Taxes Threaten Chris's Livelihood

JULY 27, 2016  | by BOB DICK

Chris Hughes has owned Fat Cat Vapor Shop for almost three years. The shop—tucked away in a small Lycoming County borough—specializes in electronic cigarettes (e-cigs), which many people seek as a healthier alternative to traditional smoking.

Chris understood the needs of people looking for an alternative to cigarettes. Instead of waiting for someone else to meet those needs, Chris took a risk and opened his own vape shop in December of 2013. “I didn’t go into business for myself," Chris said. "I went into business to help people.”

His capacity to help others is now in jeopardy.

Earlier this month, the state legislature passed a 40 percent excise tax on Chris’s vape shop and others like it. Worse, the tax is retroactive. Not only is the 40 percent tax imposed on products Chris buys, but he must also pay the tax on existing inventory.

According to Chris’s estimates, the new law would require him to make a tax payment of up to $40,000. “I just can’t afford that. This tax is forcing me to close my business.” Lawmakers included the new tax on e-cigs as part of a $650 million tax increase package to balance the state’s budget.

The new e-cigs tax raises $13 million, which accounts for just 2 percent of the overall tax package. But to Chris, the tax is an enormous burden on his business—one he won’t be able to recover from. Chris isn’t the only one upset at the prospect of closing. “I’ve had customers come in crying because of the news that I’m shutting my doors. This is wrong. This is just unfair.”

Chris attempted to work with the legislature to pass a less punitive tax but to no avail. His pleas to avoid a life-altering tax fell on deaf ears. Chris plans to close his shop in September if lawmakers don’t repeal the tax. “I’m going to continue to fight, but I can’t help but feel let down by my government.”

Fortunately, there’s still time to make things right. Lawmakers should come back to Harrisburg and repeal the excise tax. Any revenue lost could be offset by cutting spending from the $800 million of corporate welfare in the state budget.

Reducing special subsidies to save the livelihood of small business owners like Chris is a practical and moral solution to an unacceptable problem. It’s also a cause worthy of lawmakers’ attention—and one they must pursue before time runs out.

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Pennsylvania’s Prime Subsidies to Amazon

JULY 26, 2016  | by JAMES PAUL

Corporate welfare projects and celebratory press releases go together like peanut butter and jelly. For the most recent example in Pennsylvania, see the latest from the governor’s communications office:

Governor Tom Wolf announced today that Amazon will expand its presence in Pennsylvania and has committed to the creation of at least 5,000 new, full-time jobs statewide.

Wait for the kicker:

The company received a funding proposal from the Department of Community and Economic Development that includes a $5 million Pennsylvania First Program grant, $15 million in Job Creation Tax Credits to be distributed upon creation of the new jobs, and $2.25 million in WEDnetPA funding for employee training.

These stories, sadly, are commonplace in the commonwealth—the nation’s leader in corporate welfare. Rather than leveling the playing field for all businesses, Pennsylvania government picks winners and losers with a hodge-podge of grants, loans, and tax credits—often only available to well-connected firms with influential lobbyists.

Sure, 5,000 (promised) jobs will be terrific for Pennsylvanians lucky enough to land one. But what about the entrepreneurs competing with Amazon who won’t benefit from taxpayer-funded perks? Don’t hold your breath waiting for a follow-up press release. 

See this CF Policy Brief for more on the costs of corporate welfare.

Relatedly, Amazon’s founder and CEO Jeff Bezos net worth was recently pegged at $65 billion. Whether they like it or not, Pennsylvania taxpayers are helping Bezos climb higher on the list of the richest people on Earth.

Bill Gates better not get comfortable at the top.

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Saving for a Rainy Day – But Whose Money?

JULY 25, 2016  | by JAMES PAUL

Let’s talk for a moment about rainy days—specifically, the need to save funds to spend on one. Several school board administrators and lobbyists have taken issue with CF’s searchable, sortable database of school district fund balances, showing public schools are sitting on over $4 billion in "rainy day funds." Meanwhile, 85 percent of school districts plan to raise property taxes.

A Temple University report, authored by a former Pennsylvania School Boards Association employee, argues:

Just as an individual or family should maintain a savings account for unforeseen expenses or emergencies, school districts should also have funds in reserve to pay for emergency repairs or cover unexpected interruptions in revenues – such as a layoff at a major factory which suddenly affects tax collections.

If an individual or family could impose real estate taxes on their friends and neighbors, this analogy might pass muster. But an obvious difference exists between families socking away their own hard-earned money in a savings account and a school board severely over-taxing its district. The CF database shows 21 districts with over 50 percent (!) of their total expenditures squirreled away in reserve.

Every dollar held in excess by a school board is money earned by taxpayers that could otherwise be saved, invested, or spent by taxpayers. While some school districts stock up reserve funds, thousands of Pennsylvanians struggle to balance their family budgets.

Typically, the school board lobby defends excessive reserves by drawing an ironclad distinction between unassigned funds and assigned or committed funds. As CF explained in an earlier blog:

A district’s fund balance—what it owns minus it what it owes—is comprised of assigned, committed, and unassigned funds. Assigned and committed reserves are available funds designated for a specific purpose, while unassigned funds are available for any purpose.

School board directors argue the public should only scrutinize unassigned funds, since assigned and committed funds have already been earmarked. [For example, the Temple University report focuses solely on unassigned funds. Other funds are largely ignored.] They fail to mention, however, how easily money can be shifted among the three funds—often with a mere majority vote at the next board meeting.

The CF database anticipates this line of argument—and provides both total and unassigned reserve funds as a percent of expenditures. You’ll notice many districts keep their unassigned funds stocked to the legally mandated maximum amount at which they can still raise taxes, between 8 and 12 percent of total expenses, depending on district size.

Whether school boards should be judged on all reserve funds or simply unassigned funds is ultimately for taxpayers to determine. But the fact remains that dozens of Pennsylvania districts amassed large rainy day funds while also seeking tax increases.

What’s more, the Temple University report makes no mention of school districts’ capital reserve funds—yet another pot of money districts use to plan for construction projects.

Drawing attention to reserve funds is critical in order to increase transparency and raise awareness for taxpayers. While few school districts are sitting on a “pot of gold,” Pennsylvanians have a right to know that almost all districts enjoy alternatives to higher taxes.

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The Pension Crisis Will Trigger Another Tax Hike


The 2016-17 budget is in the books with a $650 million tax increase. That's a significant increasebut it could pale in comparison to future tax hikes if pension reform continues to fall by the wayside.

Meanwhile, there's a notion gaining traction that we don't need pension reform because our public pension crisis is at a climax. After all, the yearly spikes in pension contributions will moderate beginning in fiscal year 2018.

Nothing could be further from the truth.

Recent reports from the state's two pension systems (PSERS & SERS) show the crisis is far from over. In April, SERS reported an approximately $350 million jump in the system's unfunded liability, swelling to $18.79 billion in 2015. But according to their actuary, the unfunded liability is closer to $19.45 billiona roughly $1 billion jump. 

SERS assumes a 7.5 percent rate of return for investments, but the actual rate of return was only 0.4 percent in 2015. This year isn't looking any better. SERS reported a 0.7 percent investment return for the first quarter of 2016.

In June, PSERS reduced their assumed rate of return from 7.5 percent to 7.25 percent starting in fiscal year 2017. These changes will add to the unfunded liability by about $2 billion.

In the past 3 months alone, we've added at least $3 billion to the already enormous $63 billion pension liability. Now imagine the impact of a recession or another reduction in assumed investment returns.

It's clear our pension system's liabilities are still growing at a rapid pace with no protection for taxpayers. The only way to truly end the pension crisis is to change the fundamental structure of these plans from the antiquated defined benefit plan to a modern defined contribution plan.

Like the budget, small adjustments may ease tensions in the short-term, but systematic reforms are required to change our future. Right now all signs point to higher taxes for Pennsylvanians.

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A Budget of Convenience

JULY 19, 2016  | by BOB DICK

The dust has settled on the 2016-17 budget debate—at least for the moment.

Some people hail the agreement as an example of what Harrisburg can accomplish when two parties work together. Others defend it as an improvement over previous budgets and the least bad option under the circumstances.

These conclusions miss the mark. In the budget battles to come, taxpayers deserve better policies and a more deliberative process to govern how lawmakers collect and spend their hard-earned dollars.


Lawmakers drove up spending by $1.6 billion and raised taxes by $650 million to pay for a massive increase in the size and scope of government. Such a policy decision will have painful consequences for the Pennsylvanians working every day to make ends meet.

Part of the $650 million tax package includes a 40 percent excise tax on e-cigarettes. This punitive tax will force some small business owners to close their doors. Wallace McKelvey of PennLive featured one of those business owners, Chris Hughes, in his story about the costs of higher taxes:

Hughes, whose Lycoming County shop currently has three employees, said he plans to sell off his inventory and close the store before the end of September. Like many owners, he said, he doesn't have the cash reserves to make a lump-sum payment to the state. 

While e-cigarette shops across the state prepare to close, and residents—especially low-and middle-income residents—prepare to pay more for cigarettes, select businesses will soon have a bigger pool of special subsidies to draw from. According to Eric Holmberg of PublicSource, lawmakers increased the number of available tax credit subsidies by more than $100 million starting next year.

With the stroke of a pen, government can put people out of business and lavish others with special privileges simultaneously. It's not fair and it's not effective. The ad hoc method of economic development employed by the state has not succeeded and will only further alienate those who feel government should not be picking winners and losers.


Lawmakers’ unwillingness to control spending and protect working people from tax increases wasn’t the only disappointing aspect of this budget cycle.

The process leading up to the passage of the $650 million tax increase was marred by a lack of transparency. Both the House and Senate suspended the rules that allow for adequate consideration of the legislation. Consequently, the 267-page tax bill passed less than three hours after it was introduced. There was little time to review and debate it.

Some of the tax bill’s provisions are just now coming to light, including a handout to Allentown businesses, a bailout of Philadelphia’s cigarette tax fund and a permanent extension of the tax itself. Again, no debate over the merits of these policies.

During the midst of the budget impasse, I made the point that it’s not enough to get the budget done. Lawmakers had to get it right. This year, too many lawmakers opted for the former, giving us a budget of convenience rather than one of principle. 

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What's in the Final 2016-17 Budget?


On June 30, the legislature passed a $31.6 billion General Fund Budget. Gov. Wolf allowed this budget to become law without his signature on July 12. On July 13, the House and Senate passed a revenue package to pay for the spending plan.  

Here is what you need to know about the budget.

The Good

  • Spends less than Gov. Wolf's proposal. The governor's $33.3 billion budget was never seriously considered, but it's still worth noting that the final budget spends $1.7 billion less.
  • No income or sales tax increases. The tax package does not include income or sales tax increases. The overall tax increase of $650 million is about one-fourth of the $2.7 billion tax hike Gov. Wolf proposed. The enacted tax increases amount to $203 per family of four, borne mostly by smokers.
  • Expansion of school choice. The legislature increased the Educational Improvement Tax Credit (EITC) by $25 million. The EITC provides tens of thousands of private school scholarships to students in need. The state will now offer $75 million in tax credits for K-12 scholarships.

The Bad

  • Spending growth 5 times the rate of inflation and population growth. The $1.6 billion increase represents a 5 percent increase in a year when inflation is less than 1 percent. This represents the biggest spending increase in a decade. The General Fund has grown by $2.5 billion in Gov. Wolf’s first two years, approaching the $2.85 billion General Fund increase passed during the prior eight years.
  • $650 million tax increase. The $1 per pack cigarette tax hike makes up the bulk of the new revenue. This tax is an unreliable revenue source, would disproportionately harm the poor and do little to dramatically reduce the number of smokers in Pennsylvania. The tax could potentially hit 2 million adults.

  • The budget remains unbalanced. The budget counts on $200 million in loans from other funds and $100 million from expanding online gambling—legislation that hasn’t passed the legislature yet. Pennsylvania's Constitution does not say the legislature can pass something pretty close to a balanced budget or a promise to balance the budget in the near future. It requires a balanced budget. By not balancing the budget and depending heavily on unreliable revenues from sin taxes, the risks of a large budget deficit and a renewed push for broad-based tax hikes in 2017 is high.
  • Does not include vital spending reforms. Lawmakers did not address the $800 million in corporate welfare identified in the budget. Nor did they tackle reforms to slow the unsustainable growth of human services spending. There is much more the legislature and Gov. Wolf can do to prioritize the use of taxpayers’ dollars before calling for higher taxes on families.

For a more detailed version of our analysis, read our Policy Points on the 2016-17 budget.

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Unlearned State Budget Lessons


Charles Mitchell, newly appointed President and CEO of the Commonwealth Foundation, appeared last week on PMA Perspective to discuss this year’s state budget process and the “unlearned lessons” of last year’s budget.

Charles explains how this year’s budget takes money from the poor and gives it to big corporations, and how the decision to pass a spending plan before a revenue plan led to higher taxes on Pennsylvanians. Charles also points out that no state has ever been successful in the long-term by expanding taxes on gambling and tobacco.

Watch the video below to learn more about the budget process and how we can reverse these patterns to make Pennsylvania the next success story.  

Budget Process Continues from PMA Perspective on Vimeo.

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How the $650 Million Tax Increase Impacts You


The state budget is, for all intents and purposes, complete. While it remains unbalanced, we now know exactly which taxes are going up. 

The $650 million tax hike passed by the legislature is less destructive than Governor Wolf's $2.7 billion proposal—which would have taken another $850 per family of four—but it still demands more of working Pennsylvanians in the midst of a struggling economy.

The chart below breaks down the additional $204 per family of four in new taxes. It also shows which Wolf tax hikes were not approved. 

Tax Hikes in the 2016-2017 Budget
State Tax Rate Changes

Total Revenue


Per Capita Per Family of Four
Income tax on lottery winnings $15,800 $1.23 $4.94
Digital downloads sales tax $46,900 $3.66 $14.65
Bank shares tax $23,000 $1.80 $7.19
Cigarette tax hike $431,100 $33.67 $134.69
Smokeless tobacco and e-cigarettes tax $64,600 $5.05 $20.18
Limit on vendor sales tax discount $55,500 $4.34 $17.34
Gambling tax on table games $16,800 $1.31 $5.25
Severance Tax $217,800 $17.01 68.05
Personal Income Tax $1361,500 $106.35 425.39
Insurance Premium Tax $100,900 $7.88 31.53
Total State Tax Increases $653,700 $51.06 $204.24

Low-income Pennsylvanians will feel the brunt of the tax increases, since the bulk of the new revenue comes from cigarettes and tobacco products. Those making less than $30,000 spend 14.2 percent of their income on tobacco, while those earning between $30,000 and $59,999 spend only 4.3 percent. 

To add insult to injury, politically-favored corporations were awarded new forms of corporate welfare. The final budget increases the film tax credit for Hollywood film producers by $5 million, beginning next year, and adds at least $9 million in a variety of other corporate handouts.

To shield Pennsylvanians from higher taxes, elected officials must control spending. A great place to start is reducing corporate welfare by limiting borrowing and tax credits. Passing true pension reform will also go a long way in relieving the long-term budget squeeze on school funding.

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State Spending Addiction Leads to Tax Hike

JULY 13, 2016  | by BOB DICK

Lawmakers are on the cusp of pushing through a $650 million tax increase on working Pennsylvanians.

Earlier this afternoon—without much warning or debate—a conference committee passed House Bill 1198, which purportedly raises $750 million (as part of a $1.3 billion revenue package) to balance the state’s presently illegal budget.

The bill does not raise sales or income taxes, and represents only a fraction of Gov. Wolf's original tax hike proposal.

However, this seventh tax hike proposal does include eight different tax hikes to pay for massive spending increases agreed to last month. Here are the tax hikes up for consideration:

  • $1 per pack cigarette tax hike. This tax is an unreliable revenue source, would disproportionately harm the poor and do little to dramatically reduce the number of smokers in Pennsylvania. The tax could potentially hit 2 million adult smokers in the state.
  • Other tobacco tax increase. House Bill 1198 would impose a 55-cents-per-ounce tax on roll-your-own-tobacco and smokeless tobacco, taking an estimated $50 million out of the pockets of small business owners and their customers.
  • E-cigarettes tax. The proposal would slap a 40 percent excise tax on the wholesale price of electronic cigarettes.
  • Entertainment tax. A 6 percent sales tax would be added to all purchases of downloaded digital videos, books, games, music, and applications.
  • Bank savings tax. Raises the shares tax on bank and trust companies. According to testimony from the PA Bankers Association, the current bank shares tax is already higher than most other states, and raising it could hurt lending in the commonwealth.
  • Business owner tax hike. The legislation reduces the “vendor discount” offered to retail stores who collect sales taxes for the state. As the Lancaster Chamber of Commerce has pointed out, the vendor discount is “justifiable compensation to recover a small portion of the actual costs incurred by acting as a tax collector…” Under this proposal, the price of acting as a collection agency for the state would rise.
  • Another gambling tax. State law would require casinos to pay a new 2 percent tax on their gross revenue generated from table games.
  • A luck tax. If you happen to win the lottery, state government will be skimming 3.07 percent off the top.

Despite 8 new tax increases raising an estimated $650 million, the budget is still not balanced. Why?

Lawmakers are relying on $100 million from online gambling—though the legislature has yet to pass the legislation to legalize it. The budget also relies on borrowing $200 million from a state medical malpractice insurance fund.

The state constitution doesn’t say the legislature can pass something pretty close to a balanced budget, or a promise to balance the budget in the near future. It requires a balanced budget, officially saying, “Operating budget appropriations made by the General Assembly shall not exceed the actual and estimated revenues and surplus available in the same fiscal year.” 

Pension and charter school reform, two issues previously included as part of this budget negotiation, were not addressed. Lawmakers indicated they plan to address these issues this fall.

One positive reform to note: Lawmakers are advancing a school code bill that includes a $25 million increase in the Educational Improvement Tax Credit (EITC) program. The EITC, which provides tens of thousands of private school scholarships to students in need, is a pillar of school choice in Pennsylvania.

The EITC expansion is one bright spot in an otherwise dark set of tax hikes.

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PSERS Revokes Ghost Teachers’ Illegal Pension Credit


In a victory for taxpayers, the Public School Employees Retirement System (PSERS) has revoked pension credit illegally given to Allentown “ghost teachers” who were hired to teach but instead worked full-time for the local teachers’ union.

Even as the Allentown School District laid off 272 teachers in the past five years, the district used tax dollars to fund the salary and benefits of the full-time president of the Allentown Education Association.  

In response to a lawsuit filed by the Fairness Center, PSERS determined the tenures of the current and previous AEA presidents were “non-retirement-covered compensation and years of service credit were removed for the same number of years that each served as union president…”

With this announcement, reported by the Allentown Morning Call and the Easton Express-Times, PSERS declared more than $1 million in salary earned by these ghost teachers ineligible for pension credit.

But pensions aren’t the end of it. Allentown taxpayers have also funded the salaries and other benefits of the city’s ghost teachers—even while the cash-strapped district laid off hundreds.

Pennsylvanians expect their education tax dollars will actually fund education. The fact remains that taxpayers should not be on the hook for union work, and teachers should be paid to teach.

Members of the General Assembly agree. Last month legislation that would strictly limit ghost teaching (HB 2125) advanced in the House.

PSERS’ decision is an important first step toward protecting taxpayers from funding employees of a private organization and making sure teachers are actually in the classroom.

Click here to find out if there are ghost teachers in your school district, and watch and share this short video describing the problem:

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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.