You're probably aware that Pennsylvania’s tax burden is among the most oppressive in the country. But the tax code is just the tip of the iceberg when it comes to the state’s stifling regulatory policy. Entrepreneurs and innovators are also weighed down by complex regulations and onerous licensure requirements.
According to a recent survey of thousands of firms, Pennsylvania is one of the least friendly states for small business—receiving a "D" grade for its overall business climate, a lower mark than each of its bordering neighbors. Only 5 states scored worse with an "F".
The survey estimates a whopping 43 percent of low-income occupations in Pennsylvania require a state license. Starting a new business in the Commonwealth has never been more challenging.
The hidden cost of regulatory compliance is staggering. Every afternoon spent toiling away with confusing paperwork is an afternoon that could be spent providing goods or services. Every trip to City Hall to renew a permit, every hour wasted on a government phone tree, every day spent waiting for the bureaucratic stamp of approval to arrive in the mailbox—each of these is a lost opportunity for sustainable, long-term economic growth.
And let’s not forget the cynical reason behind many regulations: to protect established firms from facing new competition. The unfortunate victims of these regulations are consumers, who suffer with higher prices and fewer choices.
Making life simpler for families and job creators may sound like a minor reform, but it would go a long way toward improving Pennsylvania’s economic outlook.
We have been warned: Pennsylvania is on a path to higher taxes, fewer jobs, more debt, and a lower standard of living if the state does not rein in government spending.
As we pointed out last November, Pennsylvania is facing a structural deficit, but it now looks like the state’s fiscal problems have compounded. The Independent Fiscal Office (IFO) recently released updated revenue projections, forecasting $1.3 billion less revenue for fiscal year 2013-14 and 2014-15.
The IFO’s projections mean a year-end deficit of more than $353 million for this fiscal year and a nearly $1.2 billion shortfall in next year's proposed budget. Acknowledging the reality of our fiscal problems, Governor Corbett has reportedly called for $1.2 billion in cuts from his budget proposal.
We agree with the governor’s call for fiscal responsibility. From ending corporate welfare to welfare reforms, our newest report, Blueprint for a Prosperous Pennsylvania, explains how lawmakers can make cuts that balance the books and improve the quality of life for all in the commonwealth.
Over the next two weeks, we will highlight those specific recommendations right here on PolicyBlog. Stay tuned!
In 2007, the Philadelphia Youth Network needed to cut 1,100 jobs for inner-city teens. Why? Because they couldn't afford to place as many teens in jobs under the higher minimum wage.
In the end, the organization was able to secure additional funding to maintain job placements, but the experience of Philadelphia Youth Network demonstrates how the minimum wage harms, not helps low-income workers.
Raising the minimum wage is ineffective for two reasons: Most low-income breadwinners do not make the minimum wage and minimum wage hikes actually shrink the number of available jobs.
First of all, the majority of Pennsylvania's minimum and near-minimum wage earners reside in households with an annual income above $40,000 a year. Only 10% of PA min wage earners are single parents who qualify for the federal EITC.
Secondly, minimum wage hikes reduce job opportunities. In 2006, a comprehensive review of more than 100 studies found, in the vast majority of cases, raising the minimum wage increases unemployment for low-wage workers. A 10% increase in a federal or state minimum wage actually decreased employment for black males by 6.5%, according to a 2011 study.
The bottom line is a higher minimum wage makes it harder for employers to offer opportunities to those who need it most.
So how do we help families struggling to make ends meet? A one-percentage point drop in the state's corporate tax rate would increase annual economic growth by 0.1 to 0.2%, leading to higher productivity, which means more jobs and higher wages. Pennsylvania can also scale back professional licensing to give low-wage earners the opportunity to increase their incomes through entrepreneurship.
Advocates for low-wage workers should be pursuing reforms that work, not policies that raise some workers wages at the expense of others.
Pennsylvania’s economy is beginning to recover from the 2007 recession, according to the latest numbers from the Bureau of Labor Statistics.
Since 2010, Pennsylvania has added 86,400 jobs, ranking 21st among states. In contrast, Pennsylvania added just 41,300 jobs from 2002-2010. This lack of job growth can be attributed to a variety of things including national trends; Pennsylvania's tax burden, which is the 10th highest in the nation; and the state's regulatory environment and growth in government spending—issues which lawmakers need to tackle.
While Pennsylvania employment has not returned to its prerecession peak, the state is slowly making progress. Claims of Pennsylvania ranking near the bottom in job creation during the past few years are widespread but misleading. In fact, the state has ranked poorly in job growth for decades.
Policymakers in Harrisburg should consider reforms to encourage job growth. Here are just a few recommendations from our new report, Blueprint for a Prosperous Pennsylvania:
End Corporate Welfare and Lower the Tax Burden: Pennsylvania will spend approximately $1.6 billion on corporate welfare this fiscal year. Instead of handing out loans, tax credits, and special favors to privileged companies, policymakers should end these programs and use the savings to cut Pennsylvania’s corporate tax rate, which is the second highest in the world.
Enact Welfare Reform: Pennsylvania's welfare budget continues to grow at an unsustainable rate. To prevent burdening Pennsylvanians with even higher taxes, policymakers should crackdown on the fraud and waste inherent in welfare programs, and demand flexibility from the federal government to restructure the welfare system’s incentives, which only hurt those trying to escape poverty.
Enact Spending Limits: In order to put Pennsylvania on a sustainable path, lawmakers should adopt fiscal restraints, such as spending limits for core functions of government. The limits would control the growth of government spending by tying increases to inflation and population growth. Had state spending limits been enacted in 2000, taxpayers could have seen savings of $4,000 per family of four.
Pennsylvanians are losing economic freedom according to the Fraser Institute’s annual report, Economic Freedom of North America 2013. The commonwealth is slowly losing ground ranking 33rd in 2009 and dropping to 40th in the latest study.
The index measures the limitations on economic freedom imposed by all levels of government in the 50 U.S. states and 10 Canadian provinces under three broad categories. Pennsylvania performs poorly in each category:
- Size of government: 48th
- Takings and discriminatory wealth redistribution: 34th
- Labor market freedom: 24th
There are several reasons for Pennsylvania’s abysmal performance. Chief among them is Pennsylvania's growing debt and spending, which has created $47 billion in unfunded pension debt and an estimated $1.2 to $1.4 billion budget deficit.
If policymakers want to improve the lives of Pennsylvanians, focus should be on increasing economic freedom and opportunity by enacting pension reform, slowing the growth of overall spending and reducing the size of government.
For more on how to accomplish these goals, check out our newest report: Blueprint for a Prosperous Pennsylvania.
Did you know that raising the minimum wage harms the low-skilled workers the policy is meant to help?
Or that prevailing wage laws artificially increase the cost of public works projects at the expense of lower taxes or expanded government services?
Associate Professor of Economics Matthew Rousu joins us for a wide-ranging discussion on Pennsylvania's labor policy in our latest Google+ Hangout and podcast.
Matt teaches at Susquehanna University in Selinsgrove, Pa., and has written on economics for Forbes and US News and World Report as well as for Pennsylvania newspapers The Patriot-News and The Philadelphia Inquirer.
Matt helps us rethink the impact of economic policies that seem beneficial on the surface but have unintended negative consequences.
Click here for an audio-only podcast version.
Want to hear more from Professor Rousu? Visit his blog on economic policy at paeconomist.blogspot.com.
This morning, CF President & CEO Matthew Brouillette appeared on FOX Business's Varney & Co. to highlight the public pension crisis facing Pennsylvania and cities and states across the nation.
Matt's appearance follows his recent op-ed in Investor’s Business Daily which draws lessons from Detroit’s economic decline and bankruptcy. He warns that state and city public pension and health care costs together equal $60,000 per family of four.
Things are looking somewhat up for Pennsylvania’s economy, according to the annual Rich States, Poor States published by ALEC. The 2013 edition ranks Pennsylvania 34th in economic outlook, up from 40th last year and the highest economic ranking since the index’s creation.
Rich States, Poor States considers 15 factors heavily influenced by state policies to predict how a state’s economy will perform. While the commonwealth’s high tax burden and lack of worker freedom continue to hinder growth, a slowdown in state spending and continued phase-out of the capital stock and franchise tax have helped the state move from the bottom third to the middle-of-the pack.
But middle-of-the-pack isn’t good enough. To continue to attract jobs and investment, Pennsylvania will have to tackle big cost drivers like Medicaid and the pension tsunami. Continued tax reforms will help too, such as Governor Corbett’s latest proposal, which we estimate will create more than 2,500 new jobs by 2018 if enacted.
Earlier this week, GE announced plans to move 950 jobs from Erie, Pa. to Texas. What is one of the key reasons Pennsylvania continues to lose jobs and population to states like Texas? Economic freedom.
The Mercatus Center's latest edition of Freedom in the 50 States underlines the problem hindering the opportunities available to Pennsylvanians. The study ranks the Keystone State 31st overall on its freedom index. The reasoning:
The state's ranking remains mediocre on fiscal policy. It has higher-than-average taxes but performs much better than most states on government spending and employment. However, it has high government debt and is not as fiscally decentralized as most states.
Not only are Pennsylvanians taxed too much, but we are neck deep in government debt. The analysis also scored our state below average in business regulations and tort abuse.
Study after study finds that economic freedom results in higher quality of life. States with more economic freedom see higher rates of GDP growth, lower unemployment, and lower levels of state and local debt. Economic freedom also leads to higher incomes, less poverty, better environments, and even longer lives.
This short video from Duquesne University professor and CF Scholar Antony Davies underscores the benefits of economic freedom.
Critics, and likely election challengers, of Gov. Tom Corbett point to the singular fact that the state's unemployment rate is higher than the national average (though not significantly, nor significantly changed from last year). These critics claim this is the result of fiscal restraint in the last two state budgets. But focusing on this one data point ignores the broader economic trends found in the same Bureau of Labor Statistics data.
To begin with, the unemployment rate is determined by calculating the number of "unemployed"—those actively seeking work—by the total labor force (those with jobs plus unemployed). Thus the "unemployment rate" can rise if people lose jobs, or if more people enter the labor force by starting to look for work or move to a new state. The latter is the case in Pennsylvania—more people are entering the labor force, and most are getting jobs.
Here are some facts about Pennsylvania's growth:
- The number of employed persons grew by 143,537. Pennsylvania's growth rate was more than double the national average.
- Over the past year, Pennsylvania nearly matched the other 49 states combined in new labor force participants. PA's labor force growth rate was 17 times the growth in the other 49 states.
Last Two Years
- The number of employed persons grew by 165,997. Pennsylvania's growth rate was slightly higher than the national average.
- Pennsylvania's labor force growth rate was 4.5 times the growth in the other 49 states.
Corbett's Two Years vs. Rendell's Second Term
- Job growth (reported by employers, which differs somewhat from household survey data described above) was 91,100 over the past two years. From January 2007 to 2011, Pennsylvania lost 136,600 jobs.
- Pennsylvania's unemployment rate is down 0.1 percent since January 2011. It had grown 3.8 percent in the prior four years.
This trend shouldn't be surprising. The historical evidence demonstrates that government spending doesn't stimulate economic growth. Pennsylvania's jobs record demonstrates the old axiom that you can grow the economy or you can grow the government, but you can't grow both.
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The Commonwealth Foundation is Pennsylvania's free-market think tank. The Commonwealth Foundation crafts free-market policies, convinces Pennsylvanians of their benefits, and counters attacks on liberty.