State 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 40^th in economic outlook for 2012 thanks to several factors, including:

• 50^th in Top Marginal Corporate Income Tax Rate
• 32^nd in Top Marginal Personal Income Tax Rate
• 50^th in Levying Estate/Inheritance Tax
• 45^th in Remaining Tax Burden (additional taxes beyond those already ranked)
• 41^st in Recently Legislated Tax Changes

Another study by ChiefExecutive.net placed the Keystone State as the 43^rd 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.

A new analysis from the Oklahoma Council of Public Affairs shows that since the Sooner State passed a right to work law in 2001—allowing all workers to choose whether or not to join or pay a fee to a union—the state has outpaced the nation in manufacturing job growth. 

At the same time, Oklahoma has become a net winner in state-to-state migration, as more residents moved to Okalahoma from other states than left the state for elsewhere.  This reverses a downward trend Oklahoma had been expericencing prior to 2000.

Naturally, the vast majority of domestic imigrants came from forced unionization states.  Concidentally, Pennsylvania, a forced union, state has been among the biggest losers in state migration for decades.

Pennsylvania employers pay some of the highest unemployment insurance taxes in the nation, according to a new study by the Tax Foundation. Tax rates vary based on the frequency of layoffs. If a company frequently lays off employees, their unemployment insurance taxes will be at or near the maximum rate. But if a company rarely lays off employees, their tax rate will be close to the minimum rate. 

Nationally, Pennsylvania has the highest minimum employer tax rate, which ranges from zero to 2.7 percent. The state's maximum employer tax is the fourth-highest in the nation.

The study also found states raise unemployment taxes on employers during times of high unemployment and lower them during economic booms. This pattern makes it more difficult for businesses to hire when unemployment is high and easier when jobs are plentiful.

Dr. Antony Davies, a member of CF's Council of Scholars, and John Pulito add to the growing body of research showing higher state taxes drive out residents. Their new study, "Tax Rates and Migration," finds lowering "high-income" tax thresholds, high overall state income taxes and high property taxes deplete populations.

Often known as "millionaire taxes," states lower personal income tax thresholds to include more than millionaires in the highest bracket. For instance, anyone in Arizona who makes $150,000 or more a year pays the highest level of income tax, in Ohio it is $200,000. The evidence suggests people tend to leave states that lower "high-income" tax thresholds, the same way they leave states that raise tax rates. Pennsylvania does not have tax thresholds because the state levies a flat 3.07 percent personal income tax, but seven states don't even have a state personal income tax.

However, Pennsylvania is a large offender in the property tax category. Property taxes have skyrocketed, increasing by $2.1 billion, or 26 percent, from 2004 to 2008—exceeding both inflation and student enrollment. The authors find property tax rates have a greater effect on out-migration than high-income tax rates.

For example, a one percentage point increase in the property-tax differential between two states has almost three times the effect on migration as does a one percentage point increase in the difference in high-income tax rates.

High levels of local and state taxation combined with heavy business taxation are a major reason Pennsylvania is losing residents to other states.

Last weekend I attended a dinner party just over the Pennsylvania border in Ohio. Our hosts moved across the state line about a year ago and complained to me about how expensive it was to live in Pennsylvania. Previously, they paid about two percent in local income tax on top of the state income tax. They were also frustrated by the tax treatment of a small business they run on the side. Plus, their favorite premium beer, Kentucky Bourbon Barrel Ale, isn't sold in Pennsylvania.

My friends are among the many taxpayers (more than 1,500 on net since 2000) to leave the Keystone State for the Buckeye State. By moving just 20 minutes west they now pay no local income tax and lower property taxes, and they can buy all the Kentucky Bourbon Barrel Ale they want. My friends are a real-life examples of Pennsylvania's brain drain, where higher taxes and regulation persuaded a young family to take its income and entrepreneurial spirit out-of-state.

For more on local income taxes, check out the Tax Foundation's new fiscal facts. In Ohio, 593 municipalities and 181 school districts levy local income taxes. In contrast, 2,469 municipalities and 469 school districts levy local income taxes in Pennsylvania.

When it comes to interstate migration, Pennsylvania is among the biggest losers of residents and the income they earn, according to a Tax Foundation map using IRS data. Between 1999 to 2009, Pennsylvania lost $4.9 billion in net annual income from residents who moved to states, most with lower taxes, less regulation and greater job growth.