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'Permanent' changes needed to fill state's widening budget gap, economist tells lawmakers

| Tuesday, Feb. 21, 2017, 4:27 p.m.

Lawmakers in Harrisburg on Tuesday heard that “permanent” changes are necessary to address the state's growing fiscal problems.

Matthew Knittel, director of the nonpartisan Independent Fiscal Office, appeared before the House and Senate appropriations committees and said those fixes could mean spending cuts, tax increases or both.

“Temporary changes will not address a structural deficit. It will still be there,” Knittel said.

State budgets over the past few years have been balanced using one-time revenues to fill budget gaps. The state faces a shortfall of more than $700 million this budget year and an estimated deficit of nearly $3 billion by July 2018.

Lawmakers on Tuesday aimed to frame the debate over revenues and spending, while Knittel said the state has a long-term demographic problem that is negatively impacting growth.

“It's a very broad-based and underlying trend that we think is restraining growth every year,” Knittel said. “We have a workforce that we think could contract over the next decade, and that's a major driver of economic growth.”

He said the working-age population, those between 20 and 64, will contract by 181,000 residents over the next seven years. During that time, the number of retirees is estimated to increase by 31 percent, or 677,000 residents.

Gov. Tom Wolf's $32.3 billion proposed spending package uses a combination of $2 billion in funding cuts and tax increases to balance next year's budget.

Republicans homed in on Wolf's proposed natural gas severance tax, expected to generate nearly $300 million, as well as a proposed minimum wage increase from $7.25 an hour to $12 an hour, which the Wolf administration estimates will generate $95 million in new personal income tax and sales tax revenue.

Knittel said a past IFO analysis found increasing the minimum wage to $10.10 an hour would generate between $10 million to $40 million in new revenue. He said there are uncertainties when analyzing minimum wage proposals and a higher hourly rate would impact assumptions. But he said it would still likely lead to a net revenue increase.

Wolf's budget plan will be scrutinized as agency officials appear before the House and Senate appropriations committees the next few weeks.

Kevin Zwick is a Tribune-Review staff writer. Reach him at 724-850-2856.

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