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.
Buried in a little debated 267-page tax code bill is a provision emblematic of Pennsylvania’s corporate welfare culture.
The provision directs hotel tax revenue generated inside a Neighborhood Improvement Zone (NIZ) to hotel owners and developers. The revenue can be used to pay for hotel renovations or to finance entirely new hotels.
The hotel tax normally funds tourism promotion and economic development for the Lehigh Valley. But now, rather than using the revenue to promote the Lehigh Valley, it will be used to subsidize a small group of private enterprises.
“This is blatantly unfair competition,” said Bruce Haines, who is a managing partner of the Hotel Bethlehem, which competes directly with hotels inside the NIZ. “We worked hard to get where we are. We put our own capital on the line. We did it the old-fashioned way.”
The new rule governing the NIZ will make it harder for entrepreneurs like Bruce to compete. Businesses inside the NIZ already had access to tax dollars before the change. Now they’ll have an even larger pool of tax dollars to use for new projects.
This raises an obvious question: Are the subsidies necessary? Research and experience both say no.
According to scholars from the Cato Institute and the Lincoln Institute of Land Policy, NIZ-type programs generally don’t create new wealth; they just shift its location. These findings are consistent with Bruce’s experience: “The NIZ isn’t really creating new businesses. They’re just moving from the surrounding areas into the NIZ. The market works for hotels. It doesn’t need subsidies.”
Bruce understands that competition is a necessary part of any free market. “If more businesses open in the Lehigh Valley without subsidies, that’s okay because it’s fair. But I should not have to lose potential customers because of crony capitalism. Philosophically, that bothers me.”
Handing out tax dollars to businesses, carving out special exemptions, or creating new rules benefiting a select few dampens economic growth. To promote broad-based prosperity, government must refrain from tilting the playing-field in favor of any business.
As Harrisburg searches for politically acceptable tax hikes to fund a record-breaking budget, Pennsylvania’s attractiveness to manufacturers continues to decline. According to a study reported by the Central Pennsylvania Business Journal, local manufacturers operate under an already onerous tax load.
The report, prepared by Ball State University’s Center for Business and Economic Research in Indiana, graded states on a number of factors, including benefit costs and tax climate. Manufacturing in the commonwealth earned a grade of C- this year, down from a C in 2015.
The study examines factors most likely to be considered by site selection experts for manufacturing and logistics firms, and by the prevailing economic research on growth, according to the researchers.
Michael Hicks, director of the research center, says high taxes are particularly problematic for Pennsylvania manufacturing.
The Keystone State earned a D for worker benefit costs and a D- for tax climate in the study.
“I think it’s fair to state that in Pennsylvania the effective tax rate is rather burdensome,” Hicks said.
Pennsylvania, like many states, offers tax-abatement programs for business, but Hicks noted that they may not help.
“The problem is that most job growth in manufacturing comes from existing companies,” which may not have access to incentives aimed at startups, he said.
With Pennsylvania already bearing the 15th highest state and local tax burden in the nation and the state’s manufacturers withering under its weight, what good reason is there to increase taxes?
None is the answer.
Governor Wolf and legislative leaders present Pennsylvanians with two options. The first requires taxpayers to fork over hundreds of millions in higher taxes. The second calls for steep cuts to essential government programs. In the words of Wolf, “We’re going to have cuts the likes of which this Commonwealth has not seen in a generation, if ever.” Taxpayers, we are told, must choose between lousy outcomes: higher taxes or painful cuts.
Make no mistake—this is a false choice. A responsible appropriations bill can be crafted that controls spending and holds the line on tax hikes. New revenues are not necessary to balance the budget—especially not $1 billion worth.
Recall that just last year, Wolf claimed Pennsylvania’s $2.3 billion “structural deficit” mandated $4.6 billion in higher taxes. When the dust settled after a 9-month impasse, the legislature balanced the budget without taxes while also boosting funding for education ($250 million in non-pension spending) and human services ($83 million).
The 2015-16 General Fund spent roughly $30.0 billion. The final revenue projection from the Independent Fiscal Office projects 2016-17 revenues of $30.4 billion. If, in other words, lawmakers merely limited spending increases, there would be no need for higher revenues.
Some argue government programs must assume a “cost-to-carry”—baked-in spending increases from one year to the next. Surely, though, this does not apply to Community and Economic Development programs, which see a $10 million bump under the House budget plan. Or the Department of Conservation and Natural Resources, which would enjoy a $44 million boost. Is there a "cost-to-carry" for House Caucus Operations (R and D), which are set to increase by $16 million?
The spending plan, as currently written, also assumes another $250 million in non-pension education spending, at a time when school district reserve funds are at all-time highs.
Don’t fall victim to the taxpayers’ false choice. By limiting spending increases to $400 million worth of core government functions, lawmakers can protect working families from harmful tax increases.
Pennsylvania's economy isn't looking so hot this summer. The Bureau of Labor Statistics reports:
- Pennsylvania lost 23,600 jobs in the last two months (nonfarm, payroll jobs).
- Over the same time frame, the unemployment rate climbed 0.6 percent with 43,900 more individuals officially counted as unemployed. Over a three month span, the unemployment rate rose 0.9 percent, and 60,500 more individuals were unemployed.
- Pennsylvania now exceeds the national unemployment rate.
Here’s some worse news: Our poor economic performance is part of a long-term trend.
- Pennsylvania lost 41,600 residents in net moves to other states last year—one person every 12.5 minutes.The Keystone State has lost 295,000 residents with $11.6 billion in annual income since 1992.
- From 1991 to 2015, Pennsylvania ranked a dismal 46th in job growth, 45th in personal income growth, and 46th in population growth.
- Pennsylvania currently has the 15th highest state and local tax burden.
This bad news comes at a critical juncture in state budget negotiations. The question for lawmakers: Will raising taxes on families offer good news?
History indicates it won't.
Workers hit by the natural gas slump in western PA received some much needed good news this week. Shell announced they will proceed with building a multibillion dollar chemical "cracker" plant in Beaver County.
Shell probably wouldn’t have picked Pennsylvania without millions in tax incentives, but that isn't proof that corporate welfare works. Rather, it shows business climate and tax rates matter.
As expected, a slew of press releases from Gov. Wolf and other elected officials took credit for the expected jobs, but did you know Pennsylvania lost 17,000 jobs last month? Doubtless no politician is sending out news releases accepting the blame.
Truth is: The majority of Pennsylvania jobs are created by thousands of small businesses that don’t get tax breaks or government subsidies. These businesses continue to suffer under the one of the most most oppressive tax burdens in the nation.
Despite our 9.99 percent corporate income tax, (second highest in the nation) Pennsylvania added 55,000 jobs over the past 12 months, and that was a bad year.
So while we can celebrate that Shell will employ thousands of workers in 18 months, and hundreds of permanent workers, it doesn’t change the fact that Pennsylvania's high taxes to are driving away jobs.
In fact from 2005-2015, states spending the most on corporate welfare saw slower economic growth than states spending the least.
Our state would be better off ending corporate welfare subsidies and using those dollars to lower the tax burden on all businesses. If lawmakers eliminated more than $700 million in corporate welfare (identified here), the corporate income tax could be lowered to 7.2 percent.
Pennsylvania should concentrate on creating a positive business climate for all businesses, not a select few.
Why would one of Pennsylvania’s largest natural gas producers suddenly switch from selling all non-Pennsylvania assets to purchasing a $3.3 billion Houston company that operates exclusively in Louisiana?
Range Resources, which in 2004 drilled the first commercial horizontal well in Pennsylvania’s Marcellus Shale, plans to purchase Memorial Resource Development partly because of regulatory hurdles in Pennsylvania and other Northeastern states.
Energy companies are trying to cope with constant calls for higher taxes, new methane emissions standards, a dramatic overhaul of drilling regulations, and pipeline delays. At the same time, the region is experiencing a severe and prolonged drop in natural gas prices.
The Dallas Morning News reports:
“The U.S. gas market is Balkanized," said Subash Chandra, an analyst with Guggenheim Securities. "And the Appalachian Basin is becoming increasingly isolated."
Pipeline projects in Pennsylvania and New England running into regulatory issues over the past year include Northeast Energy Direct, Constitution, Rover and PennEast. In some cases, the delay could be a matter of months; for others, longer.
Keeping the natural gas from getting to market in the Northeast makes retail prices bounce around more and can contribute to shortages in an unusually cold winter. And it pushes some producers to the sidelines for a while.
“A couple of the producers with the best cost of production in North America are sitting on their hands for a couple of years," Miller said.
In Pennsylvania, the industry has shed thousands of jobs, and the number of drilling rigs operating in the state is at 2007 (pre-boom) levels. The paper continues:
But in the meantime, the Range purchase of Memorial means Range will have options. It can push development in Louisiana while waiting for more congenial conditions in Pennsylvania.
Reporting on the transaction, Forbes says, “[P]ipeline bottlenecks in the northeast have gotten so bad that Range has been realizing sale prices 66% below market.”
Before punishing the natural gas industry with a severance tax or regulations of questionable value, Pennsylvania politicians should consider congeniality—or common sense.
Unfortunately, a lack of it seems already to have driven one company to invest $3 billion in Louisiana instead of in Pennsylvania.
The commonwealth, on net, loses one person every 12.5 minutes. Some say it's all about the weather, but a recent Gallup poll found another reason. Across the country, residents in high-tax states are more likely to want to leave than those in lower-tax states.
Decades of high taxes, growing red tape and rising debt are driving Pennsylvanians away. Can you relate? Have you left the keystone state for brighter opportunities? Share your story below and help us show Harrisburg that higher taxes are the wrong way to go.
In the Wall Street Journal, Florida Governor Rick Scott makes a mockery of Pennsylvania Governor Tom Wolf and his quest to raise taxes, calling Wolf one of his "favorite governors."
"Every time they raise taxes,” Mr. Scott says, “it’s basically a gift to Florida."
Florida’s population increased by 350,000 last year, and IRS data confirm that many were exiles from high-tax California, Connecticut and Pennsylvania.
As we've pointed out recently here, Pennsylvania has long been losing residents to other states—more than 40,000 lost in net state to state migration last year alone, or one resident every 12.5 minutes.
Pennsylvania and other high tax states are losing to states with lower overall tax burdens.
Not to worry though. Gov. Wolf has a solution! He's going to change the slogan for tourism!
Of course we all know slogans are the key to economic growth and job creation. Take this quick poll and tell us what you think Pennsylvania's new Tourism Slogan should be.
Eunice Medina is a childcare worker living in Oakland, California. Last March, the city instituted a $12.55 minimum wage, leaving Eunice with fewer workdays and reduced hours.
Across the country in East Aurora, New York, restaurant owner John Rooney just closed one of his two locations after 14 years in business:
I've got employees that have been working for me for 14 years, that we had to say goodbye to, for no other reason," Rooney said, "than that increase in the minimum wage.
Eunice and John are cautionary tales for Pennsylvania where Governor Wolf just issued an executive order to raise the minimum wage for 450 state workers and future state contractors.
Increasing the minimum wage from $7.25 an hour to $10.15 an hour for about 0.57% of state workers sounds compassionate, but experiences in Oakland, New York and many other places show higher wage mandates lead to fewer job opportunities.
Of course, the Commonwealth isn't like a regular employer. Instead of layoffs, politicians will simply pass on the $4 million cost of this mandate to taxpayers.
Interestingly, after lauding his executive order, Gov. Wolf seemed to acknowledge that wage mandates are a burden. When asked if the wage increase will affect human service workers, the governor explained they didn't want to place further burdens or pressure on human service workers absent a budget.
The Independent Fiscal Office confirmed the governor's concerns in a report it relased on the costs of raising the minimum wage, concluding it would keep or put 31,000 Pennsylvanians out of work. Some may argue this is a necessary tradeoff to reduce poverty, but research from the Employment Policies Institute found no statistically significant evidence that a higher minimum wage reduces participation in means-tested welfare programs.
If Gov. Wolf and other policymakers are truly concerned about lifting people out of poverty, they should pursue the following reforms:
Lower the cost of doing business: It is possible to raise wages and increase hiring at the same time. According to a Mercatus Center study, a one-percentage point drop in the corporate tax rate would likely increase annual economic growth by 0.1 to 0.2%.
Reward hard work: Restructure welfare programs to avoid the arbitrary benefit cutoffs discouraging employment and trapping families in poverty.
Lower barriers to employment: Scale back professional licensing to give low-wage earners the opportunity to increase their incomes through entrepreneurship.
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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.