Corporate Welfare




Fiscal Code Packed with Earmarks

JANUARY 12, 2016

Pennsylvania's fiscal code is intended to provide lawmakers with instructions for spending funds appropriated in the state budget. But it is also ground-zero for a host of earmarks that funnel limited resources to the priorities of well-connected lobbyists. 

CF has identified over $40 million in dozens of earmarks that may or may not serve the best interests of Pennsylvania taxpayers. Projects stealthily embedded in the fiscal code are not subject to a competitive grant process. Take a look at the earmarks listed below: 

  Earmarks1327 Final

 

The fiscal code (HB 1327) passed the House on Tuesday afternoon. It must be approved by the Senate before reaching Gov. Tom Wolf. 

posted by JAMES PAUL | 05:10 PM | Comments

A Governor's Resolution List for 2016

JANUARY 5, 2016

Last year, Gov. Tom Wolf promised he would take state government in a "different direction" and grow the middle class. He pledged to do this by making Pennsylvania a magnet for private sector entrepreneurs without giving massive tax breaks to special interests.

Throughout 2015, the governor has strayed from those promises by vetoing a budget that held the line on taxes, privatized liquor and made an effort to protect the state's credit ratings through pension reform.

Of course, a new year provides new opportunities…or should we say a fresh start. So with the new year in mind, here are five resolutions the governor can work toward to deliver on his promises to Pennsylvanians:

Resolution #1: Return to the campaign promise not to raise taxes on working people.

As a candidate, Tom Wolf promised to protect low and middle-income people from a tax increase, but in 2015, he broke that promise. Fortunately, the governor has an opportunity to stand on the side of an overtaxed working class, and prevent policies that will expedite the exodus of Pennsylvanians.

Resolution #2: Level the playing field and cut spending on corporate welfare programs. 

Unbelievably, government spending has increased in 44 of the last 45 budget years. Cutting down or eliminating nearly $700 million in corporate welfare is a great way to save tax dollars and level the playing field for all Pennsylvanians.

Resolution #3: Deliver property tax relief by signing real pension reform.

Over the past year, the governor highlighted the onerous property tax system in Pennsylvania and proposed a tax shift to help, but such a shift does not solve the real problem: school budgets squeezed by pension costs.

To provide relief to homeowners, we need comprehensive pension reform that stops adding new debt and provides a method to pay down existing debt. That means converting to a 401k-type system and finding additional revenue (either through spending cuts or non-tax revenue sources) to pay for the more than $53 billion in benefits promised to public employees.

Resolution #4: Make government work smarter by getting out of the booze business.

Selling wine and liquor is not a function of state government. Government booze control leads to higher prices, fewer choices, less convenience, an inefficient bureaucracy. Selling the state stores would be a windfall for both taxpayers and consumers alike.

Resolution #5: Create "government that works" by increasing transparency and ensuring taxpayer resources are not used for politics.

Government should not grant any private organization unfair political privileges. This includes using taxpayer resources for the collection of political money. A true “transparency governor” will end these favors and restore accountability to taxpayers.

To strengthen our state and give Pennsylvania a real fresh start, these are five resolutions worth keeping.

posted by BOB DICK | 03:24 PM | Comments

With Details, Wolf Budget "Framework" Looks Even Worse

DECEMBER 7, 2015

Now that the Pennsylvania Senate has begun passing legislation, taxpayers can finally see what’s in Gov. Wolf’s “framework” for a new budget. Based on the passage of SB 1073 and SB 1082 today in the Senate, here are five things we know about the budget framework:

1. Excessive Spending Growth. The $30.788 billion budget represents spending growth of 5.4 percent over last year’s budget. Even including items shifted off budget last year, this amounts to an increase of $500 million more than inflation and population growth.

2. WAMs are back. The budget passed by the Senate includes a $103 million increase (51 percent) in Community and Economic Development spending. This includes several line-items identified as WAMs and eliminated in previous budgets.

WAMs (or “walking around money”) are slush funds used for special projects, usually controlled by legislative leaders. In the past, they’ve been used to buy votes and have been the abused with rampant corruption.

3. Problematic pension reform. The revised pension bill included a side-by-side hybrid, with a smaller defined benefit pension and a defined contribution component. This reform is weaker than SB 1 (vetoed by the governor) and while a step in the right direction, doesn’t get the politics out of pensions.

Here’s the positive: For current employees, the legislation would alter the calculations for “lump sum withdrawals” (the money employees can take in one single payment when they retire, with a reduced pension) and the calculation of “average final salary.”

On the negative side, the bill underfunds pensions. The proposal reduces collared contribution rates, which further underfunds the pension plan and adds an estimated $500 million to its unfunded liability.

Moreover, the bill suspends the provision that all pension bills have an actuarial note attached before being voted on. Actuarial notes summarize any changes that would occur and estimate the cost to taxpayers. This is a stunning lack of transparency.

4. No privatization in “liquor privatization.” The Senate liquor plan—which has been reported on but not yet passed—strips out many of the components of “privatization.” For starters, it would retain the government monopoly over the wholesale side—every retailer would still have to buy wine and spirits from the PLCB. Instead, there would be a “study” to recommend whether the state should privatize wholesale liquor sales.

This monopoly gives a few bureaucrats power to determine what can be sold in Pennsylvania, maintains the conflict of interest whereby the state sells and controls alcohol, and has led to numerous cases of corruption and bribes.

Restaurants and bars would be able to sell wine (and only wine) to-go, while beer distributors would also be able to sell wine and spirits. There would be no new liquor licenses for grocery stores or other private retailers. State stores would remain open in perpetuity.

5. Higher Taxes. We know there will be higher taxes. We know this will include some broad-based tax increase to generate the $600-$700 million needed to pay for the spending.

We don’t know what taxes will go up. There is no agreement on a tax plan; that is, the Senate passed a budget without the revenues to pay for it.

It’s unclear if there is support in the Senate to pass a tax hike, and very clear signs there isn’t support in the House for a tax hike of this magnitude.

To see how your senator voted, here is the roll call for SB 1073 and SB 1082.

posted by NATHAN BENEFIELD | 05:48 PM | Comments

Corporate Welfare and Cronyism in Bethlehem

NOVEMBER 5, 2015

Election day was a quiet affair in most communities, but in Bethlehem residents used the a local election to protest the appearance of cronyism in connection with a new corporate welfare program.

The Morning Call reports:

Outside Bethlehem City Hall, a handful of city residents waged a write-in campaign for an unusual albeit illegal candidate — Martin Tower.

City residents Barbara and Steve Diamond and their friend, Sonja Walker, were encouraging voters to write in the name "Martin Tower" instead of voting for City Council President J. William Reynolds.

The residents are particularly upset with Reynolds because he took donations from the owners of Martin Tower and didn't recuse himself from the first reading of the ordinance to rezone the property.

What does Martin Tower (the former home of Bethlehem Steel) and rezoning have to do with corporate welfare? Bethlehem is one of two cities in Pennsylvania with a special City Revitalization & Improvement Zone (CRIZ). These zones are designed to attract development by letting developers keep state and local tax revenue generated inside the zone. Martin Tower sits in a CRIZ.

The Pennsylvania Independent reports that the owners of Martin Tower originally planned to build residential communities, but after the CRIZ was established they began lobbying city council to rezone the property for retail stores--potentially increasing the property's value by millions.

It’s impossible to prove the presence of political favoritism, or a quid pro quo, at play in Bethlehem.

But it’s certainly true the developers stand to gain handsomely from the rezoning, and it’s true they donated to three of the members of the City Council responsible for making that decision.

The CRIZ program is giving untold power to local council officials to determine the winner and losers in the local economy. This special treatment for a few comes at the expense of the many. Even those on a left, like Stephen Herzenberg, executive director of Keystone Research Center, agree corporate welfare is unfair. Herzenberg says:

Anytime you have a very targeted subsidy for a business or one industry, there are going to be issues with whether that targeted subsidy lends itself to political favoritism, or at least the appearance of political favoritism.

There's a simple solution: It's time to end these corrupting programs. If Pennsylvania eliminated the nearly $700 million of corporate welfare subsidies the corporate income tax could be lowered from 9.99 to 7.2 percent, attracting genuine business investement.  Now that's a fairer way to revitalize communities.

posted by ELIZABETH STELLE | 09:20 AM | Comments

Tackling our Structural Deficit Without Tax Hikes

OCTOBER 13, 2015

“I’m not taking anything off the table” said Gov. Wolf shortly after his tax plan was resoundingly defeated in the House last week.

The governor’s refusal to abandon his fixation on tax increases is curious considering the lack of support for his proposals in the General Assembly. He insists taking more out of the pockets of working people—even as his administration hands out corporate welfare to a favored company—is a necessary part of any plan to fix Pennsylvania’s structural budget deficit.

It’s not.

To understand why, it’s important to identify the driving factor behind the state’s structural deficit: projected spending increases. To be clear, the governor and legislature aren’t debating how to pay for current levels of spending. There’s enough revenue to cover those expenses. As we pointed out back in February, the debate is how to pay for new spending this year and in the future.

In the short-term, balancing the budget is rather straightforward. If lawmakers limited spending increases to $500 million this year, the budget would be balanced for 2015-16. However, slowing spending growth this year doesn’t fix the structural deficit or prevent future credit downgrades.

The governor has rightfully acknowledged our structural deficit, but his solutions don't fix the root cause of our budget woes, namely, the rapid growth in spending fueled by the state's pension obligations, which were cited by credit rating agencies as one of the reasons for the state's bond downgrades.

Acknowledging the pension problem, Republicans sent the governor a reform plan rated favorably by the credit agencies. He vetoed it. This appears to be a real blind spot for the governor. His efforts have been focused almost exclusively on the revenue side of the balance sheet, instead of looking for savings on the expenditure side.

Still, tax hikes are not inevitable, by cutting wasteful spending permanently and selling off government assets, lawmakers can avoid driving people away with higher taxes.

posted by BOB DICK | 03:05 PM | Comments

Corporate Welfare's Hazards

SEPTEMBER 9, 2015

State officials often hail the Redevelopment Assistance Capital Program (RACP or R-Cap) as a tool for "economic development" projects across the commonwealth. The program uses borrowed money—with interest payments financed by taxpayers—to help pay for these projects. But does R-Cap really support economic growth?

R-Cap gives state officials license to hand out grants for private projects meeting certain requirements. These corporate welfare programs transfer wealth to and concentrate power in government at the expense of taxpayers, with little benefit.

A new study authored by Dr. Adam Millsap of the Mercatus Center focuses on the R-Cap program, its effects on state employment, and the inherent problems associated with corporate welfare.

On the employment side, Millsap finds a positive benefit between R-Cap grants and economic growth:

The analysis shows that a one standard deviation increase in the natural log of RACP funding per capita in 2010 resulted in a 1.1 percentage point increase in county employment growth from 2010 to 2013.

Put simply, by increasing R-Cap funding above a certain level, a county could expect to see an increase in job growth. So government spending can create economic growth. Case closed, right? Not quite. Millsap notes:

It should be emphasized that the positive effect found here is not surprising, and it does not show that the grant led to a net increase in Pennsylvania’s economic growth. [Bold mine.]

Yes, government spending increased employment in the areas where it was directed, but this doesn’t mean government spending is good for the entire state. Millsap explains:

Instead of spending time and energy inventing new products or improving production processes, entrepreneurs are incentivized to expend resources pursuing government grants. Since the grant is simply a transfer of resources from one group to another—in this case from taxpayers to the winning businesses—the resources spent on acquiring the grant do not create new output…

Not only does government create perverse incentives for businesses, but it also misuses taxpayer dollars by diverting those dollars to politically-savvy groups, instead of allowing those who earn it to spend it as they wish.

While Millsap's study does not analyze R-Cap's effect on total employment growth in the state, evidence compiled by CF suggests corporate welfare does not improve a state's economy

Rather than requiring taxpayers to fund government grant programs or horse race prizes, lawmakers should cut corporate welfare and use the savings to lower the tax burden on all business, putting the economic decision-making authority where it belongs: with working people in the private sector. 

posted by BOB DICK | 05:14 PM | Comments

Doing Business in Pennsylvania Can Be Taxing

JANUARY 12, 2015

This post was updated to reflect the most recent data available.

Tax policy may not be as exciting as discussing Golden Globe winners, but few topics rise to the level of its importance. Taxes directly impact your quality of life. The more the government collects from you, the fewer dollars you have to provide for yourself and your family.

The same principle applies to businesses. When government finances its profligate spending through excessive corporate taxes, entrepreneurs have fewer dollars to re-invest in those businesses. Less investment results in reduced job and wage growth.

The commonsense notion that higher taxes stunt economic growth is not without evidence. A Mercatus study determined higher taxes lead to a decline in gross state product (GSP), per-capita income, and the number of new businesses. Our own analysis (page 23) found better job growth in states with the lowest tax burdens when compared to states with the highest tax burdens.  

As we've persistently pointed out, Pennsylvania is among the states with the highest tax burdens. Luckily, relief may be on the way. Senator Michelle Brooks and Representative Seth Grove will be sponsoring bills to cut the state's corporate tax rate, which is the 2nd highest in the U.S.

Last year, my colleague Elizabeth Stelle wrote about cutting the corporate tax rate by ending special subsidies. This idea is just as relevant in 2015. According to the most recent numbers, if lawmakers eliminated nearly $700 million in special subsidies (indentified below), the corporate tax rate could be lowered to 7.2 percent from 9.99 percent.

Corporate Welfare Grant & Loan Programs 2014-15 Budget (Thousands)
General and Special Funds
Agriculural Excellence $1,100
Agricultural Research $787
Agricultural Promotion, Education and Exports $250
Ben Franklin Tech Development Authority Transfer $14,500
Commonwealth Financing Authority Transfer $77,755
Council on the Arts $898
Discovered in PA Developed in PA $5,000
Food Marketing Research $494
Grants to the Arts $8,590
Hardwoods Research and Promotion $350
Industry Partnerships $1,813
Infrastructure and Facilities Improvement Grants $19,000
Keystone Communities $6,150
Keystone Works $100
Livestock Show $177
Marketing to Attract Business $2,008
Marketing to Attract Tourists $7,264
Municipalities Financial Recovery Revolving Fund Transfer $4,000
New Choices/New Options $500
Open Dairy Show $177
Partnerships for Regional Economic Performance $11,880
Pennsylvania First $20,000
Pennsylvania Race Horse Development Fund $250,118
Tourism-Accredited Zoos $550
World Trade PA $5,824
Youth Shows $140
Total $439,425
Tax Credits
Film Tax Credit $60,000
Job Creation Tax Credit $10,100
Research and Development Tax Credit $55,000
Keystone Opportunity Zone $87,500
Keystone Innovation Zone $25,000
Resource Enhancement and Protection Tax Credit  $10,000
Alternative Energy Production Tax Credit $10,000
Total $257,600
Total $697,025

This 27 percent decrease in the corporate tax rate would rank Pennsylvania 22nd among the fifty states—a vast improvement over our current position.

What's more, these calculations are based on a purely static model. Given that businesses respond to lower taxes, a lower tax rate could result in more robust economic growth, creating an increase in state revenue and allowing the rate to be cut even further.

Historically, Pennsylvania's economy is slow to grow. A cut in the corporate tax rate may be just the jolt it needs to pick up steam. 

posted by BOB DICK | 09:27 PM | Comments

Government Falls Short in Subsidizing Job Creation

DECEMBER 12, 2014

"Incomplete, misleading, and unreliable"—that is how an Auditor General report described Department of Community and Economic Development (DCED) efforts to ensure transparency and accountability in the use of your tax dollars.

The criticisms did not end there.

The report, released on Wednesday, analyzed five "job creation" programs under the purview of DCED. Here are the five major findings:

  • DCED did not set any performance goals or measurements of success for its programs.
  • DCED penalized businesses that didn't create the promised jobs.
  • The DCED did not verify if businesses that were awarded taxpayer-financed loans actually created or retained jobs.
  • DCED's annual reports on these programs proved to be inaccurate, misleading and unreliable.
  • While the DCED has improved its monitoring in some areas, it does not have adequate monitoring procedures for all of its programs.

According to the Auditor General's analysis, 44 percent of businesses that were awarded taxpayer funds did not reach their goal in new job creation. As Pennsylvania Independent points out, this cost taxpayers more than $93 million.

These disappointing findings should spark a debate about "job creation" policies. Government should not pick winners and losers in the economy and decide what businesses receive direct taxpayer support. This is neither an equitable nor an effective way to create job growth.

By eliminating corporate welfare and lowering the overall tax burden on all businesses, Pennsylvania can become more competitive.

It's also one way to solve our state's budget woes. As lawmakers look to balance a deficit of nearly $2 billion this upcoming fiscal year, eliminating the more than $440 million in grant and loan programs is a great place to start.

Corporate Welfare Grant & Loan Programs 2014-15 Budget (Thousands)
General Fund
Agricultural Research $787
Agricultural Promotion, Education and Exports $250
Ben Franklin Tech Development Authority Transfer $14,500
Commonwealth Financing Authority Transfer $77,755
Council on the Arts $898
Discovered in PA Developed in PA $5,000
Food and Marketing Research $494
Grants to the Arts $8,590
Hardwoods Research and Promotion $350
Industry Partnerships $1,813
Infrastructure and Facilities Improvement Grants $19,000
Keystone Communities $6,150
Keystone Works $100
Livestock Show $177
Marketing to Attract Business $2,008
Marketing to Attract Tourists $7,264
Municipalities Financial Recovery Revolving Fund Transfer $4,000
New Choices/New Options $500
Open Dairy Show $177
Partnerships for Regional Economic Performance $11,880
Pennsylvania First $20,000
Pennsylvania Race Horse Development Fund $252,583
Tourism-Accredited Zoos $550
World Trade PA $5,824
Youth Shows $140
Total $440,790

Previously, we calculated that by eliminating economic development subsidies, including targeted tax breaks, Pennsylvania could lower the Corporate Income Tax rate from 9.99 to 7.08 percent.

Instead of having the second-highest rate in the nation, we would suddenly be lower than 21 other states, which would certainly make the Keystone State a more attractive place to move or expand a business—and be a more effective way to create jobs.

posted by BOB DICK | 03:15 PM | Comments

Study: Selective Carve-Outs Make Poor Tax Policy

AUGUST 7, 2014

Lawmakers across the country have promoted specific, targeted tax breaks that encourage businesses to invest in their state. According to a recent study, these incentive programs are ineffective at promoting widespread economic benefits, despite being advantageous for certain firms and industries. 

The study, published by The American Legislative Exchange Council (ALEC), examines "the use of public policy to benefit a specific industry, firm, or individual, as opposed to setting broad and generally applicable rules and policies that apply to society as a whole." These include targeted tax breaks or cash subsidies for select firms, as well as preferential tax treatment for firms located in a given geographic area.

ALEC finds that while this type of tax favoritism is not illegal, these programs stunt a state’s potential growth. Tax carve outs, while helping ease the tax burden for select businesses, create an uneven playing field on the whole.

When select businesses are exempt from the standard tax rate, the tax base decreases. ALEC notes that "with a smaller revenue base, states must continually raise tax rates to get the desired amount of revenue." Overall, this results in most businesses paying higher taxes, as they are forced to subsidize the lower tax burden of firms receiving preferential treatment.

To achieve a state's greatest economic potential, carve-outs must be eliminated altogether. Tax policy should be competitive and equal for all businesses. 

posted by EMMA CRISCI | 05:00 PM | Comments

RCAP and Corporate Welfare Hurt Pennsylvanians

JUNE 18, 2014

What would you do if the government spent your tax dollars on a project that could bankrupt your business? Would you fight back by pointing out the injustice? Hopefully you're never faced with such a decision.

But unfortunately, for some Pennsylvanians, this hypothetical is all too real. 

In a recent example, Lebanon Valley Cancer Center’s (LVCC) amicable relationship with Good Samaritan Hospital in Lebanon, PA hit a speed bump when Good Samaritan received a $3 million government grant that could put LVCC out of business.

As reported by abc27 News, Good Samaritan plans to build a new cancer care facility with this public money. Cancer centers are a laudable contribution to the health of our communities and the commonwealth, but the radiation oncology center will duplicate the services already provided by LVCC.

Redevelopment Assistance Capital Program (RCAP) grant, could, as LVCC representatives argue, destroy an established, local, and privately-funded small business that has served the community for 24 years. 

One LVCC reprsentative put it plainly in an interview with abc27:

"Inevitably, if they go through with this, it will put us out of business," said Susan McCoy, Lebanon Valley Cancer Center office manager.

This is one prime example of the ineffectiveness of the RCAP program. RCAP, and other "corporate welfare" type projects result in government picking winners and losers, which hurts our economy.

Last year, the General Assembly was on the right track when in lowered the program's debt ceiling to $3.75 billion. This debt ceiling reduction and other reforms establish greater accountability within the program, but more can be done.

Instead of picking winners and losers, lawmakers should eliminate RCAP and other corporate welfare programs to balance the budget, paving the way for lower taxes. An overall tax rate reduction would benefit hardworking Pennsylvanians without playing favorites.

For more information on how to make Pennsylvania prosperous and fiscally sound, check out our Blueprint for a Prosperous Pennsylvania.

posted by MICHAEL HOGG | 10:56 AM | Comments

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