Doing Business in Pennsylvania Can Be Taxing

JANUARY 12, 2015 | by BOB DICK

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. 

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