strong majorities, has seen his approval ratings plunge to record lows amid the stalemate, according to the latest Quinnipiac University poll .

Pennsylvania is one of four states - along with Arizona, Connecticut and North Carolina - that had not reached final budget accords through Thursday (July 30). As negotiations in these states have grown more intense, lawmakers' proposals to deal with huge shortfalls have become increasingly extreme: Arizona legislators this week said they would consider selling Capitol buildings to raise money; Connecticut lawmakers have sought to eliminate the state's Department of Motor Vehicles.

Here in the Keystone State, the political impasse hinges on a familiar and deeply partisan debate that has been at the center of state budget negotiations around the country this year: whether to raise broad-based taxes - such as the personal income and sales taxes - to generate revenue, or make deep cuts to education and other core state responsibilities during a historic recession.

Saying "there's nothing left to cut," Rendell is pushing a three-year, 16-percent hike in the personal income tax to help the state close a $3.2 billion budget shortfall and boost K-12 education funding by $418 million. Republicans who control the state Senate have flatly rejected any broad-based tax hikes and say that increasing funding for education is irresponsible given the state's perilous fiscal condition. They favor making sweeping cuts and using federal stimulus funds to supplant state money in the K-12 education budget, a move Rendell says conflicts with the federal law.

"We think we can balance the budget in a sustainable way without new taxes or increased rates of taxation," Senate Majority Leader Dominic Pileggi (R) said in an interview with Stateline.org .

At least seven revenue-strapped states already have gone the route of higher income taxes this year. Delaware, Hawaii, New Jersey, New York, Oregon and Wisconsin raised taxes on the wealthy, while California raised income taxes by 0.25 percent on all income brackets. The income tax hikes in Hawaii, New Jersey and New York are temporary, while Oregon's still could be challenged through a ballot initiative.

In some states, Republicans have veered from their traditional anti-tax positions to seek more revenue for their strapped states. Schwarzenegger, for instance, signed off on California's income tax hike, and both Arizona Gov. Jan Brewer (R) and Connecticut Gov. M. Jodi Rell (R) are backing higher taxes to help end their current budget impasses. In Nevada, Senate Republicans joined with majority Democrats to override a veto by Republican Gov. Jim Gibbons and enact sales and other tax increases.

In other states, it is Democrats who have refused to go along with higher taxes or agreed to make deep cuts instead. North Carolina Gov. Beverly Perdue (D) recently rejected a proposed income tax hike for all tax brackets, saying she would support a hike on income taxes only for the wealthy; in California, majority Democrats this month sent Schwarzenegger a package of steep cuts.

In Pennsylvania, however, where state lawmakers have failed to meet their budget deadline for seven consecutive years under Rendell, there are few indications that Democrats or Republicans will move away from their deeply entrenched positions anytime soon.

On Wednesday, the six state lawmakers tasked with finding a compromise between the Democratic and Republican spending plans sat face-to-face around a table in a committee room in the Capitol and quickly descended into arguments over who would chair the group and when its next meeting would be. The overflow crowd at the hearing room soon filtered out, and Rendell called the lawmakers' display "appalling."

On Wednesday, the six state lawmakers tasked with finding a compromise between the Democratic and Republican spending plans sat face-to-face around a table in a committee room in the Capitol and quickly descended into arguments over who would chair the group and when its next meeting would be. The overflow crowd at the hearing room soon filtered out, and Rendell called the lawmakers' display "appalling."

In an interview with Stateline.org later in his Capitol office, Rendell lamented the acrimonious politics, saying "Harrisburg is a place where, unfortunately, partisanship has taken hold at a huge level."

But the governor took his own shots at Senate Republicans, whom he accused of "basically defrauding people" by opposing a state budget with no major tax hikes. If the General Assembly doesn't raise taxes, Rendell said, local school districts will be forced to raise property taxes to compensate later.

"We don't have to sign a tax increase, but (under the Republican plan) we are causing a tax increase as sure as we are putting up our hands and voting for it. And that's the fraud of it," Rendell said.

Until a compromise can be struck, many state workers and others affected by Pennsylvania's budget impasse are pointing their fingers at Democrats and Republicans alike - including Rendell, who normally enjoys strong support from state workers' unions.

Rachel Williams, a 33-year-old mother of two and counselor at a state prison outside Philadelphia, stood in the sweltering heat outside the Capitol on Tuesday with a sign that said, "Let me see Rendell come work in a state prison for free." Williams said the budget crisis has left her unable to pay her bills and buy supplies for her children ahead of the new school year.

"This is the time that we're supposed to be preparing them to go back to school, and we can't even do that," Williams said. "The money that is saved we have to use towards our bills."