Can Keystone Saves bill rescue Pa. from fiscal cliff?

Financial security in retirement is important for all Pennsylvania taxpayers, and especially for Pennsylvanians aged 65 and older. But what happens when residents do not have enough money for retirement? 

Such is the dilemma facing Pennsylvania as the state seeks to deal with a looming fiscal crisis – “a fiscal cliff,” Pennsylvania State Treasurer Stacy Garrity called it – created by insufficient retirement savings. 

An online seminar addressing the impact of insufficient retirement savings on Pennsylvania’s fiscal health was hosted recently by Garrity and John Scott, project director for retirement savings for The Pew Charitable Trusts. Information in the online seminar was based on analysis prepared for the Pew Charitable Trusts by Econsult Solutions, Inc. (ESI), an economic consulting firm. 

ESI provided a 2018 analysis of economic and fiscal impact of insufficient retirement savings in Pennsylvania from 2015 to 2030 for the Pennsylvania Treasury Retirement Savings Task Force. Subsequent analysis of county-level impacts was undertaken by ESI for Pew in 2020. ESI’s report updates findings of statewide impacts of insufficient savings to cover the period from 2020 to 2035. 

According to ESI’s findings, Pennsylvania’s elderly population is expected to grow by more than 550,000 in the next 15 years, increasing from 19% to 23% of PA’s population. The share of Pennsylvania households headed by an elderly resident is expected to increase from 30% in 2020 to 36% by 2035. Pennsylvania’s dependency ratio is also projected to increase from 43 households aged 65 and older for every 100 working-age households in 2020 to 56 households aged 65 and older in 2035. 

As working age households are major drivers of tax base, the change in ratio creates fiscal pressure. The reason being there will be fewer taxpaying households age 20-64 to support an elderly population that is projected to grow from 2.49 million in 2020 to 3.04 million in 2035. 

“There is a growing share of older people, older households in the Commonwealth, but the tax base that’s supporting a lot of the programs that support the elderly has not grown as quickly,” Scott said. “So that’s going to be placing more stress on taxpayers in Pennsylvania.” 

How much stress was revealed by Garrity, who noted that two million Pennsylvanians, approximately 44% of the state’s private-sector workforce, cannot save for retirement at work. The resultant cost to taxpayers, she said, is more than $1 billion annually. 

“I really want to emphasize this point,” Garrity said. “Pennsylvania taxpayers are footing a bill of more than $1 billion per year to account for unprepared retirees. That includes costs for social services and lost revenue.” 

Garrity added that research conducted by the Independent Fiscal Office confirms that Pennsylvania will reach a fiscal cliff by Fiscal Year 2025-26. 

“Common sense says we should prepare for it now,” said Garrity. “And here’s another fiscal challenge for Pennsylvania: The research we’re discussing shows the retirement savings crisis will cost Pennsylvania a total of $17.8 billion through 2035. So that’s the scope of the problem.” 

The problem having been defined, what’s the solution? Garrity and Scott said one way to address the retirement savings crisis is to implement a simple, business-friendly plan to help working Pennsylvanians save for retirement. Not a government handout, Garrity emphasized, but a program that makes it easy for people to save for retirement. 

“The goal,” she said, “is to make it easy for people to save their own money.” 

In December 2021, Garrity and Rep. Tracy Pennycuick (R-Berks/Montgomery) and then-Rep. Michael Driscoll (D-Philadelphia) announced the introduction of “Keystone Saves”, a retirement-savings program for Pennsylvanians who do not have access to retirement savings through their employer. 

As is the case with automated savings programs across the country, Keystone Saves would enroll employees automatically in a voluntary individual savings account (IRA) to which they can use direct deposit to make regular contributions. 

Estimated to help Pennsylvania reduce state spending by close to $1 billion annually, Keystone Saves is supported by The Pew Charitable Trusts, the Pennsylvania Institute of CPAs, the American Association of Retired Persons (AARP), the United Way of Pennsylvania, the Pennsylvania Health Care Association, the Pennsylvania Association of Sustainable Agriculture, and members of the state’s General Assembly. 

As many employers are unable to provide retirement savings due to administrative capacity and high startup costs, state automated savings programs are seen as a practical solution to provide savings opportunities to workers who lack them. 

Scott noted that 12 states in the U.S. have enacted legislation creating such programs, and programs in six states are operational. Participants in state-sponsored automated savings programs have an average annual savings of $1,500 to $2,000. 

“These programs are showing this can be done,” said Scott. “This is a very feasible and practical solution.” 

The Keystone Saves bill has received bipartisan support in the Pennsylvanian legislature but has yet to pass. As Gov. Josh Shapiro is a Democrat who stresses bipartisanship, the opportunity exists to work with Garrity, a Republican, to guide the bill through the legislature. 

“The time to solve this problem,” Garrity stated, “is now.”

Shapiro: $2,500 tax credit for new teachers, nurses, police officers

Last week, Gov. Josh Shapiro announced he will propose a three-year tax incentive of up to $2,500 a year for newly certified teachers, nurses and police officers in his upcoming Budget Address.

“Gov. Shapiro understands the critical workforce shortage the commonwealth faces and is committed to taking action to support workers and businesses,” a release said. Building an economy that works for everyone, ensuring that every Pennsylvania child receives a quality education, and making communities across the commonwealth safer are the top priorities that will be reflected in his March 7 address.

“I’ll be proposing a new $2,500 personal income tax credit to hire new cops, teachers and new nurses every year for at least the next three years,” Shapiro told KYW Newsradio and KDKA. “It’s going to help us put more teachers in the classroom, more nurses in the hospital, and more police officers and troopers in our communities.”

Shapiro previously shared that his upcoming budget proposal will include a 50% increase for the Manufacturing PA Innovation Program and a 25% increase in funding for computer science and STEM education through Pennsylvania’s PA Smart Program.

Paula Wolf is a freelance writer

Pa. closes 2022 with strong December revenue, budget surplus

Pennsylvania collected $4 billion in General Fund Revenue in December 2022, which was $319.9 million more than anticipated, Gov. Tom Wolf and the Department of Revenue announced Tuesday. 

Collections for the fiscal year-to-date General Fund total $19.7 billion, $503.1 million above the estimate. 

Wolf said in a statement that Pennsylvania is in a strong fiscal position heading into 2023. “Year to date, we are 2.6 percent above our estimated revenue collections, which means we have $503.1 million in the bank above and beyond what we expected. That’s money that can be used to better support the people of Pennsylvania in the coming year, and I look forward to seeing what the new administration and the General Assembly will accomplish on behalf of Pennsylvanians.” 

Pennsylvania was operating with a $2-3 billion budget deficit when Wolf took office eight years ago, and the Rainy Day Fund was just $231,800. Pennsylvania ended the most recent fiscal year with $5.537 billion in the General Fund, and an investment of more than $5 billion in the Rainy Day Fund. 

Revenue Secretary Dan Hassell noted it was only a couple years ago that Pennsylvania was dealing with a $3.2 billion shortfall at the end of the 2019-20 fiscal year. “Fortunately, we are facing a much different situation today — and that is very much a testament to the strong fiscal management of Gov. Wolf. Pennsylvanians should be encouraged that we are on such solid financial footing as the Governor closes out his term.” 

Wolf said the goal of his administration has been to build a strong foundation for Pennsylvania so that government can invest in the things that improves the lives of Pennsylvanians, including an historic $3.7 billion investment in education. 

“The strong fiscal foundation that my administration has built will empower the next administration and the General Assembly to continue making life-changing investments in the people of Pennsylvania in the years to come.” 

Most of the surplus in December is attributable to personal income tax revenue that was deposited on the first day of the month, rather than on the last day of November, as initially expected. Sales tax receipts totaled $1.2 billion for December, which was $2.3 million below estimate. Year-to-date sales tax collections total $7.1 billion, $134.8 million more than anticipated. 

Personal income tax (PIT) revenue in December was $1.4 billion, $204.9 million above estimate. This brings year-to-date PIT collections to $7.5 billion, which is $27.1 million above estimate. 

December corporation tax revenue of $1 billion was $116.3 million above estimate. Year-to-date corporation tax collections total $2.7 billion, $328.7 million above estimate. 

Inheritance tax revenue for the month was $138.0 million, $6.1 million above estimate, bringing the year-to-date total to $725.7 million, $16.3 million below estimate. Realty transfer tax revenue was $55.8 million for December, $23.3 million below estimate, bringing the fiscal-year total to $351.9 million, $26.7 million less than anticipated. 

Other General Fund tax revenue, including cigarette, malt beverage, liquor, and gaming taxes, totaled $174.2 million for the month, $5.1 million below estimate and bringing the year-to-date total to $939.6 million, $32.5 million below estimate. Non-tax revenue totaled $55.5 million for the month, $23.3 million above estimate, bringing the year-to-date total to $346.7 million, $88 million, above estimate. 

In addition to the General Fund collections, the Motor License Fund received $203.0 million for the month, $8.2 million above estimate. Fiscal year-to-date collections for the fund – which include gas and diesel taxes, as well as other license, fine and fee revenues – total $1.4 billion, $25 million above estimate.

State revenue in October exceeds expectations by 6.4%

Last month, Pennsylvania collected $3.1 billion in general fund revenue, 6.4% more than anticipated, the Department of Revenue reported.

Fiscal year-to-date general fund collections are $12.9 billion, or 3.1% above estimate.

Among the highlights for October:

· Sales tax receipts were $1.3 billion, or $94.2 million above estimate. Year-to-date sales tax collections total $4.8 billion, or 2.9 percent more than anticipated.

· Personal income tax revenue was $1.3 billion, or $68.7 million above estimate. Year-to-date collections total $5.0 billion, which is $0.5 million more than expected.

· Corporation tax revenue of $183.4 million was $17.4 million above estimate. Year-to-date collections come to $1.5 billion, or 16.1 percent more than anticipated.

· Inheritance tax revenue was $123.3 million, or $2.1 million below estimate. The year-to-date total of $478.4 million is 2.1 percent under estimate.

· Realty transfer tax revenue reached $64.3 million, $0.7 million below estimate, bringing the fiscal-year total to $250 million. That cumulative amount is 5.2 percent more than anticipated.

Other general fund tax revenue, including cigarette, malt beverage, liquor and gaming taxes, generated $156.8 million for the month, $2.1 million below estimate. The year-to-date total of $598.2 million is 1.7 percent less than anticipated.

Non-tax revenue totaled $45.4 million for October, $13.5 million above estimate, bringing the year-to-date total to $155.2 million, which is 35.9 percent more than expected.

In addition to general fund collections, the Motor License Fund received $217.6 million in October. Fiscal year-to-date collections for the fund – which include gas and diesel taxes and other license, fine and fee revenues – are $951.1 million, 0.9 percent above estimate.

Paula Wolf is a freelance writer

Thinking of selling your business? Here’s why now might be the best time.

Business owners looking to sell or transfer their business to a family member may have some tax decisions to make if the Biden administration gets its tax code revisions through Congress this year.

Don Petrille, senior lawyer with High Swartz, Doylestown, said the 2017 Tax Cut and Jobs Act created a lot of exemptions for business owners. However, many of those could go away by 2026, if not sooner.

The Biden administration’s American Jobs Plan would change the current Step-up in Basis law that Petrille explains using stock purchases as an example. “If you buy a stock at $10, that is your basis. If it appreciated to $15, your capital gain is $5,” he said. “If you give the stock to someone, they get your basis. So, under the current rules, the basis is based on what it is worth (when bought).”

That relates to selling a company. If an owner sells a company, the basis is what it is worth when it was started. Under the Biden proposal, the basis would be what the company is worth when sold. That will increase capital gains taxes.

John Reed, partner with Barley Snyder, Lancaster, expected capital gains to increase last year. “We all think change is coming, but we don’t know when.”

The takeaway, he said, “if someone is thinking about retiring, they should do it now when we know what the rules are.”

Colin Keefe, partner with Fitzpatrick, Lentz & Bubba, Allentown, agreed. “It’s a good time to sell because we believe taxes will go up in 2022.”

Reed said succession planning comes with many challenges. The proposed changes could make the financial challenges even greater.

“There is risk inherent in this,” he said. “If (the owner) needs to get money out of the business (to live on), he may sell to others and rely on monthly income. There is risk in that,” he said. “You hand control over to someone else and you no longer have control over the running of the operation.”

Petrille said owners have to take a holistic approach to keep the business going. “You have to look at what the departing owner is taking with him; his knowledge, vendor relationships, and what he contributes daily to the operation. How are you going to finance that?”

Insurance can offer some protection, he said. It can be used to retain people who can run the business or to get through rough times during the transition.

Many entrepreneurs will use a self-directed IRA to start a business, he said. The ownership is then tied to that. The Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019 says if you inherit an IRA, or a business funded by one, you have to liquidate it and pay income tax and penalties or pay income tax on the money over a 10-year period.

“This is also integrated with estate planning because you own a business and that business has value which is taxed by Pennsylvania,” he said. “So, you need to have liquidity to pay the taxes owed nine months after the person’s death.”

Inheritance tax now stands at 4.5 % for children and 12% for siblings.

“Business owners are perceived to be wealthy,” Petrille said. “But wealth doesn’t always mean you have liquidity.”

Consider the construction worker who starts his own business using his personal truck, he said. The basis for this business is zero. But, as the business grows, and the owner hires more workers, buys more trucks and maybe even establishes a shop, the business value goes up. And though the value has increased, there may be no extra cash flow. If the owner sells the capital gains would be on the basis of zero.

If the Biden plan is passed, the basis would be on the value of the company at time of sale. “So, if the business is worth, say $10 million, the taxes could total $4 million. Where do you get the cash to make the transaction?”

Keefe said it is a good time to sell if a business owner is thinking of retiring. “There are lots of buyers right now and the interest rates are still low.”

Biden’s tax plan is in committee. The proposed $4 trillion of new federal spending over 10 years will be partially funded with higher taxes on individuals and businesses. Members of the House and Senate have put forth bills that include everything from increases in capital gains and corporate income taxes to new individual and business tax credits, according to the Tax Foundation.