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.
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.
This latest look at Pennsylvania's fiscal house shows the urgency of pension reform and spending restraint.
Fitch Ratings yesterday downgraded Pennsylvania's bond rating. This effectively sends a sign to investors of greater risk in buying Pennsylvania bonds, which could result in higher interest rates for state projects like road repair and school construction. These additional costs will be passed on to taxpayers.
Fitch writes that the downgrade was based on "the commonwealth's failure to adequately address key fiscal pressures." Fitch noted a "structural imbalance"—meaning revenues aren't keeping pace with state spending.
Failure to enact pension reform was a major factor in the downgrade. Fitch writes, "Sizable increases in [pension] contributions due to the systems were required in the current-year budget and are forecast in the coming years, and are projected to consume much of future revenue growth." This exponential growth in future taxpayer pension costs—and the downgrade—shows why we simply cannot "let Act 120 work".
Moreover, Fitch notes that the pension crisis is going to get worse, not better, as the unfunded liability is expected to grow until 2018. The report also mentions the lack of action pension reform measures, and suggests it is "unclear if any pension reform will be enacted."
Why did pension reform fail to happen? Matt Brouillette shows how the "Big Government Party" that benefits from the status quo blocked reform. In another recent piece, Priya Abraham describes how we can protect taxpayers from the Pension Tsunami.
The downgrade in our state borrowing only shows the urgency for pension reform now.
CNBC just released its ranking of the top states for business in 2013. In case you missed the subtle wording in this blog's title, Pennsylvania languishes near the bottom.
Pennsylvania turned in its worst performances in the categories of "Cost of Doing Business"and "Workforce" (44th each) and highest in "Technology & Innovation" and "Access to Capital" (5th each).
Why is Pennsylvania failing to compete, falling below even states like Illinois and New York that are hardly known for their economic growth?
You can look to this year's state budget to better understand why Pennsylvania isn't seen as an ideal destination for businesses. While our poor ranking is hardly the result of one year's legislation, the burdens our government places on job creators were on full display.
For the fourth time, the legislature delayed the phase-out of the Capital Stock and Franchise Tax, a double tax that discourages business investment and kills jobs. Desperate for revenue, lawmakers pushed back the phase-out of this tax—which was originally set to end in 2009—until 2016.
And what about the catchphrase "closing the Delaware Loophole?" Instead of helping taxpayers or businesses, it merely gives the Department of Revenue more power and makes filing tax returns more complex.
Combine these unfriendly measures with the fact that Pennsylvania businesses pay the second highest tax rate on their profits in the entire industrialized world, and you start to wonder how Pennsylvania ranked as high as 39th.
It doesn’t have to be this way. Pennsylvania is gifted with abundant natural resources, fearless entrepreneurs, and cutting-edge technologies. Lawmakers should work to cultivate the state's business environment by lowering the overall tax burden, ending the Capital Stock & Franchise double tax once and for all, and passing more business-friendly legislation such as Sen. Pileggi's and Rep. Bloom's successful effort to end the state's death tax on small businesses.
Until lawmakers recognize that it is businesses—not government—that create wealth, our rank will only drop further and we’ll continue to see Pennsylvania's job creators and job seekers head to friendlier states.
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.
Pennsylvania's teachers unions rank fourth among all U.S. states in their strength and influence, according to a report released this week from the Fordham Institute. We trail only Hawaii, Oregon and Montana.
Among the factors contributing to the muscle of the Pennsylvania State Education Association (PSEA) and the Pennsylvania Federation of Teachers (PFT) are rich resources, deep political involvement and broad collective bargaining privileges. For example:
- PSEA and PFT have a wide combined membership (223,000 according to our count). According to Fordham, that translates to the 12th-highest rate of union membership in the United States, at 93.4 percent, and the 19th-highest annual revenue for state affiliates.
- Union donations made up 1.5 percent of total contributions to political candidates for state office, the 10th-highest among states.
- Collective bargaining is mandatory for public school teachers in Pennsylvania, and they are allowed to strike. In addition, bargaining is explicitly required or permitted over wages, hours, terms and conditions of employment, and management rights. State law implicitly allows for collective bargaining in 17 other areas, including tenure, layoffs, pension benefits, length of school year, and so on.
In fact, the PSEA is preparing to flex even more political muscle—once again increasing dues on teachers and other school employees. In 2012-13, a full-time public school teacher and PSEA member will pay $669 in combined dues to the PSEA and the National Education Association. That's 21 percent higher than five years ago.
Over the past few years, the PSEA has been plowing member dues into politics. In 2007-08, the union spent $1.9 million on "political activities and lobbying," which include election mailers, get-out-the-vote drives, independent campaign activities and lobbying of legislators. By 2011, just three years later, such spending had skyrocketed to $4.2 million—a 121 percent increase. This money doesn't count contributions to PSEA's political action committee, PACE, which further rakes in millions.
Despite raising union dues and spending heavily on politics, teachers unions still hang younger members out to dry in tough economic times. Hundreds of teachers have been laid off across Pennsylvania, and the first to go aren't the worst teachers. With union seniority rules, they're just the youngest. Take Esme Santiago, 26, who taught English as a second language in her hometown of Reading (America's poorest city): "I was thinking about my kids. I honestly love my job. My passion is teaching kids in Reading."
All the statistics about unchecked union influence boil down to this: Kids' education gets hurt. Taxpayers get hurt. And even teachers like Esme get hurt, too. That's the price Pennsylvanians pay for winning fourth place in the union power rankings.
Today Pennsylvania reached its Cost of Government Day, according to Americans for Tax Reform's annual report. In other words, it took the average Keystone worker until July 20, or 202 days, to earn enough to pay off federal, state and local government spending and meet the costs of regulation. While an improvement from last year, Pennsylvania remains a dismal 35th place among U.S. states, and burdens workers an additional five days more than the national average.
The American worker labored 88 days to cover federal spending, 40 days to cover state and local government spending and 69 days to cover regulatory costs. Federal spending continues to fuel the unsustainable costs of government. Over the last 10 years, federal spending has cost workers an additional 17 days, consuming nearly a quarter of GDP.
Unfortunately, the President's signature health care law is projected to push the cost of government day even later in the year. That means workers will have to work even longer to pay for their government, as the new law could cost Americans more than $2.3 trillion, requiring hundreds of billions in tax increases.
Gov. Tom Corbett is reportedly pushing a targeted tax credit for Shell and other companies that locate an ethane processing plant—often called a "cracker" plant—in Pennsylvania. The credit would total $1.7 billion over 25 years (or $67 million per year).
The announcement of Shell's decision to locate in Pennsylvania was much celebrated, reportedly bringing 10,000 direct and related jobs to the state. But unfortunately this analysis doesn't take into account the net effect of offering targeted tax breaks.
Pennsylvania's corporate income tax of 9.99% is the highest flat rate among the 50 states (this on top of the U.S. corporate tax rate, the highest in the industrialized world). A Tax Foundation analysis finds Pennsylvania has the highest business tax cost for mature firms, and second-worst for new companies.
The proposed tax credit will make Pennsylvania more attractive for Shell, but doesn't improve the economic climate for thousands of businesses, large and small, that exist in the state, or for companies or entrepreneurs in every other industry.
Pennsylvania has long been a leader in "economic development" spending—both direct subsidies and tax credits—but we have been a laggard in job growth. Moreover, a Legislative Budget and Finance Committee in 2010 on Pa.'s tax credit programs found there is little hard evidence or monitoring of job creation from these incentives.
These targeted tax breaks and corporate welfare subsidies prevent across-the-board tax rate reductions that would benefit all Pennsylvanians—attracting new businesses from all sectors, and allowing existing businesses to expand in Pennsylvania. Ditching this tax credit, and eliminating existing tax breaks to reduce tax rates, would go further in creating jobs in the Keystone State.
In three separate studies on the state's economic competitiveness and business climates, Pennsylvania remains near the bottom of the pack.
The 2012 Alec-Laffer Economic Competitiveness Index, ranks states economic performance and outlook (1 being the best, 50 the worst). According to the index, the Keystone State ranks 40th in economic outlook for 2012 thanks to several factors, including:
- 50th in Top Marginal Corporate Income Tax Rate
- 32nd in Top Marginal Personal Income Tax Rate
- 50th in Levying Estate/Inheritance Tax
- 45th in Remaining Tax Burden (additional taxes beyond those already ranked)
- 41st in Recently Legislated Tax Changes
Another study by ChiefExecutive.net placed the Keystone State as the 43rd best state for business—a four position drop since last year. CEOs found, "Pennsylvania...is regulation heavy even for very small 1-2 person businesses," this despite a "positive" ranking in the development trend indicator as a result of the natural gas boom.
The general business climate is one thing, but how is the outlook for small businesses? The Thumbtack.com/Kauffman Foundation Small Business Survey found that Pennsylvania's small business climate is mediocre, earning a C for overall friendliness to small businesses. Although the survey gave business start ups a C+, the commonwealth received a C- for hiring regulations, and a D in jobs training programs.
Pennsylvania remains a relatively unattractive place to begin or operate a business. Crippling taxes, heavy regulation, and burdensome bureaucracy have held back the Keystone State's economic growth.
A new study from the Tax Foundation finds that mature Pennsylvania businesses are the highest taxed in the nation. Newly established operations in the commonwealth are the second highest taxed, behind Hawaii.
The study evaluates the impact of corporate income taxes, property taxes, sales taxes, local income taxes, gross receipts taxes, and unemployment compensation taxes. You can click here for the Pennsylvania profile, and read a story on the study in the Pittsburgh Tribune-Review.
The study looks at seven categories of businesses and the effective tax rate on each. The table below identifies the burden, and ranking among the 50 states, for each type of business studied.
|Pennsylvania Business Tax Costs|
|Newly established operations||Mature Operations|
|Type of Firm||Total Effective Tax Rate||Tax Index||Tax Rank||Total Effective Tax Rate||Tax Index||Tax Rank|
|Capital-Intensive Manufacturing Operation||6.1%||53.1||9||6.1%||48.4||5|
|Labor-Intensive Manufacturing Operation||11.8%||100.7||26||9.1%||78||15|
|Research and Development (R&D) Facility||33.5%||227.4||50||29.1%||226.4||50|
|Source: Tax Foundation, "Location Matters", www.taxfoundation.org|
Total Records: 83
Who are We?
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.