Corporate Welfare

There's a memorable line in Promised Land, the new Matt Damon movie opening Friday about a gas drilling company buying land rights in a declining farming community. One character fighting the industry's arrival tells Damon, who plays the gas industry's morally ambivalent landman, "We're not fighting for land, Steve--we're fighting for people."

It's a pity, then, that the Middle East-funded film takes such an anti-people approach to fracking. The film assumes that gas drilling is bad for the environment, laying waste to land and livestock, and that the industry preys on a suffering community's desire for wealth and good schools just to turn a profit.

So far, so Hollywood. Big industry rarely gets more than this false celluloid caricature, even though in Pennsylvania, fracking has created over 102,000 jobs, lowered utility bills, and helped real farmers like Bradford County's Jim VanBlarcom, who was able to double his dairy herd size by leasing his land. And contrary to popular belief, fracking has not contaminated the water supply.

Moreover, the gas industry has boomed without taxpayer subsidies and paid all the taxes common to other businesses plus a special impact fee. That's the double irony of Promised Land: It isn't only anti-people on fracking, it's anti-Pennsylvanians because of the Film Tax Credit used to fund its Pittsburgh-area filming.

Pennsylvania taxpayers doled out more than $4 million through the Film Tax Credit for the movie. For those unfamiliar with the Film Tax Credit, it is unique among tax breaks in that it is "transferable." That is, even if the production company (in this case, Gramercy Productions) doesn't owe any state taxes, they can sell the remainder of their tax credit to another company.

We've noted how corporate welfare for Hollywood studios doesn't "create" any jobs, but shifts economic activity from one area to another. A tax break for one industry requires higher tax rates on everyone else, hindering job creation in every other sector of the economy—which hurts Pennsylvanians everywhere.

In real life, natural gas drilling has revitalized communities across Pennsylvania and helped people to better lives and incomes. For more stories of families benefiting from gas drilling in Pennsylvania, check out The Real Promised Land .

Film industry lobbyists are renewing calls for more corporate welfare for the film industry, through expansion of Pennsylvania's Film Tax Credit. 

As we've noted time and time again, the benefits of the FTC are vastly overstated.  As PA Independent's Eric Boehm comments,

The article notes that "Batman: The Dark Knight Rises" did not get any tax credits from the state.

If blockbusters like that are going to film in Pennsylvania without a taxpayer-subsidized incentive, why did we spend $3.3 million to host the filming of "My Bloody Valentine" or $36 million for "The Last Airbender?"

Why indeed.  In fact, most movies and other productions filmed in Pennsylvania don't receive the film tax credit. This fact undermines the argument we need a bigger tax credit (or one at all) to attract films.

The allure of Tinseltown is beginning to wane with fewer states operating film tax credit programs than in 2010. This is due to the ensuing scandal when politicians decide which Hollywood companies get tax breaks and which bad TV shows or political movies get subsidized, and that film tax credits are failing to generate the promised economic benefits.

The biggest problem with film tax credits is common to all corporate welfare and targeted tax breaks—they prevent states from making across the board tax reductions that would benefit all business.  Such reform, not more credits for Big Hollywood, is how Pennsylvania can improve its economy.

I testified yesterday before the House Finance Committee about how government-directed "economic development" hampers economic growth.

A prime example of this happened Tuesday, where taxpayers forked over more than $2 million dollars for the Hershey Company to expand a chocolate-making factory. While ribbon-cutting ceremonies make for good photo ops, the effects of distorting the market and playing favorites are not immediately seen. But these unseen costs outweigh any visible benefits to Pennsylvania's economy as a whole.

Targeted tax breaks and corporate welfare subsidies prevent across-the-board tax rate reductions that would benefit all Pennsylvanians, which are better at attracting new businesses from all sectors, and allowing existing businesses to expand in Pennsylvania.

Of course, Pennsylvania has felt the need to do this because of inhospitable business climate, including the highest flat corporate income tax in the United States and the 10th highest state and local tax burden in the country. Addressing these problems and making Pennsylvania more business-friendly would significantly reduce the need for such corporate welfare. Until this happens, Pennsylvania is merely renting jobs with its economic development spending.

As the table below illustrates, over the last six years, the commonwealth out-spent every state in the country on "economic development," according to data collected by the Council for Community and Economic Research. However, there is no evidence that states utilizing more direct subsidies and tax credits better stimulated their economies. From 2002 to 2012, the top 10 states—which spent the most on economic development—actually experienced worse job growth than the bottom 10 spending states.

Rather than tax breaks and incentives to stimulate job growth in targeted industries such as Hershey Co., economic development policy should focus on making the state more attractive for all businesses. A better strategy than trying to pick winners and losers with handouts from taxpayers would be for state and local governments to focus on improving our business climate by taxing and spending less.

Tim Carney continues to highlight the role special interests— including the largest players in the health care industry—played in crafting the socalled Affordable Care Act, dispelling the myth that President Obama took on these vested interests:

Obama largely let the drug lobby write the bill. I was screaming this at the time, and recently published memos have cemented this fact. The drug lobby isn't merely a huge part of the health industry's lobbying force, it's the single largest part. In 2009 and 2010, Pharma and health products was the No. 1 industry in federal lobbying according to the Center for Responsive Politics.

The Pharmaceutical Research & Manufacturers of America spent more on lobbying than any other single-industry lobby group in 2009. Number 2 was the American Medical Association, which also endorsed the bill. In the health sector, No. 3 was the American Hospital Association, which wholeheartedly supported the bill.

In a PA Independent piece on state lawmakers' reaction to the proposed Medicaid expansion, Sharon Ward—who often demagogues about "corporate greed"—acknowledges that it is big health care companies that are most likely to benefit from billions in new taxpayer subsidies.

Sharon Ward, executive director of the legislative think tank Pennsylvania Budget and Policy Center, said expanding Medicaid would help reimburse hospitals for uncompensated care, while other federal funding measures expire.

"It's more dollars coming into the state going to our health-care providers," Ward said. "It's critically important that this occur."

The SEIU Union—another special interest group that lobbied for the Affordable Care Act—also admits that the Medicaid expansion is really intended to benefit hospitals' bottom line.

Neal Bisno is the executive director of SEIU Healthcare PA, a union representing 20,000 health-care workers in the commonwealth. Bisno said the group will work with legislators to try to enact the Medicaid expansion, as the effect on hospitals would be positive because of other cuts to reimbursements.

"Hospitals and other health-care providers that are facing federal and state payment cuts are really counting on the Medicaid expansion to help them provide quality care," he said to PA Independent. "Frankly it's fiscally irresponsible to not implement the Medicaid expansion. The funding of the Medicaid expansion is heavily subsided by the federal government."

There are three main problems with the logic of these special interest groups. First, there is no such thing as free "federal" money. These subsidies will be paid for through dozens of new and higher taxes.

Further, the Medicaid expansion will impose additional costs on states, causing further strain on their budgets. Pennsylvania is already facing a four-alarm fire with out-of-control Medicaid costs.

Finally, expanding Medicaid does not guarantee care. Because of low-reimbursement rates and bureaucratic red tape, many doctors won't even see Medicaid patients. This results in longer wait times and lower quality care for Medicaid beneficiaries. Additional cuts to reimbursement rates - which is about the only thing states can do to reduce Medicaid spending without federal flexibility - will only make a bad situation worse.

These problems with the new health care law were the topic of a forum I participated in last week. In contrast, the Commonwealth Foundation has outlined a path to real Medicaid reform.

Pennsylvania Independent's Melissa Daniels writes that corporate welfare programs to benefit solar companies are on their way out in Pennsylvania, saving consumers more than $100 million.  Two major state programs offering taxpayer subsidies for solar projects have expired:

Pennsylvania spent millions on pushing solar as the SREC [Solar Renewable Energy Credits] market developed. The $100 million Sunshine Solar Rebate Program offered rebates to consumers and small businesses who installed solar projects. The Commonwealth Financing Authority gave more than $57.6 million in grants and $7.3 million in loans for 79 solar-related projects; CFA no longer accepts applications for solar energy grants.

"Green" corporate welfare programs have been under fire for several years, most nobably following the fiasco when Solyndra, a company taking millions in federal loans, went bankrupt.

However, Pennsylvania continues to mandate that utilities get more electricity from specific alternative energy sources, including solar.  These mandates drive up prices, and while celebrated for "creating green jobs," actually destroy jobs and undermine economic growth.

Thankfully, legislation to escalate these mandates-which would cost consumers an estimated $139 million annually in higher electric prices-has stalled out, PA Indy reports.  Testimony from the Pennsylvania Utility Commission sums up why Pennsylvania lawmakers are more hesitant to subsidize more Solyndras:

Robert Powelson, chairman of the Pennsylvania Utility Commission, testified his opposition before the House Consumer Affairs Committee in January.

"By advancing the current solar carve-out, which acts as a subsidy for the solar industry, HB 1580 would increase the price of solar renewable energy credits, therefore, increasing consumers' bills," Powelson wrote. "This is simple supply and demand economics."

Organizations that love to lobby for your tax dollars and special handouts for their special interests are posturing against Gov. Tom Corbett's corporate welfare package to lure Shell's new ethane processing plant—often called a "cracker" plant—into Pennsylvania.

Have the Pennsylvania Budget and Policy Center, PennFuture and PennEnvironment had a change of heart on corporate welfare policies, or is this a case of the pot calling the kettle black?

The Commonwealth Foundation invites these organizations to join us in supporting the elimination of all of tax breaks and handouts for "job creation" to create across-the-board tax rate reductions that would benefit all Pennsylvanians.

Here are a few, but almost certainly not all, the various welfare programs Pennsylvania offered corporations and economic development groups last year.

The tax credit Gov. Corbett proposes for Shell is $67 million per year (totaling $1.7 billion over 25 years). As concerned as these groups are over this, they ought to be furious about the $745 million in total corporate welfare that Pennsylvania allotted last year.

As we've pointed out previously, a Legislative Budget and Finance Committee in 2010 on Pennsylvania's tax credit programs found there is little hard evidence that these incentives create more jobs on net.

Instead, we should ditch "economic development" spending and eliminate targeted tax breaks to reduce tax rates across the board. Such reforms would do much more to create opportunities—and jobs—across the Keystone State.

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.

Astute readers may remember that last month Pennsylvania earned the dubious distinction of the highest taxes for mature businesses and the second highest taxes for new businesses. So how did Pennsylvania just beat out Ohio and West Virginia for the Shell Oil Co. cracker plant that is estimated to create more than 10,000 construction and 10,000 permanent jobs?

The Post Gazette has the answer, "Gov. Tom Corbett and his closest advisers spent months wooing the company." In other words, corporate welfare.  Pennsylvania's corporate taxes are so awful that the Corbett administration had to wine and dine company officials and hand over special tax exemptions and subsidies to seal the deal.

Eventually the administration discovered some Shell executives were fans of the Steelers and treated them to a game at Heinz Field. The Post Gazette reports executives were even given a glimpse of the locker room. Good thing West Virginia doesn't have an NFL team and the Cleveland Browns. . . well we all know that story.

On the policy side, the General Assembly voted in February to expand Keystone Opportunity Zones (areas which exempt businesses from taxes) for businesses that invest at least $1 billion and create at least 400 permanent, full-time jobs.  Legislators also implemented a natural gas impact tax, about $10 million of which will be used to subsidize projects like the Shell plant.

While the Shell decision seems like good news, the truth is tax breaks and corporate welfare merely mask and exacerbate the problems with our business taxes and regulations.

If Governor Corbett and the General Assembly want to attract jobs they need to stop making exceptions for large corporations and improve the business climate for all businesses. Indeed, lawmakers should take the lesson from the Keystone Opportunity Zones—that businesses are attracted to lower taxes—and apply it statewide.

This week the Pennsylvania House passed RACP (pronounced RCAP) reform by a wide margin of 184 to 9.

RACP - the Redevelopment Assistance Capital Program - is a political goody bag, rewarding politicians with borrowed funding for local "economic development" projects. Some of the more controversial projects include the Arlen Specter Library, the corporate headquarters of bankrupt Tastykake and numerous sports stadiums. Most recently, RACP was the source of a $3 million grant to the Second Mile, the charity founded by alleged child molester Jerry Sandusky.

HB 2175, sponsored by Rep. Turzai, seeks to shrink the program that's helped cover the commonwealth in red ink. Since 1986, the program has racked up more than $4 billion in debt. The RACP reforms include:

• Reducing the RACP debt ceiling immediately from $4.05 billion to $3.5 billion and then incrementally until it reaches $1.5 billion.
• Requiring future projects to demonstrate a substantial regional or multijurisdictional economic impact.
• Enacting a stringent review and approval process within the Office of the Budget, including meetings in local communities where the projects would take place.

While reducing corporate welfare programs is a step in the right direction, true reform would get rid of this government wealth redistribution scheme that benefits the politically savvy and contributes to the $120 billion in combined state and local government debt - almost $10,000 for every man, woman, and child.

Debt is just one part of the four-alarm fire that is threatening to destroy Pennsylvania's fiscal house - watch this video to learn more.