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Medicaid trumps businesses tax reductions when it comes to possible uses of a projected state budget revenue surplus of nearly $500 million, Gov. Ed Rendell said Tuesday in Pittsburgh.

"Medicaid is my first priority," said Rendell at a news conference at Pittsburgh International Airport. He essentially rejected a call by the Allegheny Conference on Community Development to use the surplus to cut the corporate net income tax rate from 9.9 percent to 8.5 percent.

Rendell called the event to tout the state's achievement of an all-time high of 6,045,000 people employed and a drop of the unemployment rate in the commonwealth to 4.8 percent in May, or 0.3 percentage point below the 5.1 percent national average.

But he also fielded questions about state economic issues when he emphasized his desire to resolve the funding crisis for Medicaid, which serves 1.8 million poor and disabled residents.

As reported, growth in the program is projected to outstrip state tax revenue by $1 billion in each of the next five years, and to help rein in a similar funding gap this year, Rendell proposed $500 million in cuts to the program.

But recent projections for this fiscal year show state revenues running well ahead of the $290 million increase Rendell had figured in his proposed $23.8 billion budget for 2005-06, and he said yesterday he intends to use that excess to soften the impact of Medicaid cutbacks.

As for business taxes, Rendell noted that he has called for a reduction in the corporate net income tax to 7.9 percent, but only if business advocates agree to close loopholes that allow many companies to avoid paying the tax altogether.

"We will lower the tax, but only when everybody pays," he said.

Currently about 72 percent of companies in the state don't pay the tax, according to Rendell.

But Kathryn Klaber, Allegheny Conference vice president, said that number may be misleading because it may include companies that aren't taxed in any given year because they don't make a profit, and those that are still registered companies but no longer exist.

"Medicaid certainly is a challenge for the governor and the Legislature," said Klaber. "But we hope that there will be some consideration given to additional business tax reductions."

Incentives for creating new business will help assure continued job and revenue growth in the state to help bring more budget surpluses in future years, Klaber said.

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