A battle over what to do with projected budget surpluses appears imminent in Pennsylvania. Gov. Ed Rendell proposed Monday to use much of the budget surplus to provide rebates of up to $400 to low-income households. Though much less effective than enacting an Earned Income Tax Credit (EITC), this proposal would do a great deal not only to improve tax fairness and the lives of those most in need, but also to stimulate the economy by putting money back in the hands of low-income individuals sure to spend it on their daily needs.
By contrast, Pennsylvania Republicans have proposed using the surplus to cut the income tax rate. Unlike the Governor's proposal, which involves changes only to the current year's tax collections, the Republican plan would alter the Pennsylvania tax code in a way that would permanently restrict the state's ability to raise revenue. A broad income tax rate cut would also benefit the wealthiest Pennsylvanians far more than it would low and middle income taxpayers, and would completely wipe out the surplus and likely force future legislators to chose between cutting services and raising other taxes.
In addition to this plan, some legislators have suggested a "zero growth budget" where government spending increases would be strictly limited to the rate of inflation. Such limitations have proven disastrous for state governments, the most famous example having taken place in Colorado where a similar measure was suspended after education and other public services sharply deteriorated without adequate funding.