Pennsylvania State Budget
Last year, nearly 42,000 Pennsylvanians left the state to pursue their dreams elsewhere—that's one person every 12 and a half minutes. Why is money walking out of Pennsylvania?
That’s the topic of the second episode of Commonwealth Insight, our new, bi-weekly podcast featuring state and national entrepreneurs, policy makers, and thought leaders tackling issues critical to Pennsylvania's economic future.
First, we talk with Travis Brown, Forbes contributor and author of How Money Walks, who says Pennsylvanians are “voting with their feet and taking their wallets” to states like Florida, North Carolina, and Arizona because of our state’s tax burden.
He explains that states compete with each other to attract investment and residents:
Just like the Steeler Nation would look competitively across state lines and do the scouting and reporting to see how we can be better and better next year against the New England Patriots, every competitor would look to the North and say: How can we attract these residents and how do we keep the residents we have?
Travis says there are three major policy areas Pennsylvania can change to be more competitive: regulation, taxation, and litigation.
To reverse out-migration and make Pennsylvania attractive to families and businesses, we must avoid higher taxes, more government spending, and greater regulation.
We also talk with Bob Dick, senior policy analyst for the Commonwealth Foundation, about how the Pennsylvania state budget works—and doesn’t work. Bob says state spending is growing beyond its citizens' ability to fund it, resulting in tax hikes that kill jobs and slow private sector growth. The politically unpopular, but fiscally responsible, solution is to control spending.
posted by DOUGLAS BAKER | 01:57 PM | Comments
Amy Crivella was addicted to cigarettes. She tried everything—gum, patches, going cold turkey—but nothing worked. Then, she tried e-cigarettes, or vaping, and she didn’t need a cigarette for the first time in 17 years.
The mom of two closed her bakery and took out a loan to open East Coast Vapes in Cranberry Township near Pittsburgh. Amy estimates her business has helped about 700 people reduce smoking or quit cigarettes altogether since she opened her doors almost a year ago.
“I didn’t choose to do this to make a buck,” she says. “If I can pay my bills, I’m happy. We’re helping the grandmas and the grandpas quit smoking. We’re not looking for a handout.”
But Amy’s business and her family’s livelihood are in danger. Tucked away in this year’s budget is a retroactive 40 percent wholesale tax on e-cigarettes that goes into effect on October 1. This means Amy will have to send Harrisburg a check for 40 percent of the wholesale value of her entire inventory—including the inventory she purchased well before this tax was even considered.
Not only will the tax force Amy to lay off all three of her employees, but it may financially ruin her.
I don’t know if I’m going to make it. I don’t even have the option to close. I signed a five-year lease, and I’m personally responsible for those payments. I’m going to lose everything. My parents helped me take out that loan. The bank will go after their house if I don’t make my payments. I don’t know what I’m going to do.
Unfortunately, Amy has learned how dangerous big government can be:
I didn’t know too much before, and the more I learn the more scared I get. I didn’t even know what a lobbyist was until about four months ago. I should never fear my government, and I fear them right now. We hired them to stand up for the little people, and I feel like a punching bag. They don’t care that we pay $16 million in other taxes every year.
This fall, lawmakers have a choice: They can shut down businesses across the state for a mere (in relation to the rest of the budget) $13 million in projected revenue from the tax, or they can spare people like Amy from losing their livelihoods.
For starters, lawmakers should support a move spearheaded by Rep. Jeff Wheeland (R- Williamsport) to replace the 40 percent tax with a 5-cents-per-milliliter tax, similar to what exists in North Carolina and Louisiana.
If additional savings are needed, lawmakers should cut hundreds of millions in corporate welfare tax credits and optimize state health care spending. Pennsylvania could save $153 million a year if state workers contributed to their health care at the same rate as private sector workers. Common sense solutions to savings and revenue exist that don't unfairly punish businesses like Amy's.
Like other vape entrepreneurs, Amy plans to empty her inventory to avoid the 40 percent floor tax. In the meantime, she hopes lawmakers will act quickly to repeal or replace the tax instead of sending families like hers to financial ruin.
Stelle explained how this tax will put hundreds of small vape shops out of business for a minuscule amount of revenue to feed state government's spending addiction. Click below to listen:
The tax on vape shop owners sets a dangerous precedent. Without spending reforms, there's no telling which small businesses will be targeted next.
Scottie Freeman wants to serve his community. He opened a vapor shop in a depressed part of Erie and planned to use the shop’s proceeds to open up an ice cream store in the same part of town.
He had his sights set on creating a welcoming environment for the entire community, but the state’s uncontrollable spending addiction put a damper on his plans.
Elected officials decided to increase spending by more than $1.5 billion, leading to a slew of new tax increases on working people. The $650 million tax increase package includes a 40 percent excise tax on vape shops like Scottie’s.
“I’m truly having a hard time wrapping my head around this logic,” said Scottie. “It doesn’t make any sense unless the tax was designed to knock out the small guys so the bigger businesses can make money.”
Scottie decided to open up a vape business because he saw a trend in the industry. Only after his investment did he truly understand the health benefits of vaping. “People have come up to me to say I saved their life,” he said. Many see vaping as a better alternative to smoking, and numerous studies have suggested it is less harmful than cigarettes.
Scottie recently closed his Erie vape shop because he felt he would not be able to serve his customers well post-tax increase. “I can’t help people the way I want to because the product will be too expensive,” he said. “My customers still want me to stay open. And they’re angry I’m closing.”
Scottie doesn't give up easily. He's committed to continue serving his customers: “I still hope to provide people an opportunity to access vape products. I had to learn to cook when I was seven and wash my clothes at eight. I’ve learned to be creative.”
Still, Scottie can’t help but feel upset about the fate of his business. “They set out to destroy something I spent my time and money building. I can’t even go into my shop now without getting angry.”
Scottie isn’t alone. Vape shop owners from Erie to Philadelphia are closing because of the devastating excise tax on their industry.
As long as the tax remains in place, entrepreneurs like Scottie will be forced to abandon their dreams and close their doors.
The 2016-17 budget has passed, yet it remains unbalanced, relying on borrowing money and yet-to-be-passed legislation. Many revenue estimates are overly optimistic. Without efforts to reduce spending or reform cost drivers like pensions and human services, taxpayers should expect a push for tax hikes in 2017.
1. Tobacco taxes are an unstable revenue source, but they account for 75 percent of this year’s $650 million tax hike. Recently, Philadelphia reported cigarette tax revenue 25 percent below original estimates. Expect statewide tobacco taxes to fall short, and continue to decline as smokers give up or travel to other states for cheaper cigarettes.
2. New revenue from wine-expansion is questionable. The estimated $150 million in revenue for 2016-17 assumes all 12 casinos will seek $1 million permits for 24-hour alcohol sales. However, no casino has shown interest. The estimate also assumes expanded hours, coupons, and flexible pricing (read: higher prices) will boost revenues by $55 million.
3. Significant one-time revenue transfers, absent spending reforms, will increase pressure for broad-based tax hikes. The budget includes roughly $460 million in one-time revenue, including money from new gaming licenses, a $200 million loan from the medical malpractice fund, and several one-time transfers from other funds. While legislators are right to look to surpluses in other funds before raising taxes—though this year they did both—one-time shifts were needed only to cover the largest spending increase in a decade.
4. The budget depends on $100 million from a gambling expansion that doesn't exist. Lawmakers intend to pass a gaming expansion bill in the fall, but there is no guarantee they will. This additional $100 million is needed, as lawmakers moved $95 million in payments to the Commonwealth Financing Authority off budget. Balancing the budget also depends on $50 million from a casino license in Philadelphia; however, this license has been tied up in court for two years with no end in sight.
5. Optimistic General Fund revenue estimates. Independent rating agency S&P assigned Pennsylvania bonds a negative outlook due to the commonwealth’s dubious revenue estimates: “We view the fiscal 2017 budget as structurally imbalanced and believe that many of the revenue assumptions could prove optimistic.”
It's easy to overlook tax hikes that may not affect your daily life, but new taxes on smokers, vapors and Netflix users are just a prelude to the higher taxes in store for all Pennsylvanians unless legislators take action on long-term fiscal reforms.
Buried in a little debated 267-page tax code bill is a provision emblematic of Pennsylvania’s corporate welfare culture.
The provision directs hotel tax revenue generated inside a Neighborhood Improvement Zone (NIZ) to hotel owners and developers. The revenue can be used to pay for hotel renovations or to finance entirely new hotels.
The hotel tax normally funds tourism promotion and economic development for the Lehigh Valley. But now, rather than using the revenue to promote the Lehigh Valley, it will be used to subsidize a small group of private enterprises.
“This is blatantly unfair competition,” said Bruce Haines, who is a managing partner of the Hotel Bethlehem, which competes directly with hotels inside the NIZ. “We worked hard to get where we are. We put our own capital on the line. We did it the old-fashioned way.”
The new rule governing the NIZ will make it harder for entrepreneurs like Bruce to compete. Businesses inside the NIZ already had access to tax dollars before the change. Now they’ll have an even larger pool of tax dollars to use for new projects.
This raises an obvious question: Are the subsidies necessary? Research and experience both say no.
According to scholars from the Cato Institute and the Lincoln Institute of Land Policy, NIZ-type programs generally don’t create new wealth; they just shift its location. These findings are consistent with Bruce’s experience: “The NIZ isn’t really creating new businesses. They’re just moving from the surrounding areas into the NIZ. The market works for hotels. It doesn’t need subsidies.”
Bruce understands that competition is a necessary part of any free market. “If more businesses open in the Lehigh Valley without subsidies, that’s okay because it’s fair. But I should not have to lose potential customers because of crony capitalism. Philosophically, that bothers me.”
Handing out tax dollars to businesses, carving out special exemptions, or creating new rules benefiting a select few dampens economic growth. To promote broad-based prosperity, government must refrain from tilting the playing-field in favor of any business.
Government’s heavy hand can cause immense harm. Dori Odosso (pictured) and Chris Hughes know this all too well. Both small business owners are concerned about a crushing new tax that threatens to virtually wipe out their entire industry.
Their concerns are shared by many.
Over the past couple of weeks, various news outlets have featured vape shop owners who are bracing for a 40 percent excise tax on their businesses. Owners are worried about the tax’s impact on their lives and the lives of the people they serve.
Here are some of the upsetting responses from shop owners affected by the tax:
Pocono Record quoting George Predmore:
"I’m 51 and my wife is 52, if we lose the vape shop it would mean that I would have to try and find work. It could destroy my business and I would have to sell my home. It would destroy my life."
York Dispatch quoting Michael Curry:
"We're completely outraged," Curry said. "This is pretty much a catastrophe for us."
CBS 21 News quoting Dave Norris:
"The likelihood is that probably all three of my businesses will end up closing."
WTAJ-TV quoting Holly Loupe:
"It will result in shops closing, that means more unemployment, that means their families aren't going to have a source of income…"
The Lancaster Online quoted a few owners including Kerry Medina, who doesn’t think her business can survive the tax:
"This is my life," she said. "I took my life savings to do this."
This is not an academic debate about the effects of marginal tax rates on productivity. This 40 percent tax will have real consequences for working people if lawmakers leave it in place.
The General Assembly is not scheduled to come back until the end of September. That will be too late for many shop owners who have promised to shut their doors before then. If lawmakers want to save the people who work and depend on the vape industry, the tax must be repealed sooner.
Lawmakers have options for offsetting revenue losses, should they repeal the tax. They could reduce corporate welfare spending or even replace the tax with an alternative that is not as damaging.
The tax is estimated to raise $13 million, which is only 2 percent of the entire tax package passed in July. In other words, it is not an essential element of balancing the budget. But its repeal is essential to protecting people from the devastation of a poorly-designed tax.
Chris Hughes has owned Fat Cat Vapor Shop for almost three years. The shop—tucked away in a small Lycoming County borough—specializes in electronic cigarettes (e-cigs), which many people seek as a healthier alternative to traditional smoking.
Chris understood the needs of people looking for an alternative to cigarettes. Instead of waiting for someone else to meet those needs, Chris took a risk and opened his own vape shop in December of 2013. “I didn’t go into business for myself," Chris said. "I went into business to help people.”
His capacity to help others is now in jeopardy.
Earlier this month, the state legislature passed a 40 percent excise tax on Chris’s vape shop and others like it. Worse, the tax is retroactive. Not only is the 40 percent tax imposed on products Chris buys, but he must also pay the tax on existing inventory.
According to Chris’s estimates, the new law would require him to make a tax payment of up to $40,000. “I just can’t afford that. This tax is forcing me to close my business.” Lawmakers included the new tax on e-cigs as part of a $650 million tax increase package to balance the state’s budget.
The new e-cigs tax raises $13 million, which accounts for just 2 percent of the overall tax package. But to Chris, the tax is an enormous burden on his business—one he won’t be able to recover from. Chris isn’t the only one upset at the prospect of closing. “I’ve had customers come in crying because of the news that I’m shutting my doors. This is wrong. This is just unfair.”
Chris attempted to work with the legislature to pass a less punitive tax but to no avail. His pleas to avoid a life-altering tax fell on deaf ears. Chris plans to close his shop in September if lawmakers don’t repeal the tax. “I’m going to continue to fight, but I can’t help but feel let down by my government.”
Fortunately, there’s still time to make things right. Lawmakers should come back to Harrisburg and repeal the excise tax. Any revenue lost could be offset by cutting spending from the $800 million of corporate welfare in the state budget.
Reducing special subsidies to save the livelihood of small business owners like Chris is a practical and moral solution to an unacceptable problem. It’s also a cause worthy of lawmakers’ attention—and one they must pursue before time runs out.
Corporate welfare projects and celebratory press releases go together like peanut butter and jelly. For the most recent example in Pennsylvania, see the latest from the governor’s communications office:
Governor Tom Wolf announced today that Amazon will expand its presence in Pennsylvania and has committed to the creation of at least 5,000 new, full-time jobs statewide.
Wait for the kicker:
The company received a funding proposal from the Department of Community and Economic Development that includes a $5 million Pennsylvania First Program grant, $15 million in Job Creation Tax Credits to be distributed upon creation of the new jobs, and $2.25 million in WEDnetPA funding for employee training.
These stories, sadly, are commonplace in the commonwealth—the nation’s leader in corporate welfare. Rather than leveling the playing field for all businesses, Pennsylvania government picks winners and losers with a hodge-podge of grants, loans, and tax credits—often only available to well-connected firms with influential lobbyists.
Sure, 5,000 (promised) jobs will be terrific for Pennsylvanians lucky enough to land one. But what about the entrepreneurs competing with Amazon who won’t benefit from taxpayer-funded perks? Don’t hold your breath waiting for a follow-up press release.
See this CF Policy Brief for more on the costs of corporate welfare.
Relatedly, Amazon’s founder and CEO Jeff Bezos net worth was recently pegged at $65 billion. Whether they like it or not, Pennsylvania taxpayers are helping Bezos climb higher on the list of the richest people on Earth.
Bill Gates better not get comfortable at the top.
The 2016-17 budget is in the books with a $650 million tax increase. That's a significant increase—but it could pale in comparison to future tax hikes if pension reform continues to fall by the wayside.
Meanwhile, there's a notion gaining traction that we don't need pension reform because our public pension crisis is at a climax. After all, the yearly spikes in pension contributions will moderate beginning in fiscal year 2018.
Nothing could be further from the truth.
Recent reports from the state's two pension systems (PSERS & SERS) show the crisis is far from over. In April, SERS reported an approximately $350 million jump in the system's unfunded liability, swelling to $18.79 billion in 2015. But according to their actuary, the unfunded liability is closer to $19.45 billion—a roughly $1 billion jump.
SERS assumes a 7.5 percent rate of return for investments, but the actual rate of return was only 0.4 percent in 2015. This year isn't looking any better. SERS reported a 0.7 percent investment return for the first quarter of 2016.
In June, PSERS reduced their assumed rate of return from 7.5 percent to 7.25 percent starting in fiscal year 2017. These changes will add to the unfunded liability by about $2 billion.
In the past 3 months alone, we've added at least $3 billion to the already enormous $63 billion pension liability. Now imagine the impact of a recession or another reduction in assumed investment returns.
It's clear our pension system's liabilities are still growing at a rapid pace with no protection for taxpayers. The only way to truly end the pension crisis is to change the fundamental structure of these plans from the antiquated defined benefit plan to a modern defined contribution plan.
Like the budget, small adjustments may ease tensions in the short-term, but systematic reforms are required to change our future. Right now all signs point to higher taxes for Pennsylvanians.
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