Corporate Welfare

The Costs of Corporate Welfare

Mar 2, 2016 | Commentary by Bob Dick

Of the last 46 state budgets, only one did not increase total spending. This explosion has been fueled in part by special subsidies doled out to select businesses, creating an economic system favoring the privileged few at the expense of everyone else.

  Read More >

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.

.... Read More >

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

Budget Solution of the Week: Reduce Special Interest Spending

In our budget solutions blog series, we’ve covered the benefits of a government efficiency review, the need to modernize the commonwealth’s corrections system, and the importance of school choice. This week, we shift attention to special interest spending.

In Embracing Innovation in State Government, we recommend reducing spending on corporate welfare and in funds outside the General Fund Budget. Combined, these programs cost more than $2.6 billion.

If lawmakers reduced this spending by half—through program elimination or structural reforms—it would save approximately $1.3 billion. This savings could then be used to close a projected $1.7 billion shortfall in the 2017-18 budget.

All the corporate welfare programs and funds identified above deserve a thorough review, but a few stand out either for their extravagance or futility. Pennsylvania’s Film Tax Credit falls into the latter category. The Independent Fiscal Office analyzed the tax credit in 2013 and found most of the production-related wages went to nonresidents. And the return on investment was just 14 cents for every dollar in tax credits.

The credit is little more than an ineffective handout to the wealthy. According to a recent investigation by PublicSource, film production companies have sold off 99 percent of all credits redeemed. Effectively, the credit transfers wealth from taxpayers to corporations like Apple, Comcast, and Exelon.

Pennsylvania First is another corporate welfare program with a record of failure. In 2013, the Department of Community and Economic Development gave a Lehigh Valley Kraft plant almost $340,000 in subsidies to expand its operations. The plant eventually closed its doors late last year. After the announcement, the state vowed to recoup the subsidies—a move that could have been avoided had the state not taken on the role of an economic development agency.

In addition to corporate welfare, Harrisburg funds a collection of programs best described as nonessential. The most prominent example is the Keystone Recreation, Park, and Conservation Fund. Its past projects include pool feasibility studies, golf course acquisitions, and sports complex rehabilitations. Funding these types of projects while the state taxes businesses out of existence is indefensible.

For reformers looking to redesign government, eliminating ineffective and nonessential government programs would be a great place to start. Reducing special interest spending would shrink the budget deficit in the short-term and allow time for larger, long-term reforms to take effect.

.... Read More >

posted by Bob Dick | 10:43 AM

Pennsylvania Deficit Watch: January 2017

Pennsylvania fell further into a financial hole during the month of December. According to the Department of Revenue, total General Fund collections came in $105.2 million below the state's official estimate. This marks the second straight month—and five of the last six—where revenue collections failed to meet expectations.

Overall, Pennsylvania collected approximately $2.6 billion last month, which was 3.9 percent less than anticipated. To date, revenue collections are approximately $367 million below estimate.

The $1.3 billion revenue package passed last July, which includes $650 million in higher taxes, is proving inadequate to pay for the 2016-17 budget's $1.6 billion increase in government spending

The chart below shows revenue collections lagging official estimates in the first six months of the fiscal year. If this pattern continues, the state will end the year with a deficit.

 

Back in August, the Independent Fiscal Office (IFO) released a report identifying major problems with the revenue projections used to balance the budget. To present a more accurate picture of Pennsylvania's finances, the agency made the following observations and assumptions:

  • The IFO Deducted $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have expressed an interest in passing gambling expansion to generate $100 million to cover CFA spending, but no enabling legislation exists.
  • The IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million—a $76 million difference.
  • IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less than the official projections.
  • $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate. They do not expect it will generate revenue for the current fiscal year.

Regrettably, the state budget has been unbalanced from the start. It's built on $260 million in one-time revenue and transfers from other funds and includes a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association.

Borrowing money to pay our bills is the very definition of unbalanced.

Acknowledging the seriousness of the commonwealth's financial position, legislative leaders and Gov. Wolf have committed to restructuring government to balance the budget. To achieve this goal, policymakers have a number of options, including those found in our latest policy brief, Embracing Innovation in State Government. Here are just a few ideas:

With six months left in the fiscal year, revenue collections can improve. But a plan to balance the budget is needed soon in the event revenues don't match expenditures come June. The last thing taxpayers need is another tax hike to cover last year's bills.

.... Read More >

posted by Bob Dick | 01:15 PM

A Turning Point in Pennsylvania’s Budget Debate?

Pennsylvania must confront a $604 million deficit, according to Budget Secretary Randy Albright. This sober assessment was offered during the mid-year budget briefing earlier today.

The Independent Fiscal Office (IFO) offered a similar conclusion last month when it released a report projecting a $524 million deficit for the current year. The administration’s findings—along with the IFO report—reinforce the need to reverse the problematic budget trends afflicting Pennsylvania.

The present deficit is a combination of excessive spending growth—including $183 million in “supplemental appropriations” or spending above levels authorized in last June’s budget and poor revenue collections. The latter is a problem we’ve been documenting since the fiscal year began.

The good news is both the governor and lawmakers want to avoid broad-based tax increases to close the deficit. Secretary Albright says the governor is asking cabinet secretaries to find ways to cut back on expenses. And House Majority Leader Dave Reed wants to reevaluate the state budget’s structure:

Government has basically looked the same in Pennsylvania for the last 40, 50 years," said Reed. "We just go through the budget each year . . . We want the budget to look different this year.

The majority leader’s perspective is encouraging. As we’ve detailed in the past, Pennsylvania’s budget is set on autopilot, which means spending continuously grows without review or debate over the sustainability and effectiveness of state programs. A willingness to buck this trend could be a turning point in efforts to curtail spending growth and fix our broken corrections, education, and welfare systems.

Implementing real reforms and cutting back on unnecessary expenses can help the governor and General Assembly avoid tax increases that cost entrepreneurs their livelihoods and fail to solve Pennsylvania’s persistent fiscal predicaments.  

.... Read More >

posted by Bob Dick | 04:30 PM

What Pennsylvania's Budget Trends Mean for You

State government is growing at a startling rate. Since 1970, spending has risen by $4,010 per person—an inflation-adjusted increase of 189 percent. This is one of many findings in our latest publication, Tracking State Budget Trends.

The explosion in spending may come as a surprise to some, given the repeated claims about austerity in government—particularly in education, where cuts to programs are purportedly the norm. The facts reveal just the opposite. Education spending is at its highest level ever. What have Pennsylvanians received in return? No noticeable improvement in academic achievement and higher property taxes.

Education is one of the four major spending categories making it increasingly difficult for the legislature to enact sound budgets. The other three—corrections, debt service, and human services—have all grown tremendously over the last decade. Spending in all four categories increased by $11.8 billion, while spending in the remaining categories declined by $512 million.

That’s not to say spending outside the “Big Four” should be ignored. On the contrary, Pennsylvania’s corporate welfare programs need to be done away with to create a fair economic playing field where hard work and entrepreneurship—not political savvy—determine the makeup of the marketplace.

Still, eliminating corporate welfare is not enough to fix what ails Pennsylvania’s fiscal health. Significant reforms to the Big Four are a financial and moral imperative. Left unchecked, these categories will not only drive up spending but will trap more Pennsylvanians in our broken education, corrections, and welfare systems.

Even the people living outside these systems have a stake in their improvement. Their costs have contributed to the state’s high tax burden, which reduces the take home pay of working people and diminishes their prospects for better economic opportunities. In 1991, Pennsylvania’s tax burden was the 24th highest in the country. Since then, the burden has risen to 15th highest—a direct result of spending left on autopilot.

Pennsylvania’s trends—whether they be economic or fiscal—are worrisome. But they are reversible. If policymakers adopt innovative approaches to complex policy problems, they can clear the way for people to achieve their potential, which is the key to unleashing prosperity in Pennsylvania.

In the coming weeks, we’ll be releasing a new report to unlock this potential and help put Pennsylvania back on solid fiscal ground. Stay tuned.

.... Read More >

posted by Bob Dick | 11:07 AM

Hits and Misses from the 2015-16 Legislative Session

That's a wrap.

The 2015-16 legislative session is officially in the history books. Despite a $650 million tax hike, Pennsylvanians have a lot to celebrate from the past two years. From elimination of the Capital Stock and Franchise Tax to wine modernization, recent events signal Pennsylvania’s political leaders may be ready to start tackling the broken systems that are driving state spending far faster than Pennsylvania’s economy.

Here are the top seven taxpayer victories from the 2015-16 legislative session:

  1. Five tax hike proposals defeated in 2015. During his first year in office, Gov. Wolf proposed five different broad-based tax hike plans, including higher personal income, sales, and tobacco taxes; a natural gas severance tax; and more. The first proposal would have increased a family of four's tax burden by $1,450. Ultimately, the governor allowed a no-tax-hike 2015-16 budget to become law.
  2. Capital Stock and Franchise Tax elimination. Originally set to expire in 2011, this business tax, combined with the 2nd-highest corporate net income tax rate in the nation, discouraged job creation and contributed to PA’s poorly ranked business climate.
  3. No broad based tax hikes in 2016. The legislature refused to entertain sales or income tax increases. Unfortunately, lawmakers implemented $650 million in narrow-based tax hikes.
  4. Increased labor union accountability. Until last year, union leaders and members could legally stalk, harass, and threaten to use weapons of mass destruction when involved in a “labor dispute.” Act 59 of 2015 closed this loophole. In early 2016, Act 15 of 2016 gave taxpayers the ability to see the costs of government union contracts before they go into effect.
  5. Funding students, not systems. The 2016-17 budget increased the Educational Improvement Tax Credit by $25 million, giving more students the opportunity to escape violent and failing schools. The budget also includes a student-based funding formula, directing any funds above 2014-15 levels to schools based on current enrollment.
  6. Liquor modernization. In a small step forward, restaurants and grocery stores can now sell wine, and beer distributors gained additional freedoms, like the ability to sell six-packs.
  7. Honorary mention: Uber and Lyft legalization. Despite a contentious relationship with the Public Utility Commission, lawmakers finally made the ridesharing services Uber and Lyft permanently legal in Philadelphia and across the commonwealth.

The last two years also saw some missed opportunities:

  1. An unbalanced 2016-17 budget. Lawmakers passed—and Gov. Wolf let become law—a spending bill without revenue to pay for it. Despite $650 million in tax hikes, spending will still exceed revenue projections, according to the Independent Fiscal Office.
  2. Pension reform. In June 2015, lawmakers passed landmark legislation to place new state employees and public schoolteachers in a defined-contribution retirement plan, similar to a 401(k). Gov. Wolf vetoed the legislation.
  3. Liquor privatization. Both chambers passed complete liquor privatization, which Gov. Wolf promptly vetoed.  
  4. Paycheck protection. In October of 2015, the state Senate passed SB 501 to ban the use of public resources to collect political union dues and campaign contributions. The legislation stalled in the House.
  5. Medicaid expansion. Despite opposition from the legislature in 2014, Gov. Wolf rewrote a federal waiver to expand Medicaid under the Affordable Care Act with little opposition in 2015. At the time, officials predicted about 500,000 new enrollees and an infusion of federal cash that would stimulate the economy. To date, rolls have grown by more than 670,000, while the commonwealth spent $500 million last year and $240 million this fiscal year.
  6. Seniority reform. Gov. Wolf vetoed legislation to protect great teachers by ensuring that during furloughs, teachers are retained based on effectiveness, not simply seniority.
  7. Corporate welfare reductions. Pennsylvania spends more than $800 million per year on myriad tax credits, grants, and special loans to private corporations. Yet, we continually rank near the bottom in economic growth. While a few bills to reduce these loans made progress, the legislature has, by and large, failed to recognize these programs don't work.

The commonwealth's financial troubles are serious and systematic. In the new year, lawmakers will have another chance to tackle the broken systems that harm Pennsylvanians by pursuing true pension reform, welfare reform and expanded educational choice for families.

.... Read More >

posted by Elizabeth Stelle | 09:47 AM

Pennsylvania Deficit Watch: December 2016

State revenue collections came in at $79.5 million below the official estimate for November, according to the Pennsylvania Department of Revenue. Lackluster collections wiped away the little progress made during October when revenue collections slightly exceeded expectations.

Overall, Pennsylvania collected approximately $2 billion last month, which was 3.8 percent less than anticipated. To date, revenue collections are $261.8 million below estimate.

In July, the legislature passed and Gov. Wolf signed a $1.3 billion revenue package, which includes $650 million in higher taxes, to help pay for a $1.6 billion increase in government spending. The revenue assumptions built into the billion dollar package are proving unrealistic.

The chart below shows revenue collections lagging official estimates in the first five months of the fiscal year.

Back in August, the Independent Fiscal Office (IFO) released a report identifying major problems with the revenue projections lawmakers used to create the appearance of a balanced budget. To present a more accurate picture of Pennsylvania's finances, the IFO made the following adjustments:

  • The IFO deducts $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have expressed an interest in passing gambling expansion to generate $100 million to cover CFA spending, but no enabling legislation exists.
  • IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million—a $76 million difference.
  • IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less than the official projections.
  • $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate. They do not expect it will generate revenue for the current fiscal year.

In reality, the budget was unbalanced from the start, counting on $260 million in one-time revenue and transfers from other funds. It also includes a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association.

Borrowing money to pay our bills is the very definition of unbalanced.

If current revenue trends continue, lawmakers and the governor will need to focus on reducing government spending to balance the budget. Ideas to consider include,

With seven months left in the fiscal year, revenue collections can improve. But lawmakers should start putting together a plan to balance the budget now in case revenues don't match expenditures come June. The last thing taxpayers need is another tax hike to cover last year's bills.

.... Read More >

posted by Bob Dick | 08:07 AM

Pennsylvania Deficit Watch: November 2016

Pennsylvania Deficit Watch

Last month we raised concerns about Pennsylvania's fiscal trajectory. At the time, state revenue collections were more than $218 million below the official estimate. The current revenue picture is slightly better.

Pennsylvania collected approximately $2.2 billion last month, which was $36.1 million more than anticipated. Still, to date, revenue collections are $182.4 million below estimate.

In July, the legislature passed and Gov. Wolf signed a $1.3 billion revenue package, which includes $650 million in higher taxes, to help pay for a $1.6 billion increase in government spending. The revenue assumptions built into the billion dollar package are now proving unrealistic.

The chart below shows revenue collections lagging official estimates in the first third of the fiscal year.

Back in August, the Independent Fiscal Office (IFO) released a report identifying major problems with the revenue projections lawmakers used to create the appearance of a balanced budget. To present a more accurate picture of Pennsylvania's finances, the IFO made the following adjustments:

  • The IFO deducts $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have expressed an interest in passing gambling expansion to generate $100 million to cover CFA spending, but no enabling legislation exists.
  • IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million—a $76 million difference.
  • IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less than the official projections.
  • $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate. They do not expect it will generate revenue for the current fiscal year.

In reality, the budget was unbalanced from the start, counting on $260 million in one-time revenue and transfers from other funds. It also includes a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association.

Borrowing money to pay our bills is the very definition of unbalanced.

If current revenue trends continue, lawmakers and the governor will need to focus on reducing government spending to balance the budget. Ideas to consider include,

With two-thirds of the fiscal year remaining, revenue collections can improve. But lawmakers should start putting together a plan to balance the budget now in case there isn’t enough revenue to cover expenses come June. The last thing taxpayers need is another tax hike to cover last year's bills.

.... Read More >

posted by Bob Dick | 11:12 AM

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.

.... Read More >

posted by Bob Dick | 09:45 AM

Pennsylvania Deficit Watch: October 2016

Pennsylvania Deficit Watch

Pennsylvania’s state budget is three months old and showing signs of a major budget deficit.

Actual revenue collections are already behind $218.5 million through the first quarter, according to the Pennsylvania Department of Revenue. In July, the legislature passed and Gov. Wolf signed a $1.3 billion revenue package, which includes $650 million in higher taxes, to help pay for a $1.6 billion increase in government spending.

The revenue assumptions built into the billion dollar package are now proving optimistic. The chart below shows revenue collections lagging official estimates in each of the first three months.

 

In August, the Independent Fiscal Office identified problems with certain revenue projections used to balance the budget—at least on paper. Here are their major assumptions:

  • The IFO deducts $95 million to pay for the expenses of the Commonwealth Financing Authority (CFA) from sales tax revenue. The legislature moved this line-item out of the General Fund Budget and created a new fund via the fiscal code. Legislative leaders have expressed an interest in passing gambling expansion to generate $100 million to cover CFA spending, but no enabling legislation exists. 
  • IFO assumes Act 39 (wine modernization) will raise $73 million in 2016-17. The legislature predicts an increase of $149 million—a $76 million difference.
  • IFO projections of tobacco tax revenue (includes taxes on cigarettes, e-cigarettes, loose & roll-your-own tobacco) are approximately $38 million less than the official projections.
  • $75 million from the Philadelphia casino is not included in the IFO’s official revenue estimate. They do not expect it will generate revenue for the current fiscal year. 

Moreover, the budget was unbalanced from the start. The budget counts on $260 million in one-time revenue and transfers from other funds, and a $200 million loan from the Pennsylvania Professional Liability Joint Underwriting Association.

Borrowing money to pay our bills is the very definition of unbalanced.

If current revenue trends continue, lawmakers and the governor will need to focus on reducing government spending to balance the budget. Such as,

As the fiscal year progresses, and more revenue collections are announced, we will continue to update our Deficit Watch.

.... Read More >

posted by Bob Dick | 04:39 PM

Total Records: 200