Last year, nearly 42,000 Pennsylvanians left the state to pursue their dreams elsewhere—that's one person every 12 and a half minutes. Why is money walking out of Pennsylvania?
That’s the topic of the second episode of Commonwealth Insight, our new, bi-weekly podcast featuring state and national entrepreneurs, policy makers, and thought leaders tackling issues critical to Pennsylvania's economic future.
First, we talk with Travis Brown, Forbes contributor and author of How Money Walks, who says Pennsylvanians are “voting with their feet and taking their wallets” to states like Florida, North Carolina, and Arizona because of our state’s tax burden.
He explains that states compete with each other to attract investment and residents:
Just like the Steeler Nation would look competitively across state lines and do the scouting and reporting to see how we can be better and better next year against the New England Patriots, every competitor would look to the North and say: How can we attract these residents and how do we keep the residents we have?
Travis says there are three major policy areas Pennsylvania can change to be more competitive: regulation, taxation, and litigation.
To reverse out-migration and make Pennsylvania attractive to families and businesses, we must avoid higher taxes, more government spending, and greater regulation.
We also talk with Bob Dick, senior policy analyst for the Commonwealth Foundation, about how the Pennsylvania state budget works—and doesn’t work. Bob says state spending is growing beyond its citizens' ability to fund it, resulting in tax hikes that kill jobs and slow private sector growth. The politically unpopular, but fiscally responsible, solution is to control spending.
RELATED : ECONOMY, TAXES & SPENDING, PENNSYLVANIA STATE BUDGET, TAXATION
Twenty years ago President Clinton signed a law creating Temporary Aid to Needy Families (TANF), better known as sweeping welfare reform grounded in work requirements.
In 1996, 531,000 adults and children collected cash payments. Today the program enrolls just 167,018. That's proof work is our most powerful anti-poverty tool.
Both poor and non-poor Americans agree that welfare programs should be linked with work requirements. According to a recent survey from AEI:
Large majorities (81 percent of those in poverty and 91 percent of the non poor) favor a work requirement in return for welfare benefits.
Unfortunately, President Obama gave states the option to downplay work requirements in 2012. To its credit, Pennsylvania took the opposite approach and enacted a requirement that participants apply for three jobs each week to maintain benefits.
There's lots of room for improvement when it comes to the vast alphabet-soup of welfare programs, but the shift to work requirements was a dramatic step forward. Scott Winship from the Manhattan Institute puts it this way:
The question is what would have happened in the absence of the welfare reform that we actually implemented . . . Absent welfare reform, would single mothers have increased their employment rates and earnings? . . . policymakers should reject the increasingly conventional view that extreme poverty has dramatically increased and the view that welfare reform did more harm than good.
While work requirements have been a success for TANF, other major safety-net programs have dramatically expanded since 1996. Medicaid serves one in five Pennsylvanians, up from 12 percent in 2003 (the earliest data available). Food Stamps serve about 14 percent of Pennsylvanians compared to six percent in 2003.
Yet Pennsylvania is making progress. Last year, the state took another small step in the right direction by changing the structure of childcare subsidies. Now, families will gradually be responsible for higher co-pays as their earnings rise, instead of the subsidy cliff that could cause a co-pay to jump by $6,000 for earning $1 more.
Welfare reform showed government that a job is the greatest anti-poverty tool at one's disposal, and we should be quick to apply that principle to every welfare program.
RELATED : JOBS & ECONOMY, WELFARE
CF reviewed labor contracts in each of Pennsylvania’s 500 school districts and uncovered several interesting findings. These contracts, known as collective bargaining agreements, are negotiated behind closed doors between local teachers’ unions and school boards. They include routine information about salaries and benefits, but the contracts also outline maintenance of membership clauses, fair share fees, and ghost teacher arrangements.
- Teachers in 62 percent of districts are trapped in their unions by maintenance of membership clauses, which stipulate teachers may only exit a union during a specific time period—often just days—near the expiration of a contract.
- Nearly 4 in 5 school districts require non-union members to pay fair share fees to the union. These teachers are forced to pay more than 80 percent of traditional dues to the union, even though they have chosen not to be members.
- More than 9 in 10 labor contracts include release time language, allowing school employees to attend union conventions, serve as union delegates, or conduct union business. Release time also establishes the basis for ghost teachers, whereby school employees accrue seniority, receive taxpayer-funded salary, and amass pension benefits, all while conducting full-time work for the union, a private organization. Read more about ghost teachers.
These provisions tilt the playing field toward teachers’ unions at the expense of students, teachers, and taxpayers alike.
RELATED : EDUCATION, TEACHER UNIONS, UNIONS & LABOR POLICY, UNION DUES AND POLITICS
Patrick Gibbons chronicles Malachi’s experience on RedefinED Online:
For nearly three years, starting before his third birthday, Malachi lived in an orphanage in Adama, in central Ethiopia. Born with spina bifida, a birth defect that causes leg weakness and limits mobility, he had to crawl across the orphanage’s concrete floors.
The orphans shared clothes from a communal closet and he rarely wore shoes causing his feet to become covered with callouses. At night he slept in a crib in a shared room with five other orphans. They ate communal meals prepared by their caretakers over a wood-burning fireplace. With his doctor more than an hour away in Addis Ababa, the capital, he rarely had access to much-needed medical attention.
His caregivers did their best with what little resources they had, but Malachi was only surviving. It seemed impossible that he would one day stand on his own — much less walk, or go to school.
All of that changed last year, when Malachi arrived in Florida where he now lives with two adoptive parents, and, with the help of a revolutionary scholarship program, has begun pursuing an education.
After speaking to other parents with special needs children, Kamden and Mitchell Kuhn learned about Florida’s education savings account program, which helps parents customize a unique schooling experience for their child.
They applied for the Gardiner Scholarship and enrolled him in Ruskin Christian School. Kamden Kuhn said the nearby public school was good, but she didn’t want her son pulled out of class time for therapy. She wanted Malachi to have the same amount of class time as the other students. The Kuhns used funds left over after paying his tuition to purchase after-school physical, occupational and behavioral therapy.
His mother said the therapists provided instruction and therapy through play.
“I’m not the best educator for my son,” Kuhn said. “But this allows me to shop around for the best educators and best therapists. I can decide what is best, because I know him best.”
Malachi is thriving in an educational environment that is perfectly suited to his needs:
“He made so much progress in the first nine months,” Kuhn recalled. He quickly started to learn to speak English and to stand upright with the aid of a walker. Now stronger than ever, he uses a forearm cane to walk.
“Ms. Stacy helped me learn to walk, and Ms. Colleen helped me get in control,” Malachi said of his physical and occupational therapists. In a telephone interview, he said phonics is his favorite subject because he loves learning letters and how to put them together to make words.
Malachi’s story is inspiring. It also provides a call to action for Pennsylvania to move forward with ESA legislation. Every child in the commonwealth deserves educational opportunity, especially those with learning disabilities or special needs. Read more about ESAs here.
RELATED : EDUCATION, SCHOOL CHOICE
Amy Crivella was addicted to cigarettes. She tried everything—gum, patches, going cold turkey—but nothing worked. Then, she tried e-cigarettes, or vaping, and she didn’t need a cigarette for the first time in 17 years.
The mom of two closed her bakery and took out a loan to open East Coast Vapes in Cranberry Township near Pittsburgh. Amy estimates her business has helped about 700 people reduce smoking or quit cigarettes altogether since she opened her doors almost a year ago.
“I didn’t choose to do this to make a buck,” she says. “If I can pay my bills, I’m happy. We’re helping the grandmas and the grandpas quit smoking. We’re not looking for a handout.”
But Amy’s business and her family’s livelihood are in danger. Tucked away in this year’s budget is a retroactive 40 percent wholesale tax on e-cigarettes that goes into effect on October 1. This means Amy will have to send Harrisburg a check for 40 percent of the wholesale value of her entire inventory—including the inventory she purchased well before this tax was even considered.
Not only will the tax force Amy to lay off all three of her employees, but it may financially ruin her.
I don’t know if I’m going to make it. I don’t even have the option to close. I signed a five-year lease, and I’m personally responsible for those payments. I’m going to lose everything. My parents helped me take out that loan. The bank will go after their house if I don’t make my payments. I don’t know what I’m going to do.
Unfortunately, Amy has learned how dangerous big government can be:
I didn’t know too much before, and the more I learn the more scared I get. I didn’t even know what a lobbyist was until about four months ago. I should never fear my government, and I fear them right now. We hired them to stand up for the little people, and I feel like a punching bag. They don’t care that we pay $16 million in other taxes every year.
This fall, lawmakers have a choice: They can shut down businesses across the state for a mere (in relation to the rest of the budget) $13 million in projected revenue from the tax, or they can spare people like Amy from losing their livelihoods.
For starters, lawmakers should support a move spearheaded by Rep. Jeff Wheeland (R- Williamsport) to replace the 40 percent tax with a 5-cents-per-milliliter tax, similar to what exists in North Carolina and Louisiana.
If additional savings are needed, lawmakers should cut hundreds of millions in corporate welfare tax credits and optimize state health care spending. Pennsylvania could save $153 million a year if state workers contributed to their health care at the same rate as private sector workers. Common sense solutions to savings and revenue exist that don't unfairly punish businesses like Amy's.
Like other vape entrepreneurs, Amy plans to empty her inventory to avoid the 40 percent floor tax. In the meantime, she hopes lawmakers will act quickly to repeal or replace the tax instead of sending families like hers to financial ruin.
RELATED : JOBS & ECONOMY, ECONOMY, PENNSYLVANIA STATE BUDGET, TAXATION
Auditor General Eugene DePasquale recently uncovered $2.5 million improperly paid to nine public charter schools. At issue is whether buildings owned by charter schools are eligible for the state's lease reimbursement program.
But in the scrutiny rightly given to these payments, are we missing an even bigger issue?
According to DePasquale:
The Pennsylvania Department of Education’s [PDE] own guidelines for the lease reimbursement are clear that buildings owned by the charter school are not eligible. The problem is that PDE makes no effort to verify ownership of the buildings or look for conflicts of interest between the school and related parties. They simply write a check for whatever amount the charter school submits. That is a disservice to Pennsylvania students and taxpayers.
Jan Murphy of PennLive adds:
Robert Fayfich, executive director of the Pennsylvania Coalition of Public Charter Schools, said he believes this dispute comes down to a difference of interpretation of the state's lease reimbursement guidelines.
"The auditor general takes the position if the building is owned by a charter school then it's not reimbursable and PDE says ownership is irrelevant to reimbursement," he said. "I'm sure charters are working based on the recommendation from their legal counsel plus direction from PDE."
DePasquale acknowledged that charter schools were not at fault for applying for reimbursement but he said the education department was wrong in making those payments.
To correct the mistake, the Department of Education could claw-back improper payments. State lawmakers could also pass legislation clarifying the state’s reimbursement guidelines.
But DePasquale’s audit should raise a more important question: Is state government doing everything it can to maximize the value of each dollar spent on public education?
After all, this is not the first time the Auditor General has uncovered examples of wasteful education spending. In May, for example, DePasquale estimated districts could save nearly $55 million if they made use of competitive bidding for transportation services.
There are numerous other ways for districts to save money. CF has long championed prevailing wage reform (and other mandate relief), pension reform, and collective bargaining transparency to ensure taxpayer funds are directed to the classroom, where they belong.
These, too, must be top priorities for lawmakers and public officials who seek to maximize the value of each education dollar.
RELATED : EDUCATION, EDUCATION SPENDING, TAXES & SPENDING
We're excited to announce the launch of Commonwealth Insight, a biweekly podcast where we'll bring you conversations with thought leaders and influencers from around our state and the country.
In our first episode, I interview Evan Baehr, president & co-founder of Able Lending which helps small businesses find the capital they need to survive and thrive. Evan is also the author of best-selling fundraising guide for startups, Get Backed.
I talk with Evan about the challenges facing entrepreneurs, why regulatory uncertainty keeps small business owners up at night, and the importance of entrepreneurialism.
Evan says, “The number one thing that troubles small business owners is uncertainty about the future of government regulation.” Look no further than the struggles Pennsylvania vape shops owners are going through for real-world affirmation of this truth.
I also talk with Matt Brouillette, president & CEO of the Commonwealth Partners Chamber of Entrepreneurs, about the greatest challenges he sees in Pennsylvania. Matt is the former, long-time president & CEO of Commonwealth Foundation. He explains how "impatient patience" is needed to change the course of our state.
Matt notes, “The policy problems we face today weren’t created overnight.” Reformers, he says, “must be willing to take incremental improvements while impatiently pushing for even bigger ones.”
Let us know what you think and keep an eye out for our next episode in two weeks!
RELATED : GENERAL
Stelle explained how this tax will put hundreds of small vape shops out of business for a minuscule amount of revenue to feed state government's spending addiction. Click below to listen:
The tax on vape shop owners sets a dangerous precedent. Without spending reforms, there's no telling which small businesses will be targeted next.
RELATED : TAXES & SPENDING, PENNSYLVANIA STATE BUDGET, TAXATION
Scottie Freeman wants to serve his community. He opened a vapor shop in a depressed part of Erie and planned to use the shop’s proceeds to open up an ice cream store in the same part of town.
He had his sights set on creating a welcoming environment for the entire community, but the state’s uncontrollable spending addiction put a damper on his plans.
Elected officials decided to increase spending by more than $1.5 billion, leading to a slew of new tax increases on working people. The $650 million tax increase package includes a 40 percent excise tax on vape shops like Scottie’s.
“I’m truly having a hard time wrapping my head around this logic,” said Scottie. “It doesn’t make any sense unless the tax was designed to knock out the small guys so the bigger businesses can make money.”
Scottie decided to open up a vape business because he saw a trend in the industry. Only after his investment did he truly understand the health benefits of vaping. “People have come up to me to say I saved their life,” he said. Many see vaping as a better alternative to smoking, and numerous studies have suggested it is less harmful than cigarettes.
Scottie recently closed his Erie vape shop because he felt he would not be able to serve his customers well post-tax increase. “I can’t help people the way I want to because the product will be too expensive,” he said. “My customers still want me to stay open. And they’re angry I’m closing.”
Scottie doesn't give up easily. He's committed to continue serving his customers: “I still hope to provide people an opportunity to access vape products. I had to learn to cook when I was seven and wash my clothes at eight. I’ve learned to be creative.”
Still, Scottie can’t help but feel upset about the fate of his business. “They set out to destroy something I spent my time and money building. I can’t even go into my shop now without getting angry.”
Scottie isn’t alone. Vape shop owners from Erie to Philadelphia are closing because of the devastating excise tax on their industry.
As long as the tax remains in place, entrepreneurs like Scottie will be forced to abandon their dreams and close their doors.
RELATED : SMOKING, PENNSYLVANIA STATE BUDGET, TAXES & SPENDING, TAXATION
The 2016-17 budget has passed, yet it remains unbalanced, relying on borrowing money and yet-to-be-passed legislation. Many revenue estimates are overly optimistic. Without efforts to reduce spending or reform cost drivers like pensions and human services, taxpayers should expect a push for tax hikes in 2017.
1. Tobacco taxes are an unstable revenue source, but they account for 75 percent of this year’s $650 million tax hike. Recently, Philadelphia reported cigarette tax revenue 25 percent below original estimates. Expect statewide tobacco taxes to fall short, and continue to decline as smokers give up or travel to other states for cheaper cigarettes.
2. New revenue from wine-expansion is questionable. The estimated $150 million in revenue for 2016-17 assumes all 12 casinos will seek $1 million permits for 24-hour alcohol sales. However, no casino has shown interest. The estimate also assumes expanded hours, coupons, and flexible pricing (read: higher prices) will boost revenues by $55 million.
3. Significant one-time revenue transfers, absent spending reforms, will increase pressure for broad-based tax hikes. The budget includes roughly $460 million in one-time revenue, including money from new gaming licenses, a $200 million loan from the medical malpractice fund, and several one-time transfers from other funds. While legislators are right to look to surpluses in other funds before raising taxes—though this year they did both—one-time shifts were needed only to cover the largest spending increase in a decade.
4. The budget depends on $100 million from a gambling expansion that doesn't exist. Lawmakers intend to pass a gaming expansion bill in the fall, but there is no guarantee they will. This additional $100 million is needed, as lawmakers moved $95 million in payments to the Commonwealth Financing Authority off budget. Balancing the budget also depends on $50 million from a casino license in Philadelphia; however, this license has been tied up in court for two years with no end in sight.
5. Optimistic General Fund revenue estimates. Independent rating agency S&P assigned Pennsylvania bonds a negative outlook due to the commonwealth’s dubious revenue estimates: “We view the fiscal 2017 budget as structurally imbalanced and believe that many of the revenue assumptions could prove optimistic.”
It's easy to overlook tax hikes that may not affect your daily life, but new taxes on smokers, vapors and Netflix users are just a prelude to the higher taxes in store for all Pennsylvanians unless legislators take action on long-term fiscal reforms.
RELATED : TAXES & SPENDING, TAXATION, PENNSYLVANIA STATE BUDGET
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The Commonwealth Foundation is Pennsylvania's free-market think tank. The Commonwealth Foundation transforms free-market ideas into public policies so all Pennsylvanians can flourish.