January 1 2004

Six months into the fiscal year, Pennsylvania's legislature finalized the 2003-2004 state budget - just in time to start NEXT year's budget process in February.

(January 2004) Pennsylvania’s General Assembly passed most of the remaining pieces of the State’s 2003-04 fiscal year budget just in time for the holidays.  Their actions completed a nearly nine month process that started with the Governor’s introduction of his revenue and spending plan in early March, continued through the legislature’s passing his "barebones" proposal later that month and sidelining his supplemental Plan for a New Pennsylvania, and stalled after the Governor vetoed the basic education part of the spending plan.

This latest legislation restores many of the cuts adopted in the barebones budget, gives the Governor some of the new money he requested for education as part of his New Plan, and raises taxes and fees to fund both increased spending and the state’s estimated $400 million structural deficit. 

What’s in the revenue package?

An increase in the state’s Personal Income Tax is the primary component of the revenue package, supplemented by a variety of other new and increased taxes and fees.  In addition, the package included $450 million in emergency budget aid from the federal government - or half of the state’s two-year allocation. See the table below for details.

Revenue Increase Package

Revenue Source

Type of Change

Increase in Revenue  
*in millions

Increase in
*in millions

Personal Income Tax

Rate Increase: 2.8% to 3.07%



Cell Phone Bill - Gross Receipts Tax

New Tax @ 5%

$ 98 


Interstate Land Line - Gross Receipts Tax

New Tax @ 5%



Cigarette Tax

Rate Increase: 35 cents per pack to $1.35



Fee Increases


$ 14.2 

$ 29.3 

Delay Phase-Out of the Capital Stock and Franchise Tax

Tax Reduction Foregone

$ 60.7 






Most of the increase took effect January 1, 2004.  The two exceptions are the cigarette tax increase - effective January 7, 2004 - and the provision delaying the scheduled Capital Stock and Franchise Tax reduction - retroactive to January 1, 2003.

What created the prolonged budget battle?

The major impetus was the need to complete funding for basic education.  School districts across the state have been going without state funding since July, missing two state funding payments.  Several districts borrowed money to meet expenses while others dug into their reserves, reducing their interest income.  In the end, the Governor received funding for part of his original proposal, with new money for pre-kindergarten, full day kindergarten, reduction in class sizes, tutoring and other programs.  At the same time, public school districts will receive base payments at last year’s level plus increases of 3% in basic subsidies and 4.5% for special education.  The legislature also appropriated $4.6 million to offset school district costs due to the late passage of the education budget.

Of interest to the medical community - $183 million from the increase in cigarette tax for the state-run insurance fund that helps cover physicians for medical liability claims.  Twenty-five cents of the 35-cent increase will be used for this purpose.

The spending package also includes money to restore - or, in some cases, partially restore - funding reductions in the budget passed last March.  Many of the largest restorations are in human services programs like those for mental health and drug and alcohol treatment, and funding for hospitals for treating the uninsured.

The compromise did not come without cost.  Community Revitalization and Assistance grants in the Department of Community and Economic Development - commonly referred to as WAMS (Walking Around Money) or legislative initiatives -- are the result of deals made with legislators to help secure votes by funding projects in legislative districts.  The good news is that the total of $50 million is significantly less than the nearly $85 million spent last year.

What was missing from this state budget?

It took nine months to complete a process designed for closer to four months, but it’s finished - almost.  Missing from the package is a high priority for both the Governor and many in the legislature: property tax relief.  As next year’s election and school budgets approach, elected officials would like to report to the voters than their property taxes will be reduced. 

The primary vehicle for paying for property tax relief is new revenue from gambling.  Factions in the General Assembly and the Governor continue to haggle over proposals to authorize slot machines at Pennsylvania’s racetracks and possibly other venues. Signs point to additional discussion on this issue early in the new year. 

And stay tuned. The whole state budget process starts all over again when the Governor introduces his 2004-05 state budget February 3.