What the Soda Tax Can Teach us About the Budget

The high costs of Philadelphia's soda tax are mounting by the week. The Philadelphia Inquirer is reporting a 30-50 percent drop in beverage sales for some supermarkets and distributors. The drop in sales have employers talking about significant layoffs.

Jeff Brown, whose company manages six ShopRite stores, painted a sobering picture of how the tax has affected his employees:

Since January, Brown said, he has had to cut 6,000 employee hours...He said he suspects he will lose about 300 people, which amounts to one-fifth of his total workforce voluntarily and through layoffs in coming months.

What's all this have to do with Harrisburg?

Gov. Wolf's 2017-18 budget proposal mirrors Philadelphia's tax-and-spend approach. The governor is proposing more than $1 billion in tax hikes to pay for sizable increases in state spending. 

The governor defends his tax hikes by asserting his proposal “doesn’t raise taxes on people.” That sounds eerily familiar to Mayor Kenney's promises that the soda tax would be paid by distributors, not consumers. Mayor Kenney is blaming greed for the higher prices and layoffs, revealing a fundamental misunderstanding of how taxes affect workers.

In reality, a benign tax that was supposed to help fund pre-k and make Philadelphians healthier is putting people out of work and raising the cost of groceries. 

Philadelphia’s mistake should serve as stinging reminder that tax hikesno matter how seemingly inconsequential or justifiablecan hurt many of the people who can least afford to pay.

We need to look beyond tax hikes and address the real problem in our economy: Decades of red tape and uninterrupted transfers of wealth to government, both of which have diminished economic opportunties for working Pennsylvanians.

Gov. Wolf has put some good ideas on the table, but it's not enough. State government has to embrace innovation and leave the failed policies of the past behind.

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posted by Elizabeth Stelle, Bob Dick | 01:10 PM

Film Tax Credit Draws Bad Reviews

Be it Tom Cruise in Jack Reacher, Denzel Washington in Fences, or Gerard Butler in Law Abiding Citizen—everyone loves to see their favorite movie stars come to the neighborhood. This, combined with the promise of a local economic boost, provides plenty of incentive for Pennsylvania’s film tax credit program—which offers a 25 percent rebate on most film-related expenses. However, recent reporting shows the $60 million tax credit is inundated with waste, lacking oversight, and straying from legislative intent.

Reporter Eric Holmberg of Public Source obtained records for 339 film and television projects approved to receive 95 percent of tax credits allocated since 2007. Here are the major findings:

Pennsylvania productions received more than $116 million in tax credits. That’s more than one out of every five tax credit dollars, missing the program’s true intent to attract out-of-state productions.

Few productions use the tax credit; productions sell 99 percent of all film tax credits to companies that have nothing to do with film or TV. Essentially, the film tax credit is a backdoor tax break for some of the largest corporations and utilities operating in Pennsylvania.

Film tax credit dollars are frittered away in those transactions. The program wasted more than $27 million of taxpayer dollars by allowing credits to be sold to non-film companies, such as Apple. Secondary tax brokers also received thousands in fees from each transaction because of this arrangement.

Given Pennsylvania’s budget shortfall, it’s becoming nearly impossible to justify another year of this corporate welfare program. 

Fundamentally, the film tax credit is bad economics. The jobs it creates are relatively few and never permanent. It has largely failed to seed a permanent, successful native industry in Pennsylvania to work with outside studios.

Time and again, the film tax credit provides a net loss in economic activity. In Michigan, a review of the program’s performance in the 2010-2011 fiscal year found a net cost of $111.5 million. An earlier study from South Carolina found it generated only 19 cents in tax revenue for every dollar spent, which, according to the Tax Foundation, is close to the average return.

The lack of accountability is another issue plaguing the program. In 2014, an Auditor General’s report on the Pennsylvania agency tasked with overseeing the credits (DCED) concluded that "DCED did not provide true accountability and transparency." Attempts at clarification from DCED concerning its metrics for conducting and evaluating the program provided no answers at all, let alone “evidence that metrics even exist.”

Pennsylvania already leads the nation in corporate welfare. This distinction is unacceptable in light of the state’s persistent and immense budget challenges. It's time to reevaluate these programs and make better use of taxpayers’ funds. The film tax credit is a great place to start.

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posted by James Paul, Kris Malysz | 00:55 PM

The Inquirer's Problematic Budget Prescriptions

A Philadelphia Inquirer editorial urges optimism about the forthcoming state budget debate. It’s certainly well-warranted. Gov. Wolf and legislative leaders have repeatedly expressed interest in redesigning state government to avoid broad-based tax increases. This is a welcomed departure from past proposals to enact large tax hikes on working Pennsylvanians.

However, the governor still won’t completely rule out tax hikes. He’s likely to propose an energy tax to the delight of the Inquirer’s editorial board, which supports the tax as a way to make natural gas companies pay their “fair share.” This political slogan ignores all of the taxes natural gas companies already pay, including an impact fee, which effectively operates as a 6.9% severance tax.

The board also criticizes the tax relief extended to businesses, asserting this policy failed to stimulate job growth. Sure, businesses did see some relief through the elimination of the capital stock and franchise tax, but Pennsylvania’s overall tax burden ranks 15th highest in the nation. Weak job growth should be seen in light of the commonwealth’s broader tax and regulatory climate. The implication here is that a lower tax burden doesn't grow the economy. The evidence suggests just the opposite.

The editorial's assault on the state's tax structure continues:

Instead, the [tax] cuts lowered the public's quality of life by reducing revenue needed to educate children, fix roads, and provide other services. Business tax cuts account for about half the state's $600 million deficit.

These two sentences are plagued with problems. First, as CF has demonstrated in the past, more education spending does not necessarily lead to improved academic achievement. As a matter of fact, policymakers could improve the educational system while spending less on education if they embraced school choice.

Secondly, the state already has a dedicated source of funding to fix roads. That’s why the state’s gas tax jumped 8 cents to kick off the new year. If more money is needed for transportation, why not embrace public-private partnerships or repeal the prevailing wage mandate?

And third, placing blame for the deficit on tax cuts implies state government hasn’t taken enough out of the pockets of taxpayers. This flatly ignores the state’s overspending problem.

State spending has risen 46 of the last 47 years—climbing by $4,010 per person over that time. Had the state kept spending increases in line with inflation and population since 2000, it would have produced a budget surplus during this fiscal year. With spending increases possible each year, is it really reasonable to say Pennsylvania has a revenue problem?

Finally, the editorial suggests raising the minimum wage to improve residents’ quality of life and make Pennsylvania a destination state. But mandated wage hikes haven’t stop residents from fleeing other states. In fact, of the ten states that saw the biggest declines in state-to-state migration, nine had minimum wages exceeding the federal level. The only exception was Pennsylvania.

In contrast, of the ten states experiencing the largest increases in state-to-state migration, only half mandated wages above the federal minimum. The editorial board correctly identifies the importance of higher wages for Pennsylvania, but their policy prescription will ultimately undermine employment opportunities for the people who need it most.

Thankfully, Pennsylvania's dismal economic rankings are reversible. But turning the tide requires rejecting attempts to solve every problem with more government spending. What's the alternative? Robust economic growth driven by entrepreneurs and consumers pursuing their happiness.

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posted by Bob Dick | 04:01 PM

What Population Trends Tell Us

Before the holidays, CF publicized the historic decline in Pennsylvania’s population. The state was one of only eight to see an absolute decline in its number of residents. Domestic migration—or the movement of people between states—drove this decline. 

In a post early last year, we documented the population trends in twenty states. The ten states that experienced the greatest growth via domestic migration (“destination states”) had a lower average tax burden than the states that experienced the greatest declines (“deserted states”). After adding another year of population figures to the data set, the pattern remains the same.

The table below shows people fleeing high tax states and moving to low tax states.


The destination states imposed an average tax burden of 8.84 percent on residents, according to data from the Tax Foundation. The deserted states imposed an average tax burden of 11 percent—more than two percentage points above the destination states’ collective tax burden.

Of course, taxes aren’t the only obstacle government throws in the way of economic opportunity. It also imposes a variety of unnecessary regulations (licensure laws, compulsory unionism, etc.) on workers trying to pursue a decent living. Together, these restrictions affect the economic freedom of a state—a concept measured by the Fraser Institute in their annual Economic Freedom of North America report.

The report assigned an economic freedom score to each of the fifty states, some of which are included in the table above. As the table indicates, the destination states have a higher average economic freedom score than the deserted states. People want, and are willing to pursue, a better quality of life. And since economic freedom is tied to improvements in the quality of life, it makes sense for people to move to freer states.

If policymakers want to avoid the consequences of the coming demographic changes, they need to give people a reason to live and work in Pennsylvania. Adopting the recommendations in our new policy brief, Embracing Innovation in State Government, is a great start on the road to making Pennsylvania a destination state once again.

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posted by Bob Dick | 00:33 PM

How to Grow PA's Economy

An intimidating budget shortfall this year and next has state leaders calling for a change to the status quo. That is: surging state spending. Governor Wolf is pulling back on corporate welfare programs, like Keystone Opportunity Zone tax breaks, while legislative leaders have called for "restructuring" state government. The economic evidence backs this up.

This year's Economic Freedom of North America report from the Fraser Institute shows Pennsylvania's record high spending is undeniably linked with less economic opportunity.

The state ranks a disappointing 30th when it comes to controlling state spending and an abysmal 37th in income and payroll tax revenue as a percent of personal income. In other words, Pennsylvanians have seen their tax burden increase and economic opportunity decrease as state debt and state spending continues to climb.

Overall, this year's index, including data from 1984 to 2014, ranks Pennsylvania 18th among the states.

The report emphasizes a lesson Pennsylvania desperately needs to learn: Unrestrained government spending doesn’t create economic growth—it kills it. But responsible spending growth will allow lawmakers to ease the tax burden for everyone. That’s how you create an environment of opportunity and economic growth for all Pennsylvanians

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posted by Elizabeth Stelle | 11:28 AM

Pennsylvania is Shrinking

For the first time in 31 years, Pennsylvania's population is shrinking. The Census Bureau reports Pennsylvania’s total population fell by more than 7,600 last year. In state-to-state migration, one Pennsylvanian left the commonwealth every 11.5 minutes—that's a loss of 46,000 from July 2015 to July 2016.

Nationwide, Pennsylvania is an outlier. We are one of just eight states that lost population. In contrast, many states seeing population growth—including Texas, Florida, North Carolina, Nevada, and Idaho—have lower tax burdens than the commonwealth.

A Gallup poll conducted last year found residents in states with higher state and local tax burdens are more likely to want to leave than those in lower-tax states.

Lower taxes starts with limiting government spending. Had Harrisburg limited spending growth to inflation and population since 2000, Pennsylvanians would be saving nearly $22.2 billion in taxes, or $6,952 per family of four.

The Census numbers give further credence to Governor Wolf's efforts to find cost-savings and House Majority Leader Reed's interest in reevaluating how the state delivers services.

Without bold steps to spend responsibly and lighten the tax burden, we'll continue to see fellow Pennsylvanians flee to friendlier tax climates.

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posted by Elizabeth Stelle | 00:42 PM

Watch for Sweeping Changes Outside the Beltway

The political landscape has experienced a seismic shift, and it isn't centered in Washington DC. This past weekend Kyle Peterson of the Wall Street Journal highlighted Pennsylvania and six other states poised to transform their state and, in turn, our nation.

"The dynamic has shifted considerably," CF president & CEO Charles Mitchell says in Peterson's article, The Spoils of the Republican State Conquest.

Charles notes issues like meaningful pension reform are not only possible in the upcoming legislative session but probable. And paycheck protection—while once "laughed out of the room"—may land on the governor's desk.

Four of the seven states briefly profiled focus on labor reform as a necessary component of restoring economic opportunity. Any labor reform that prevents union executives from imposing their will on workers is essential to putting Pennsylvania back on the path to prosperity.

Tax reform was also a recurring theme in the article. In Pennsylvania, pension reform is, in many ways, a tax reform issue. After all, surging pension costs are a key driver of rising property taxes and yearly budget shortfalls that lead to tax hikes. So any effort to reform the tax code will likely require spending restraint.

Overall, the WSJ's highlight of CF as a frontline fighter for free-markets is an incredible endorsement of our mission and a compliment to every lawmaker working to pass the reforms that will improve the lives of all Pennsylvanians.

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posted by Elizabeth Stelle | 03:20 PM

The Rust Belt's Labor Reform Wave

Lagging job growth, rising taxes and coercive union tactics created an appetite for labor reform throughout Rust Belt states.

Transforming Labor, our latest policy report, ranks states on their progress towards reforms that can produce budget savings, shield taxpayers from overspending, and guarantee greater protections of individual workers’ freedom of association.

The report also recounts recent reforms. Nowhere did labor reform make a bigger impact than Wisconsin.

Wisconsin’s Act 10 of 2011 made sweeping changes by limiting collective bargaining for public sector workers to base wages and requiring employees to contribute more toward their health and pension benefits. According to the MacIver Institute, state retirement savings alone amounted to $3.36 billion from 2011 to 2016, and Milwaukee Public Schools alone saved $1.3 billion in long-term pension liabilities. That’s a big win for taxpayers.

In 2012, Michigan, the historical home of unionization, passed a right-to-work law.

The Michigan Education Association (MEA) quickly moved to enforce its “maintenance of membership” or opt-out clause for public school teachers who wanted to leave the union: The teachers could do so only in August. Many teachers were unaware of the obscure union resignation window and missed the opening. With the help of the Mackinac Center Legal Foundation, frustrated educators filed an unfair labor practice charge asserting that the MEA’s opt-out window violated the state’s right-to-work protections against forced union association.

In September 2015, the Michigan Employment Relations Commission ruled in favor of the teachers (a decision later upheld by the Michigan Court of Appeals), forcing the MEA to change its rules and bylaws. Michigan teachers may now leave the union whenever they please, a major victory for educator freedom across the state.

This week the Detroit Free Press wrote:

Workers must be willing — even in the face of intimidation and fear — to withdraw their union membership and stop funding their union’s political prejudices. It is the only tool they have to protect themselves from the political bias of the people who claim to have their best interest at heart

The same discontent is now creating momentum for labor reform in Pennsylvania. This session, Governor Wolf signed contract transparency legislation, Pennsylvania finally outlawed stalking and harassment during labor disputes and paycheck protection cleared the state Senate.

Pennsylvania still has a long way to go. Transforming Labor gives Pennsylvania’s public sector labor laws a D. In comparison, Wisconsin earned an A, and Michigan a B.

Labor reform isn't just critical for economic resurgence, it has election consequences too.

Michigan, Wisconsin, and Pennsylvania all turned out to be a critical factor in the presidential election. Politico noted organized labor’s historically low support for the Democrat nominee. The Fairness Center's Right on Labor blog documents the historic shift in voting patterns.

However, the gap between union leaders and their members shouldn't come as a surprise. Pennsylvania union households overwhelmingly favor reforms, like paycheck protection, that their leaders vehemently oppose.

The wave of union reform moving through the states shows taxpayers, union members and non-union members alike, understand worker freedom is a key ingredient to restoring prosperity.

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posted by Elizabeth Stelle | 00:20 PM

A Dramatic Shift in Pennsylvania

From celebration to soul-searching, post-election analysis is everywhere.

While top-of-the-ballot results dominate headlines and your news feed, don’t miss the dramatic shift that occurred last night in Pennsylvania.

Republicans achieved historic majorities in both chambers. In the state House, Republicans will control 60 percent of the seats for the first time in 70 years. In the Senate, Republicans will field the largest majority of any party in 68 years. But that's only part of story.

For years, we’ve talked about the Taxpayer Party vs. the Big Government Party in Harrisburg. Partisan labels aside, the real question is whether a lawmaker represents taxpayers’ interests or toes the government union leaders’ line.

While the Taxpayer Party has grown over the years, it couldn’t always overcome the strength of the Big Government Party. We saw this last month. Pension reform legislation fell three votes short in the House.

Last night in Pennsylvania and around the nation, the Taxpayer Party saw significant gains in state legislatures. Election results in states like Wisconsin, Pennsylvania, and Michigan showed the political benefit of taking on powerful government union interests to protect taxpayers from tax hikes and special political privileges.

It is no coincidence that over the past five years, Wisconsin and Michigan took bold steps to strengthen the Taxpayer Party, including limiting collective bargaining and passing right-to-reelect and right-to-work legislation.

Similarly, as the Taxpayer Party has grown in Pennsylvania, we’ve begun to see results. For example, Governor Wolf signed contract transparency legislation, and paycheck protection cleared the state Senate. These steps are critical to address rising government spending that's consistently driven by the Big Government party.

Yet, despite the gains of the Taxpayer Party in the General Assembly, divided government will continue in Harrisburg. That's an opportunity.

With an extremely tough budget on the horizon in 2017, the newly minted Legislature must work quickly to address the underlying problems that drive budget debates: surging pensions costs and a broken and expensive welfare system.

What’s more, the strengthened Taxpayer Party has an unprecedented chance to seize opportunities like expanding access to quality education choices and finally removing the state from the booze business.

This will require immense effort and continued vigilance. We’re excited to work towards implementing these ideas to build a stronger, more prosperous Pennsylvania

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posted by Elizabeth Stelle, Dawn Toguchi | 02:16 PM

Can a Dwight Schrute Save Scranton?

Dwight K. Schrute is an employee at Dunder Mifflin—a fictional Scranton paper company featured in NBC’s The Office. And he just may be the key to overcoming the city’s very real economic decline.

But before offering a way forward for Scranton, it’s important to understand why the city is struggling. A new paper from the Mercatus Center does an excellent job detailing the source of Scranton’s troubles.

The authors—Adam Millsap and Eileen Norcross—identify Scranton’s inability to adapt to changing economic conditions as one of the main reasons for the city’s economic and fiscal problems.

They specifically cite economist Ed Glaeser who wrote, “In the coal towns of central Pennsylvania, exodus, not innovation, was a more common response.” Glaeser's rhetoric matches reality. In 1930, the city’s population was 143,433. In 2014, it was just 75,281.

Regrettably, government policies only made things worse. Spending and taxes rose—forcing fewer taxpayers to pay for bloated budgets driven by public sector benefits. Millsap and Norcross cite the inflexibility of Pennsylvania’s collective bargaining process as the main culprit:

Act 111 is intended to give police and firefighters’ unions binding arbitration in exchange for a prohibition against striking. [26] However, the law evolved to “give uniformed employees the upper hand when it comes to collective bargaining.” [27] When negotiations between the city and unions break down, an arbitration panel of three people is selected. Municipalities are required to pay the full cost of arbitration, regardless of ability to pay. Arbitration sessions are not open to the public. The municipality has limited ability to appeal the panel’s decisions.

The chart below illustrates spending growth for police and fire services—a product of the state’s broken collective bargaining process.

Officials have tried to improve Scranton’s finances with a combination of tax increases, cost cutting, and asset sales but costs, thanks to pensions, continue to soar. They’ve also utilized government-subsidized development projects to boost economic growth but to no avail. Government-centric solutions simply aren't working.

To truly turn Scranton around, dramatic changes to state and local policies are necessary. At the local level, Millsap and Norcross recommend improving the city’s business climate by reducing the overall tax burden. Controlling spending is critical too. Officials can do this by privatizing government functionsthe city's parking authority is one possible option, according to the report.

At the state level, officials must reform the collective bargaining process to help distressed cities get control of their budgets. As it stands now, collective bargaining law imposes costs on cities without taking into account their ability to pay. By giving local officials more autonomy to negotiate with unions, they can better protect local taxpayers.

Back to Dwight Schrute. If you know the character, he has a reputation for being entrepreneurial and hardworking (also, a little quirky). If distressed places like Scranton and Uniontown are going to experience a revitalization, that's exactly the kind of people they'll need to attract. 

Ultimately, government can only lay the foundation for an economic turnaround. But if that foundation is strong, innovative, educated, and hardworking people can and will build upon it.

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posted by Bob Dick | 09:45 AM

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