My proposal begins with commonsense changes to our state tax system:



First, Pennsylvanians have spoken and so has the House of Representatives. They believe that it makes sense to tax cigars and other smokeless tobacco products as well as to tax Marcellus Shale extraction. Once again, it's simply not fair that big tobacco and big oil and gas are exempt from the obligations the rest of us have to bear. The revenues raised by these initiatives are overwhelmingly supported by our fellow citizens, and would provide a half a billion dollars for the Stimulus Transition Reserve Fund. Similarly, let's stop rewarding businesses by giving them a bonus for obeying the law and paying their taxes on time. Doing so allows us to generate $150 million for the Stimulus Transition Reserve Fund.



Next, we should eliminate the 74 non-essential exemptions to the state sales tax. Under our proposal, there will still be no sales tax imposed on essential items like food, clothing, and prescription drugs. And it preserves sales tax exemption for our manufacturers and non-profit cultural institutions. But we will eliminate exemptions for professional services like fees for lawyers and accountants, as well as a variety of other non-essential products and services.



By closing these loopholes, we can broaden the base of the state sales tax and actually reduce it from six percent to four percent. Let me put it another way: my proposal will cut the sales tax statewide for every Pennsylvanian by one-third.



The sales tax today is a testament to the power of lobbyists and special interests. There is little rhyme or reason why we tax some items or services and wholly exempt others, except that in years past someone lobbied to secure favored treatment for themselves at the expense of others. As the Pennsylvania Budget and Policy Center pointed out last year, a simple trip to the movies "provides insight into the patchwork nature of Pennsylvania's sales tax. The rental of the movies by the theater, the admission ticket and candy and gum purchased at the counter are all exempt from taxation. (But) popcorn and soda purchased at the same counter are subject to sales tax."



Some exemptions defy logic. If you do your own laundry, the laundry detergent is subject to the sales tax. But if you have your laundry done, it's sales tax free. Soda is taxed in Pennsylvania, but bottled water and fruit juices - products often made by the same soda companies - are not.



My proposal calls for the elimination of these loopholes so that everyone pays his or her fair share of the sales tax. To those who argue that this is a tax increase that will hurt our citizens and our business competitiveness, I say that the evidence demonstrates otherwise. For the average family, eliminating these loopholes doesn't impact them one way or the other. But for business, closing the loopholes actually will allow many businesses - those who already pay sales tax - to become more competitive. It also means that Pennsylvania will no longer lose sales to New York, where the sales tax rate is at four percent today.



Repealing these exemptions does not create a competitive disadvantage for our Commonwealth. Thirty-six other states tax movie tickets and other amusement events, thirty-two other states tax magazines, forty-two other states tax over-the-counter drugs, and every other state that has a sales tax taxes personal hygiene items. Pennsylvania today applies the sales tax to fewer goods and services than our neighbors in New York, New Jersey, Ohio and West Virginia.



Closing these loopholes and broadening the base of the sales tax can generate $1.4 billion in new tax revenue for the Stimulus Transition Reserve Fund by the end of fiscal year 2011-12, and nearly a billion each year thereafter. For the millions of our citizens who don't have Political Action Committees or lobbyists, this approach will lower the tax rate and spare them from hefty tax increases in the future.



It is fair, it is fairly pain-free, and it allows us to prepare for the challenges to come. I therefore urge you to support closing the loopholes that will allow us to reduce the sales tax from six percent to four percent statewide.



To augment the Stimulus Transition Reserve Fund, I also propose that we extend the same principal of fairness to our corporate tax system. We must close the loopholes that allow companies located outside the state, yet have a substantial Pennsylvania presence, a significant tax advantage over those that have all of their operations within our borders. Why is this important? Because 71 percent of the corporations subject to our Corporate Net Income Tax pay no tax at all. And of those that pay 79 percent pay less than $10,000 in taxes a year. This happens because companies with operations in many states rent a mail box in tax haven states like Delaware and as a result skirt their fair share of Pennsylvania taxes. The goal, again, is for all companies to pay their fair share. By doing this, we will be able to make our corporate tax system more progressive, recognizing the full value of operating losses, and base our taxes entirely on sales rather than inventory, and lower the corporate net income tax rate from 9.99 percent to 8.99 percent, a full point. At the same time, we will generate over $230 million for the Stimulus Transition Reserve Fund.



These proposals provide commonsense solutions to the problems that will confront Pennsylvania, problems that have been caused largely by the damage inflicted by the economic recession. They will create a reserve fund of $2.3 billion dollars to address the impact of the expiration of the federal fiscal relief funds. Think of it this way: if you do not adopt my proposal, or one of your own, that generates as much or more revenue, next year at this time you will have to start working to close a budget gap of $2.4 billion. If you adopt my proposal and our revenue growth projections hold, that deficit will drop to $155 million. In the following year, the year of the pension spike, your deficit will be $5.6 billion, but if you adopt my proposal that deficit drops to $1.8 billion. No deficit is easy to deal with, but clearly, taking action to ensure that our citizens are not saddled with a $5.6 billion deficit two years from now makes abundant good sense.



Now, I recognize that some in this chamber may judge these proposals by their potential political impact - in other words, whether they help or hurt a member's re-election chances this year. But regardless, we owe the people of this great state the truth. They deserve it and they can handle it. Because of the tough decisions we've made in the past, Pennsylvania is better prepared to weather this recession. But like it or not, the decisions are going to get tougher, much tougher, in the days ahead.



This legislature has made tough decisions before. You have taken the "road less traveled," as the poet said, and it "has made all the difference" for Pennsylvania. You did so in the belief that it was the right thing to do, and what's more, you recognized the risks involved in not taking decisive action.



The risks remain, and they pose a genuine threat to our future.



Over the last three years we have together delivered $1.7 billion in property tax relief. We made it possible for more than 123,000 senior citizens to have their school property taxes completely eliminated. If we don't act to address the challenges ahead, the funds that make this critical relief possible could be diverted to close an even bigger budget gap.



Two years ago, we agreed to enact a school funding formula that, for the first time in decades, ensures every child's right to a decent public education. We have dramatically increased school funding over the last seven years in pursuit of that goal, and we have committed to meeting the ambitious funding goals you enacted for the sake of our children's future. Again, our failure to act today could make these investments a target for budget relief in the years ahead.



Together we have made strategic investments and business tax cuts that have brought critically-needed relief to cities and towns across the state, and which successfully leveraged billions of additional private investment dollars that generate jobs, tax revenues, and meaningful opportunity for thousands of Pennsylvania families. It is not farfetched to suggest that investment funds and business tax relief could disappear if we don't start to prepare for the impending fiscal challenges that we will face in just 12 months.



These achievements, many of which generated public controversy and carried considerable political risk, have placed Pennsylvania among the leading states in the nation in the progress toward economic recovery. But the challenges we face can wipe out that progress, and so we must find ways to address them without losing the momentum we've already gained.



You have demonstrated your ability to act with courage for the benefit of Pennsylvania's future, and while I remain open to considering any other ideas that address these issues, I urge you to support these proposals and the commonsense solutions they provide for the challenges to come.



Let me close by thanking each of you in this chamber for your willingness to work with me over the last seven years. Those who have watched us tangle on the budget or other issues might find it hard to believe, but I have come to count many of you, on both sides of the aisle, as my friends. And whether we've agreed or disagreed over the years, it has been one of the great privileges of my life to have had the chance to work with you on behalf of the citizens we all serve - a privilege that I get to enjoy once again as we set about the task of enacting a budget that keeps Pennsylvania moving forward.



And if we do this job well and meet our responsibilities with courage and a spirit of bi-partisanship we can build on our accomplishments and ensure a bright future for the Commonwealth and its people.



Thank you.