Governor Edward G. Rendell Budget Address to the General Assembly of the Commonwealth of Pennsylvania

GOVERNOR EDWARD G. RENDELL
BUDGET ADDRESS TO THE GENERAL ASSEMBLY
OF THE COMMONWEALTH OF PENNSYLVANIA

Good afternoon.  Let me begin by asking all of you to join with me in a moment of silent respect for the brave men and women of our coalition forces, including 4,000 members of Pennsylvania National Guard, who as we speak are putting their lives on the line in the Middle East and around the world for the cause of freedom, and that in particular we honor the memory of United States Army Captain Christopher Scott Seifert of Williams Township, who lost his life defending the cause of freedom in Kuwait at Camp Pennsylvania.
 
Thank you.  And let me assure the people of Pennsylvania that we are taking all necessary steps to ensure our safety and security throughout the Commonwealth.  In these difficult days, I encourage each of us to support our troops, and just as importantly, to go about our daily routine just as we always have.  The best way to stand up to terrorism is to refuse to allow it to change our way of life.

And now to the budget.  The philosopher Sophocles said: "One must wait until the evening to see how splendid the day has been."

Clearly, the Greeks never tried to do a budget in Pennsylvania.

But today I do not want to spend any time looking back; I want to look forward to Pennsylvania's future.

Once again, I call on the members of the General Assembly to work with me in tackling the critical issues of our time.

So far, this budget debate has been about things as they are: yet another round of painful budget-cutting in response to yet another year of economic decline.  Traditional, but necessary, answers to recurring problems.

Today, I call on Republicans and Democrats alike to change the way we conduct the public's business, and to build a Pennsylvania the way it ought to be.

These are the elements of my Plan for a New Pennsylvania - a plan that calls for Pennsylvania to take charge of its own destiny, recognizing that tax reform and education reform are not simply important in and of themselves - they also are critical elements in the effort to revitalize Pennsylvania's economy.

It starts, as it must, with property taxes.  They are a statewide disgrace, and local taxpayers have made it clear:  The time to act is now.

In the last 10 years, Pennsylvania's property taxes have increased by an average of 54.9 percent.  We all know that these taxes have increased to make up for a declining state share of public education funding.  Clearly, local taxpayers value public education, or else they would never have supported these increases.  But it is simply not fair to ask them to continue to shoulder more and more of this tax burden.

The numbers are shocking.  In the Spring-Ford School District in Montgomery County, for example, property taxes have increased 185 percent since 1991.  In the Pocono Mountain district, the increase since 1991 is 114 percent.  It would be bad enough if these districts were the exception.  But unfortunately, they are increasingly the rule when it comes to property tax hikes.  In fact, 40 school districts in Pennsylvania have increased property taxes by more than 100 percent since 1992.  Another 130 local school districts have implemented increases of more than 70 percent, and a whopping 255 districts have hiked property taxes by more than 50 percent in the last 10 years.

What's more, these statistics hide a distasteful and growing pattern of tax inequity statewide.  More and more, Pennsylvanians who are poor or living on limited incomes are paying larger and larger proportions of their livelihoods to property taxes, which are flat taxes that unfairly impact the poor and the elderly.  And when their fellow citizens tire of paying higher taxes and move away, the burden on those who can't afford to move gets even bigger.  In the end, this so-called "race to the bottom" destroys any hope for community revitalization, and it has to stop.

 If we enact this plan, school property taxes would drop by an average of 30 percent this year throughout Pennsylvania because we will invest $1.5 billion of new state funds to make it happen.  In fact, 391 of our districts - a full 78% of the districts - will be able to offer property tax relief averaging 30% or greater.  In the communities where property tax increases have devastated local economies, senior citizens and others will get the tax relief they deserve. At the same time, we can help to forge a new bond between older and younger taxpayers in support of local schools, and unite our communities for a better quality of life.

Let me be clear.  This proposal does not raise school spending by $1.5 billion. Instead, it shifts the burden from local communities to the state.  For every dollar the state sends to a school district under this plan, the school district must cut its property taxes by the exact same amount.  This is a straight dollar-for-dollar exchange - nothing more and nothing less.  More importantly, it is tax relief that Pennsylvanians deserve now, and I urge that we work together to get it done in this budget.

Statewide property tax relief is critical, but we must do more to build a New Pennsylvania.  By directing $1.5 billion in state funds to our schools we can return to the days when Harrisburg was a full partner in funding public education.  But even that is not enough, particularly in the face of funding inequities that exist throughout Pennsylvania's 501 public school districts.  Today, we are one of the worst states in the nation when it comes to equity in public school funding.  The gap between our richest and poorest districts is over $193,000 per class, and we all should be ashamed of the fact that the gap is growing.

In Philadelphia, property taxes will not go down.  They will not go down because we have decided to use the state resources to cut the long-reviled city wage tax that has inhibited growth in our largest city for far too long.  This package will bring the wage tax down to 3.8921% for residents and 3.3841% for Pennsylvanians working in Philadelphia - a 13.51% reduction in the wage tax in one year that will increase the competitive position of Southeastern Pennsylvania immeasurably.  This means that from the time I began the reductions in 1995, the wage tax rate will have been reduced by over 21.5%.  It is my expectation that this reduction will be augmented even further by the incremental annual rate cuts codified in the recent Philadelphia City Council ordinance - reducing the rate a total of 24.6% by 2008.

Many members of the General Assembly have proposed methods to prevent local taxes from spiraling upwards once school districts begin to receive additional state funds for education.  I look forward to working with members of General Assembly to ensure that once we bring property taxes under control they stay under control for good.

Property tax reform, however, is only the beginning of this plan.  I vetoed the entire basic education subsidy in the budget, which presents us with a unique opportunity.  We can start over, and this time, we can fund a comprehensive reform of public education that serves our children fully and fairly.  For starters, we propose to increase the Basic Education Subsidy for next year by 2.5 percent just to keep pace with inflation.  We'll do the same thing for special education and vocational education.   And because our schools are obligated to pay substantial new pension costs - over $120 million next year alone - I propose that we work together with local school officials to address this growing obligation, including consideration of amortizing the costs of these increases over several years.  We will also provide technical assistance to school districts to realize management and productivity savings in overhead costs, ensuring that our investment is focused on education, not administration.

Let there be no doubt.  When it comes to public education, I am serious about leaving no child behind.

To achieve this goal, I am proposing an unprecedented new investment in proven educational practices that can produce demonstrable results in Pennsylvania's public schools - more than $550 million in new investment next year, over $1 billion in new funding for FY04-05, and over $1.25 billion in new dollars for education in FY05-06.  Under my plan, every school district in the state will receive funding that is dramatically higher than the current state basic education subsidy.

When he was asked how he became a war hero, President Kennedy said the answer was simple: "They sank my boat."  Why invest in Pennsylvania's public schools?  It's simple - they're sinking fast, and they need our help.

The time to act is now.  What choice do we have when 50% of our 11th grade students cannot pass our standardized math tests?  These students are only two years away from the job market and we have not sufficiently prepared them to compete in this increasingly high tech global economy.  And 41% of our 11th graders - a full 50,000 students - cannot read well enough to pass our standardized reading test.  Of course, these disturbing numbers do not even include those students who dropped out long before even getting to 11th grade.  Think about 50,000 students - equivalent to the population of Harrisburg or Altoona or ten thousand more people than live in York.  The future of this state is linked to the skills of our graduates, and we have no choice but to act to change this situation.

Our public schools are falling behind, and no reasonable person could conclude otherwise.  The problem reaches virtually every area of the state. Even in suburban Delaware County, for example, 41% of the 11th grade students in the county's 15 school districts scored below proficient in reading on the state test.  In Montgomery County - one of the wealthiest counties in Pennsylvania - 29% of 11th graders in the county's 21 school districts fell below the passing grade on the reading assessment.

I realize that money alone won't solve the problems of our public schools.  And later I will talk about the need for stricter accountability and holding our schools to strict performance standards.  But without increased funding to targeted programs that we know work, we have no chance to improve public education. And our downward spiral will continue.

The good news is that investment in education can produce dramatic results.  In states like Kentucky, North Carolina, and Texas, significant investment in public schools is working.  All of these states are showing demonstrable improvement in the skills of their students, and their state economies are the primary beneficiaries of education reform because they are preparing the type of qualified workforce that global economy demands.

My plan starts with early childhood education.  Studies have shown that investment in early education can make all the difference for a young child.

The extraordinary impact of early childhood education is well established.  In a 2001 Chicago study of the impact of pre-k on youngsters, they tracked the progress of more than a 1,000 students over the course of their school careers.  More than a decade after these children left pre-school, as high school graduation age approached, the results were startling: the rates of juvenile arrest, grade retention and special education entrants were lower for those who were enrolled in pre-k programs. This study confirmed the results of a groundbreaking study of children enrolled in pre-k in 1963 and then tracked for 30 years in Ypsilanti, Michigan.  This study found that every dollar invested in quality pre-k programming saved $7 down the road in other public costs.

These are proven practices that can make a difference, and it is long past time for Pennsylvania to implement these programs.  The research on early childhood intervention is compelling, as are the results.  I am therefore proposing that over the next three years we provide enough funding to enroll over 40,000 four-year-old children in high-quality pre-kindergarten programs beginning first in school districts with the highest concentration of children coming from low-income families.

Full day kindergarten is another program that has produced stunning results.  Our own Secretary of Education, Vicki Phillips, saw this impact first-hand when she took over as Superintendent of the Lancaster School District.  After the introduction of full-day kindergarten in Lancaster, the rate of students reading at grade level moving from first to second grade rose from 56 percent to a whopping 85 percent.  Before learning of Secretary Phillip's program, I was familiar with the experience in Montgomery County, Maryland, where they tracked the impact of full-day kindergarten on 7,849 students.  They found that those children who attended full day rather than half-day kindergarten made far greater gains, regardless of race or family income levels.

I know from first hand experience that full-day kindergarten works for our children.  When I was Mayor of Philadelphia, we implemented full-day kindergarten in 1995, and by the end of my term in January 2000, according to the Council of the Great City Schools, Philadelphia's elementary school test scores were rising the fastest of any big city school district in America.

In Pennsylvania, only 30 percent of our school children have access to full-day kindergarten.  We need to do better.  Today I am proposing that we scale up our funding to ensure full-day kindergarten for every kindergarten student in the state.  This is a program that works.  Let's implement it for our children, and we will reap the benefits for generations to come.

But we should not stop there.  A large body of research confirms that reducing class size in grades kindergarten through three can make a dramatic difference in student performance.  A Tennessee study, of 6,000 students per grade from kindergarten to third found that in every grade, students in smaller classes outscored those in larger classes - and best of all that these children sustained this academic growth throughout their school careers.

I propose today that we invest in our children's education by reducing class size in kindergarten through third grade and that we work to ensure that no child will go to class in Pennsylvania with more than 17 students to each teacher.  This investment alone, over the next three years, will help elementary school students in schools statewide get the attention they need in school to improve their learning skills.  I realize that some districts may need to renovate or build additions to accommodate new classes, and I am proposing a school construction funds to help accommodate this new school construction demand.

I am also proposing that we make a determined effort to improve the skills of the students who are struggling the most.  Again, the evidence makes it clear that tutoring programs for failing students can make the difference in allowing them to catch up to their peers.  My plan for Pennsylvania's schools includes funding specially earmarked for tutoring students who score the lowest on their standardized tests.  Some of our schools already offer tutoring, and it works.  In the Palisades School District in Bucks County, they have a "Meet the Standard" club.  Palisades' terrific superintendent, Francis Barnes, recruited teachers who would stay after school and work in small groups with willing students.  In every case - every case - the failing students were able to perform at grade level by the end of the academic year.

I expect similar results statewide from this investment, which over the next three years will grow to provide funding to permit all school districts in the state to offer tutoring to over 300,000 students who are not able reach the "basic" threshold on our state assessment.  And let's not forget, President Bush's ambitious federal education initiative, No Child Left Behind, requires states to close the performance gap for every student in every school.  This tutoring program works, and it is time to implement it in Pennsylvania.

Additionally, I am today proposing that we invest in Pennsylvania's teachers.  States that are producing demonstrable results in public education share a common trait: All are investing in high-quality continuing professional development for their teachers.  To achieve this goal, I propose that we fund an additional six days of training and professional development programs for public school teachers working in our poorest school districts in Pennsylvania. My plan also provides funds to place expert reading and math coaches in the districts that need them most - those districts working with our poorest children.  These coaches will work with our teachers to help improve their teaching techniques so that we can help all students improve.  It is another proven approach that we should employ for the benefit of our children.

I also ask for your support to target resources directly to our rural schools.  During the campaign, I was repeatedly asked to provide help for the challenges confronting our rural schools, particularly regarding the difficulties these schools have in recruiting qualified high school math and science teachers.  Our rural communities need extra resources to attract teachers with high school math and science certification.  This plan puts those resources in place.

We also face significant challenges recruiting and retaining teachers in our urban districts.  I will be working hard to craft solutions that enable our urban districts to compete for and keep good teachers.  I believe our rural teacher recruitment component can be expanded to urban areas in the years to come.

We will also expand upon the grant programs for struggling districts now used to help those on the Empowerment List.  We should not wait until the ship is sinking to do repairs.  This expanded struggling district fund will provide targeted, time-limited resources to districts that are close to Empowerment Status to do our best to make sure no more districts are ever added to the Empowerment list.  On the other side, I believe that as a result of this package, more and more of our districts will exceed their performance goals.  Therefore, I also propose to expand the funds we allocate for performance incentives.

Finally, I propose that we allocate $50 million for a competitive grant program to help our districts upgrade their science and technology labs, and purchase software and other instructional supplies necessary to deliver a high quality instruction.  A few weeks ago I met Paul Perry, the student council president at Norristown High School.  He asked why in some schools kids started school with palm pilots and in other schools they didn't have books.  As an elected official, as an adult, as a parent, I was ashamed that he could even make that comparison.  This fund will be used to level the playing field so that kids in all districts have access to the supplies, labs and materials needed for a 21st century education.

These are the programs that work, and the new funding that I propose would be used solely for the proven programs that I have described.  I urge the members of the General Assembly to consider these reforms as one comprehensive program.  The effectiveness of each new program depends on the implementation of all of these proven techniques.  A good pre-k program, for example, is wasted if we don't follow up with full-day kindergarten and reduced class size.  All of these programs work, but they work best when they work together.

If our children are to take their place as productive members of our society, we have an obligation to educate them to meet the challenges they will face.  This investment of over $1 billion - in addition to the $1.5 billion in funds to reduce the property tax burden on local communities - offers an unprecedented opportunity for us to dramatically improve public education in Pennsylvania.

But I do not propose that we give public schools a blank check and simply hope for a positive outcome.  Today, I am also putting forward a comprehensive accountability system.  Not only do I believe that the status quo is a recipe for disaster for our state in general, I am convinced it will be the demise of our public schools.  This system has a clear set of expectations for progress for every school and every district in this state.   It offers incentives and supports - and it also outlines consequences.  Schools that fail our kids will be restarted with new leadership, new teachers and new controls.

 Our superintendents and principals need to be judged and given contracts based on the performance of their districts.  Principal tenure is an outdated concept that must be replaced with a contracting system that affords principals reasonable protection but places the performance of students in their schools squarely in their hands.  And, if we are going to hold our principals and superintendents accountable for results, they need the authority necessary to do the job.  We need to give these leaders the right to assign teachers, schedule their days, cluster their classes, and manage student assessments as they see fit.  Like the tenure system for principals, the pay for longevity system of our teacher union contracts is a relic of the past. Teachers receive a great deal of support in this plan, and this accountability system should provide teachers with rewards based on a mix of experience and skills.

I have the greatest respect for our teachers and their union leaders.  I believe that they share my passion for making public education the best it can be.  This endeavor, however, is too important for compromise.  Accountability is more than a test.  But this plan will test our commitment to our children.  It provides a template for a serious discussion about reforming public education in this state.

It is time to change things as they are in Pennsylvania's public schools.  The plan I submit to you today gives us the chance to create schools as they ought to be - leaving no child behind, investing in proven techniques to get results, and breaking the vicious cycle of local property tax increases to fund our schools.  Most importantly, this plan gives us a real shot to educate our children to take their place in the 21st Century Pennsylvania economy.

Growing that economy, providing Pennsylvania with jobs and opportunity, is the third critical element of the Plan for a New Pennsylvania.

No one disputes the fact that the real reason for the budget deficit is that state revenues have declined dramatically, reflecting the fact that Pennsylvania's economy continues to show no sign of recovery.  We are not alone in this regard.  As I said on March 4th, many other states face similar - or even worse - problems than we do.  In fact, the combined budget deficit of the states now approaches $85 billion - the surest sign that the national economy remains stagnant.

Our problems are not new, but we cannot continue to wait for help from Washington, or for some hoped-for rising economic tide that lifts all boats, including ours.  We need to take action now.

Consider these facts: Pennsylvania's economy ranks 47th out of 50 states.  We've lost 74,000 jobs since December and our February unemployment rate was 6.2%.  This slow steady climb in unemployment spells economic turmoil for our communities.  The local economies of many of our boroughs and townships are literally dying for lack of investment that can generate jobs and opportunity for our citizens.

At the same time, we have become the second oldest state in the nation, and each year, thousands of our young women and men who graduate from Pennsylvania universities and colleges choose to leave us for better opportunities elsewhere.  As I said on Inauguration Day, if our young people continue to leave, if they don't see a future here, then Pennsylvania has no future.

My Plan for a New Pennsylvania is built on the premise that we cannot afford to wait for a national economic recovery.  Instead, we must jump-start a Pennsylvania recovery.  That's why I am proposing an economic stimulus program that will inject nearly $2 billion in economic development funds into Pennsylvania's economy - an initiative that will conservatively leverage more than $5 billion in additional investment in cities, boroughs and townships across the Commonwealth.  This plan also contemplates that these dollars will be infused into our economy in the next 30-36 months to stimulate growth immediately.

This investment will provide the much-needed capital to fuel Pennsylvania's economic engine.  My goal is to target investment across the state - investments that create jobs for Pennsylvanians and help to generate economic momentum in local communities.  Our plan targets two basic areas - rebuilding Pennsylvania's infrastructure to prepare for and support economic growth and making capital available for investment in every region of the state.

For the last two years, I traveled to small cities and towns across this state and saw signs of missed opportunities.  I saw old factories that could be retrofitted to become business incubators, old industrial sites that could be cleared for high tech industry and abandoned manufacturing plants that, as we are doing with the International Paper mill in Lock Haven, can and must be brought back to life.  I saw opportunity lost for lack of capital.  After eight years in Philadelphia working to attract business, I learned first hand that the hardest capital to get is pre-development funding.  For this reason, I ask you to enact the Business in our Sites revolving loan fund.  This fund would be capitalized with $300 million for site acquisition and remediation.   Loans from this fund could be used for site clearance and clean up, and to pay for the critical infrastructure improvements like new sidewalks, curbs, roads, and telecommunications infrastructure.  It will help build an inventory of potential sites ready for new development.  And best of all, it will reduce urban blight and curtail suburban sprawl.

Our Main Streets are the very heart and soul of our small communities.  They are the retail transaction centers that also bind our communities in ways that malls could never replace.  We want to continue investing in Main Streets across Pennsylvania, but we also want to provide help for the residential corridors nearby, and so we are proposing the creation of a new $5 million Elm Street residential improvement program as a companion to the important Main Street Program.

I talked briefly about the need to fund more school construction.  We intend to work with local school boards to accelerate school construction without spending an additional dime of state funds.  By refinancing existing debt and flattening out future payments on school construction bonds, we can generate substantial savings in our School Construction Sinking Fund Line Item.  Let's invest those savings to modernize our schools and stimulate our local economies right now so that we can help schools build additions and new facilities to support advances like full day kindergarten and smaller class sizes.

My final infrastructure component is expansion of housing construction.  Our housing stock is among the oldest in the nation.  Thirty percent of our houses were built before the end of the Second World War.  I propose that we increase the funds for housing rehabilitation and new construction by adding $15 million this year and an additional $35 million over the next three years to the Housing and Redevelopment Assistance Grant Program.  We also propose an additional $10 million to the Homeownership Choice Loan Program.

As I said throughout my campaign, our biggest challenge is finding the funds to make development a reality.  This is especially true for our small and mid-sized communities.  To meet this challenge, we propose creating two new initiatives that will earmark capital reinvestment directly.

First, the plan will take advantage of federal resources.  Philadelphia and Pittsburgh have terrific experience with the federal HUD 108 loan program.  I want to help our smaller cities access this powerful tool for development. Through a combination of technical assistance and loan guarantees I believe we can leverage an additional $288 million from the federal HUD 108 loan program and make this capital available specifically for smaller communities that as of now cannot use the HUD 108 loan program because they receive no direct CDBG entitlement funds.  This innovative idea has already been endorsed by the Secretary of HUD Mel Martinez at a recent meeting we had with him in Washington.

Second, Tax Increment Financing also offers communities across this state an innovative and important resource for development.  We need to give local elected officials in smaller cities and towns help in packaging development proposals in a way that taps the power of TIFs responsibly for their communities without forcing them to lose a significant portion of these funds to soft costs for lawyers and underwriters.  I propose that we provide a loan guarantee pool of up to $100 million to give our communities the confidence to leverage these resources and stimulate development.  These resources will strengthen development by using this state fund as a new and much cheaper TIF resource.

We all know the discouraging statistics that demonstrate Pennsylvania's brain drain.  I believe we can keep Pennsylvania's best and brightest students from leaving this state after college graduation by attracting more high tech and research oriented companies and by encouraging those students who are going to start up their own companies to start them right here.  That is why I announced in February the creation of the Keystone Innovation Zones.  The KIZs will provide cutting edge companies early stage capital, an educated workforce, and modern facilities.  And I propose that every KIZ have the opportunity to apply for KOZ status. To further demonstrate our commitment to keeping college graduates here, we must increase the tax credits available for growth companies that invest in research and development from $15 million to $60 million over the next two years.  I also propose that we enact a statute that will allow young, start-up companies to sell their research and development operating losses to obtain capital from older, established companies that can credit these operating losses to offset some of their profits.

Let me turn to what I believe to be the most innovative aspect of this package - I propose that we use state resources to become a direct investor in development projects.  I ask for your support in creating two investment funds, one to enable the state to be a financial partner in real estate development.  The other, an equity investment fund to invest in companies with growth potential that can create more jobs.

The first fund would allow us to bring back to life older, abandoned buildings that currently stand as monuments to our economic failures.  The revitalization of these buildings will reenergize growth in many of our struggling urban communities.  We saw this happen in the early 1980s when the federal low-income housing tax credit program revitalized many of Pennsylvania's cities.

The second fund can be used to invest in a wide array of businesses - new, start-up high technology companies; research driven life sciences enterprises; new small businesses that contribute so much to our job growth; and existing companies, including manufacturing firms that need capital to modernize and acquire new technologies.

Each of these funds would be capitalized with $250 million from the state.  The state funds would be matched dollar for dollar by private investors and foundations.  Separate venture fund managers would administer these two portfolios - each with a half a billion dollars to invest.  Each fund would have a strong expert board to direct investments.  The state would have a presence on these boards to ensure that the public's interests are protected.  We would retain veto power over any project.  I believe by becoming an investor and breaking from the traditional sideline role in development, Pennsylvania will become a Mecca for innovative start-up companies and successful real estate development.

Our ability to attract university-related research companies is crucial to the future of the state.  But so too is the expansion of our sturdiest and largest economic sectors - agriculture and tourism.  For our farmers I want to provide special eligibility criteria that will help them access loans from the successful Machinery and Equipment Loan Fund and support from our Small Business First program.  By allowing more of our farmers to be eligible for this program, we can spur renewed investment in Pennsylvania farms and farming industries for years to come.  Today I am also proposing $100 million in additional incentives to stabilize and expand our tourism and agriculture opportunities through existing DCED programs.

I propose a major expansion of the Redevelopment Assistance Capital Budget Program, providing an additional $500 million for economic development grants - this program has provided significant capital to important community and economic development projects throughout the Commonwealth and the demand continues to exceed the funds available.  Though all of us want to aid community projects throughout the Commonwealth, I believe that the economic challenges that currently confront us are so severe that they dictate that every dollar of investment under this program must have a direct economic development, job-creating purpose.  Restricted in this fashion, Redevelopment Assistance Capital can be a powerful stimulant to growth in every sector of our state.

As I've said before, I believe that we can be the comeback story of the decade.  More importantly, we have no option but to try.  In the end, the only way we can get out of our deficit and the horrible situation we find ourselves in is to grow our way out.  If our stimulus plan succeeds in growing our economy, it will broaden our tax base.  The increasing revenues from that growth will allow us to restore cuts and to do even more.

Most importantly, if we invest in our future, we can build a Pennsylvania economy that allows us to break out of the vicious budget cycle that has dominated our deliberations for the last several years.  A cycle in which, thanks to declining state revenues, we worry more about how to eliminate deficits than how to stimulate the type of long-term growth that can prevent deficits from occurring in the first place.

 We can grow our way out of this crisis, and in the process, we can break out of the pack of states whose problems are even worse than ours.  When it comes to economic recovery, Pennsylvania should be America's Keystone.  Pennsylvania, we do have a choice.

Although our economic stimulus program will have almost no immediate impact on our operating budget because almost all of its funds come from economic development bonds or federal programs, the rest of the Plan for a New Pennsylvania is not without cost.  It represents a significant set of investments - in our families, in our children, and in our economic future.  And while I am confident that these investments can work for Pennsylvania, I insist that we invest only in proven practices - and that we take extraordinary care in how we spend taxpayer dollars.

Three weeks ago, I stood at this rostrum and announced a painful series of budget cuts and spending reductions.  My purpose was to demonstrate that my Administration will do all in its power to cut waste in government, to reduce the cost of government, and to balance a $2.4 billion budget deficit that, if left unchecked, could stop us from making real progress before we even started.

These cuts represent real hardship for thousands of Pennsylvanians, but this pain is short-term, and if we are willing to make these sacrifices and grow our way out of the deficit, there is every reason to believe that we can enjoy long-term growth.

As I said then, Part One of the budget represented the first painful step in the process of investing in our future.  Indeed, Part One amounts to a down payment on the Plan for a New Pennsylvania, cutting the cost of government and closing the budget gap to position us to invest in tax relief, school reform, and economic revitalization.

We will continue to squeeze every nickel of waste out of government.  I have pledged that we will try to identify and implement $1 billion in government savings, and we are well on our way to achieving that goal already - with initiatives that take advantage of our huge purchasing power for office supplies, parts and equipment, and even prescription drugs used by those on state-funded prescription programs.  We are determined to buy "smarter," to streamline the cost of many government services, and to find new ways to save taxpayer dollars.

But lowering the cost of government alone is not enough. We have to continue to find ways to increase state revenues.  Conservative estimates suggest that the Commonwealth could eventually realize an additional $775 million a year in revenue from a moderate expansion of gaming.  And, think about what these revenues could mean they can be used to fund more than 51 percent of my plan to reduce property taxes by $1.5 billion in Pennsylvania this year.  I realize that if this General Assembly approves legalizing slots at racetracks, we won't realize all of the revenues immediately, but my plan assumes that these revenues will phase in over the course of three years - growing from $300 million this year to $526 million in 2005 and reaching $775 million by 2006.

So I am proposing today that Pennsylvania follow the lead of its neighbors in New Jersey, New York, Delaware, and West Virginia by enacting a limited expansion of gaming in Pennsylvania - specifically, by legalizing slot machine gaming.  I recognize the concerns that some have expressed about the moral dilemmas of gaming.  But we cannot continue to ignore the fact that Pennsylvanians are spending more than $3 billion a year on gaming in other states.  As I said before, on this issue, Pennsylvanians are voting with their feet, leaving the Commonwealth by the thousands to spend these dollars in our neighboring states.

Legalizing slot machines at Pennsylvania race tracks will also protect the interests of horse racing statewide, a $1.2 billion industry that employs more than 35,000 people across the state.  Today I urge you to enact one of the several bills that have been proposed in the House and Senate so that we can begin to use these new revenues as part of the Plan for a New Pennsylvania.

When I became Governor, I promised that I would bring change to Pennsylvania.  I pledged that we would invest in our future, and the Plan for a New Pennsylvania delivers on that promise.  I said that I would not raise any taxes unless we reduced property taxes first, and the Plan for a New Pennsylvania delivers on that pledge.  I also said that before I ever sought to raise taxes, I would pursue every opportunity to save money or seek other revenue enhancements.  So let me be absolutely clear:  I will veto any tax increase bill that is not tied directly to property tax reduction legislation.

In March when we introduced the first portion of our budget package we met with legislative leaders, and members of the press, and went to great pains to point out the uncertainty hanging over the economy and the state's revenue estimates.  We noted that the administration would carefully monitor our tax collections and other economic data as the legislature was considering the budget.  As you know, more 25% of the state's revenue is still outstanding.  And neither the national economy nor our state economy shows any sign of permanent economic recovery.

With the nation at war, it would be imprudent of us to expect that we will reach the levels of revenues originally projected.  Therefore, as part of this proposal today I have included revenues sufficient for us to close the revenue gap in the budget enacted last week.  A full $700 million of the revenues from this package will be used to fund budget items already approved by this legislature.

While these measures have significantly closed the revenue gap, they don't get us all the way home in the effort to fund property tax reductions and investment in our public schools and our economy.  That is why I am today submitting a proposal to realize new tax revenues from the following additional sources:

First, I propose that we increase the Pennsylvania Personal Income Tax rate from 2.8 to 3.75 percent, effective July 1.  Like all of you, I have no enthusiasm for raising taxes, but the pressing nature of the budget crisis, combined with the shifting of tax burden from local property to personal income, as well as the need to fund investments that will stimulate long-term growth in our economy and our schools, compel me to join the ranks of 26 other governors, Republicans and Democrats alike, who have reluctantly concluded that tax increases are necessary to fund critical state services.

After running for reelection on a no new tax program, Republican Governor John Rowland of Connecticut went before the legislature asking for new taxes and when they were approved, said,   "It was a long and difficult process. For 120 days, we stared at a $2 billion deficit - and for 120 days, that deficit stared us down. We all knew what was at stake, and I thank you for doing the right thing. You acted to secure our future, by putting the people's agenda ahead of your own political or philosophical agendas.  The approval of last week's package sent a clear signal that the overall welfare of this state is more important than any of the issues that swirled around this budget. The bottom line is that we must all focus on the next generation rather than the next election."

Listen to the words of Republican Governor Dirk Kempthorne of Idaho, who recently called for increased taxes because he refused to cut education funding: " I did not look forward to delivering this type of message.  It is not in my fiber.  But in the end, I concluded that this is in the best interest of our citizens. . . .We are not asking our citizens to pay more to expand government.  We are asking them to participate in ensuring that we can meet the critical needs of the people of Idaho today and into the future."

Like Governors Rowland and Kempthorne, we are determined to keep this increase as low as possible.  And to ensure that the poorest among us are not further jeopardized, we will increase the so-called poverty exemption on the state income tax by $1,000.  And it is important to note that even with our proposed increases, Pennsylvania's Personal Income Tax rate will be the third lowest of all 41 states that have a personal income tax.

What is the impact?  A family of four earning under $32,000 will pay nothing under this approach, compared with having to pay $746 if they lived in Ohio and $613 in New York.  Another way to look at it is that a family of four in Pennsylvania earning  $75,000 would pay $713 more in income taxes due to this tax increase.  If that same family lived in New York or West Virginia, in comparison to our new rate they would pay $1113 more in income taxes.  This proposed increase amounts to about 1.95 a day -- less than the price of a bottle of water or a pack of cigarettes, and far less than a cheese steak or a Primanti Brother's sandwich.  And remember -- that Pennsylvania family will be able to deduct the additional amount they will pay in state income taxes on their federal tax return, lowering the financial impact.

 This revenue package supports our education and economic development goals, and funds Pennsylvania's long-term growth.  And remember that fully half of this new revenue will be used to cover the cost of cutting local property taxes throughout Pennsylvania.  In other words, when you talk about raising taxes, let's talk about cutting taxes, too.  Because 58 percent of the increase in the Personal Income Tax will be used to reduce local property taxes.  In a very real sense, we are talking about tax shifting as well as tax increases.

We are also going to increase revenues by imposing "reckless driving" surcharges that increase fines and fees for the most dangerous drivers on the road. We anticipate that this initiative will generate $100 million in new revenue for the Commonwealth.  A similar initiative in New Jersey has raised over $120 million annually in new revenue.

I am proposing today an increase of approximately $55 million in taxes on beer, marking the first increase in beer taxes since 1947 -- from 8 cents to 25 cents per gallon.  If that same 8 cents had been raised regularly to keep pace with inflation this tax would be 66 cents today.  Although this is big jump, it is long overdue.  At 25 cents per gallon, Pennsylvania would rank 19th among all states that tax malt liquor.  In South Carolina the tax is 77 cents per gallon, and it is more than twice our rate in North Carolina and Alabama.

Next, it is time to treat all businesses fairly.  Today in Pennsylvania, some businesses pay corporate taxes, while others use the protections of loopholes in our corporate tax system to escape paying their fair share.  In particular, I propose that we restrict the Corporate Net Income Tax deductibility of intangible and interest expenses paid to third parties - the so-called Delaware Subsidiary loophole, and that we require pass-through entities to withhold corporate tax for non-resident owners.  Closing these loopholes will generate $100 million in additional revenue.

We must address another business tax issue - specifically, we must find ways to broaden the corporate tax base in Pennsylvania.  Today, only 22 percent of all Pennsylvania businesses actually pay the Corporate Net Income Tax.  In other words, four out of five businesses pay no CNI whatsoever.  That's unfair, and the practice must stop.

To address this problem, I am convening a task force of tax experts, business leaders and legislators to assist us in developing a more equitable business tax structure in Pennsylvania.  By closing loopholes in business taxes and broadening the tax base, we can ensure greater fairness in business taxation and a more competitive business climate, because doing so will allow us to significantly reduce our corporate net income tax in the years to come.  I will ask the task force to report back to me by December 31, 2003.

I am also proposing that we modernize our tax system to capture tax revenues from the rapidly growing wireless communications industry.  We expect to generate more than $200 million in new revenue this year, and more than $300 million next year.  There are three components to this plan.

First, as you know, the Gross Receipts Tax is now imposed only on telephone calls that are both made and received in Pennsylvania.  This plan expands the tax to interstate phone calls as well.  Seven other states follow this approach.

Second, under current law, the GRT does not apply to revenue generated through cell phone and pager services.  Our proposal treats cell phones the same as traditional landline phones by subjecting cell phone service to the GRT.  Phone use is fundamentally the same whether the telephone is connected to the wall or is wireless; this plan brings Pennsylvania's tax approach in line with that reality.  Eight other states have already implemented this measure, which is the wave of the future for all state governments.

At the same time, we will rationalize the way cell phone providers pay sales and use taxes.  Under current law, cell phone providers pay sales and use tax on equipment purchases, but sales and use tax is not imposed on landline equipment.  Under this plan, cell phone providers would not pay sales and use tax on equipment used directly in providing service.  This approach levels the competitive playing field for all telecommunications companies.
 
These proposals will be the subject of comprehensive public discussion in the weeks ahead.  That is as it should be.  Ours is an ambitious agenda, and I welcome the debate that begins today.

The cost of these programs surely will be a major element of our deliberations, and we are prepared to discuss them in detail.  And while some undoubtedly will question the cost of these initiatives, I submit that that the cost of doing nothing is even higher.

If we fail to invest in Pennsylvania's families by providing critically needed property tax relief, we threaten local taxpayers with the exclusive burden of paying for the rising costs of public education, pitting community against community, young against old, and "haves" against "have nots."

If we fail to fund real education reform in Pennsylvania, we threaten our children's future, leaving them ill prepared to become productive members of a vibrant 21st Century Pennsylvania economy.

And if we fail to stimulate our economy and jump-start a Pennsylvania recovery, then we close the door on the chance to create Pennsylvania jobs and opportunity for thousands of families across the Commonwealth.

During my campaign I promised to bring change, and my Plan for a New Pennsylvania represents exactly that.  I believe that we can make Pennsylvania great again, if we are willing to work together to fund meaningful reforms in taxation, education, and economic development.

Pennsylvania, we do have a choice.

Now is the time for us to implement a vision that emphasizes growth, investment, and confidence that the best is yet to come.

Join me in this effort. Working together, we cannot fail.  And in the end, all of Pennsylvania will see how splendid that day can be.