Education Choice Benefits All

AUGUST 3, 2016  | by NATHAN BENEFIELD

Private school choice programs benefit students, public schools, and taxpayers, according to new report from EdChoice.

The report, the fourth edition of A Win-Win Solution: The Empirical Evidence on School Choice, summarizes the findings of 100 studies of education choice programs providing scholarships to students attending private schools. The analysis finds that school choice improves education outcomes for participants, improves outcomes in public schools, saves money, and reduces segregation.

  • Of the 18 “gold standard” studies (that is, random assignment) of participating students, 14 found school choice programs improved academic performance.
  • There were 33 studies of the impact of programs on public schools; 31 found that public schools improved as a result.
  • Of 28 studies on the fiscal impact of school choice programs, 25 found they save taxpayers—costs to both local districts and state government—because school choice programs educate students for significantly less per student.
  • Ten studies look at the impact of school choice on racial segregation, with 9 finding choice reduces segregation.
  • Finally, 8 out of 11 studies on civic values find that school choice programs improve civic values.

School choice truly is a win-win for students, parents, and taxpayers.

Pennsylvania should learn from this evidence and embrace school choice. The commonwealth’s two school choice programs—the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC)—have proven immensely popular with families and lawmakers alike. 

Thankfully, the legislature increased funding for the EITC this year. Yet even with this increase, the $125 million available for K-12 scholarships represents less than 0.4 percent of the funding for school districts.

Pennsylvania's students, parents, and taxpayers would all benefit from continuing to expand our school choice offerings. 


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Government Favoritism Hurts Honest Businesses

AUGUST 2, 2016  | by BOB DICK

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.


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Overtaxing Can Change Lives for the Worse

AUGUST 2, 2016  | by BOB DICK

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.


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Why Dori is Fighting Back Against Government Overreach

JULY 29, 2016  | by BOB DICK

On Wednesday, we shared with you Chris’s fight to save his small business from a devastating tax increase. Regrettably, Chris’s business isn’t the only one threatened by the new tax—a punitive 40 percent excise on e-cigarettes.

There are between 320-350 vape shops across Pennsylvania, including Sweet Home Vapor Co PA—whose one owner and sole operator is Dori Odosso of Armstrong County. “I busted my butt to get where I am,” said Dori. “To have a new tax imposed on my business? That hurts.”

Like Chris, Dori believes she is helping improve the lives of her customers. “We’re saving people. If you make our product less accessible, people will be harmed.” Many people see e-cigarettes or vape products as a healthier alternative to traditional cigarettes. In fact, studies suggest these alternatives can reduce the harm caused by smoking.

“I know we’re important to our customers. That’s why I’m doing everything I can to stay in business. Some customers are upset and they don’t want to go back to smoking. It’s the reason I’m fighting for my business.”

Dori, Chris, and other small business owners are preparing for the worst. Chris is planning to close, and Dori has placed her products on sale to avoid one particularly egregious aspect of the new levy known as the "floor tax."

The floor tax requires all vape shops to make a tax payment on their current inventory. That is, they have to pay a tax on the products they already purchased prior to the tax going into effect. "To me, it all seems unfair. I feel like this is a deliberate effort to put us out of business."

That’s not how any small business owners should feel about their government. Ever.

Lawmakers can still save the more than 300 shops from their undeserved fate. But that will require the House and Senate to reconvene and fix HB 1198 (now Act 84), preferably before the tax takes effect on October 1. Any revenue lost could be offset through spending reductions, or, at the very worst, a less harmful tax on e-cigarettes.

It’s clear Pennsylvanians' livelihoods and even their health is on the line. Righting this wrong has now become a moral imperative.    


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Taxes Threaten Chris's Livelihood

JULY 27, 2016  | by BOB DICK

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.


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Pennsylvania’s Prime Subsidies to Amazon

JULY 26, 2016  | by JAMES PAUL

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.


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Saving for a Rainy Day – But Whose Money?

JULY 25, 2016  | by JAMES PAUL

Let’s talk for a moment about rainy days—specifically, the need to save funds to spend on one. Several school board administrators and lobbyists have taken issue with CF’s searchable, sortable database of school district fund balances, showing public schools are sitting on over $4 billion in "rainy day funds." Meanwhile, 85 percent of school districts plan to raise property taxes.

A Temple University report, authored by a former Pennsylvania School Boards Association employee, argues:

Just as an individual or family should maintain a savings account for unforeseen expenses or emergencies, school districts should also have funds in reserve to pay for emergency repairs or cover unexpected interruptions in revenues – such as a layoff at a major factory which suddenly affects tax collections.

If an individual or family could impose real estate taxes on their friends and neighbors, this analogy might pass muster. But an obvious difference exists between families socking away their own hard-earned money in a savings account and a school board severely over-taxing its district. The CF database shows 21 districts with over 50 percent (!) of their total expenditures squirreled away in reserve.

Every dollar held in excess by a school board is money earned by taxpayers that could otherwise be saved, invested, or spent by taxpayers. While some school districts stock up reserve funds, thousands of Pennsylvanians struggle to balance their family budgets.

Typically, the school board lobby defends excessive reserves by drawing an ironclad distinction between unassigned funds and assigned or committed funds. As CF explained in an earlier blog:

A district’s fund balance—what it owns minus it what it owes—is comprised of assigned, committed, and unassigned funds. Assigned and committed reserves are available funds designated for a specific purpose, while unassigned funds are available for any purpose.

School board directors argue the public should only scrutinize unassigned funds, since assigned and committed funds have already been earmarked. [For example, the Temple University report focuses solely on unassigned funds. Other funds are largely ignored.] They fail to mention, however, how easily money can be shifted among the three funds—often with a mere majority vote at the next board meeting.

The CF database anticipates this line of argument—and provides both total and unassigned reserve funds as a percent of expenditures. You’ll notice many districts keep their unassigned funds stocked to the legally mandated maximum amount at which they can still raise taxes, between 8 and 12 percent of total expenses, depending on district size.

Whether school boards should be judged on all reserve funds or simply unassigned funds is ultimately for taxpayers to determine. But the fact remains that dozens of Pennsylvania districts amassed large rainy day funds while also seeking tax increases.

What’s more, the Temple University report makes no mention of school districts’ capital reserve funds—yet another pot of money districts use to plan for construction projects.

Drawing attention to reserve funds is critical in order to increase transparency and raise awareness for taxpayers. While few school districts are sitting on a “pot of gold,” Pennsylvanians have a right to know that almost all districts enjoy alternatives to higher taxes.


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The Pension Crisis Will Trigger Another Tax Hike

JULY 25, 2016  | by ELIZABETH STELLE

The 2016-17 budget is in the books with a $650 million tax increase. That's a significant increasebut 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 billiona 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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A Budget of Convenience

JULY 19, 2016  | by BOB DICK

The dust has settled on the 2016-17 budget debate—at least for the moment.

Some people hail the agreement as an example of what Harrisburg can accomplish when two parties work together. Others defend it as an improvement over previous budgets and the least bad option under the circumstances.

These conclusions miss the mark. In the budget battles to come, taxpayers deserve better policies and a more deliberative process to govern how lawmakers collect and spend their hard-earned dollars.

Policy

Lawmakers drove up spending by $1.6 billion and raised taxes by $650 million to pay for a massive increase in the size and scope of government. Such a policy decision will have painful consequences for the Pennsylvanians working every day to make ends meet.

Part of the $650 million tax package includes a 40 percent excise tax on e-cigarettes. This punitive tax will force some small business owners to close their doors. Wallace McKelvey of PennLive featured one of those business owners, Chris Hughes, in his story about the costs of higher taxes:

Hughes, whose Lycoming County shop currently has three employees, said he plans to sell off his inventory and close the store before the end of September. Like many owners, he said, he doesn't have the cash reserves to make a lump-sum payment to the state. 

While e-cigarette shops across the state prepare to close, and residents—especially low-and middle-income residents—prepare to pay more for cigarettes, select businesses will soon have a bigger pool of special subsidies to draw from. According to Eric Holmberg of PublicSource, lawmakers increased the number of available tax credit subsidies by more than $100 million starting next year.

With the stroke of a pen, government can put people out of business and lavish others with special privileges simultaneously. It's not fair and it's not effective. The ad hoc method of economic development employed by the state has not succeeded and will only further alienate those who feel government should not be picking winners and losers.

Process

Lawmakers’ unwillingness to control spending and protect working people from tax increases wasn’t the only disappointing aspect of this budget cycle.

The process leading up to the passage of the $650 million tax increase was marred by a lack of transparency. Both the House and Senate suspended the rules that allow for adequate consideration of the legislation. Consequently, the 267-page tax bill passed less than three hours after it was introduced. There was little time to review and debate it.

Some of the tax bill’s provisions are just now coming to light, including a handout to Allentown businesses, a bailout of Philadelphia’s cigarette tax fund and a permanent extension of the tax itself. Again, no debate over the merits of these policies.

During the midst of the budget impasse, I made the point that it’s not enough to get the budget done. Lawmakers had to get it right. This year, too many lawmakers opted for the former, giving us a budget of convenience rather than one of principle. 


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What's in the Final 2016-17 Budget?

JULY 15, 2016  | by ELIZABETH STELLE

On June 30, the legislature passed a $31.6 billion General Fund Budget. Gov. Wolf allowed this budget to become law without his signature on July 12. On July 13, the House and Senate passed a revenue package to pay for the spending plan.  

Here is what you need to know about the budget.

The Good

  • Spends less than Gov. Wolf's proposal. The governor's $33.3 billion budget was never seriously considered, but it's still worth noting that the final budget spends $1.7 billion less.
  • No income or sales tax increases. The tax package does not include income or sales tax increases. The overall tax increase of $650 million is about one-fourth of the $2.7 billion tax hike Gov. Wolf proposed. The enacted tax increases amount to $203 per family of four, borne mostly by smokers.
  • Expansion of school choice. The legislature increased the Educational Improvement Tax Credit (EITC) by $25 million. The EITC provides tens of thousands of private school scholarships to students in need. The state will now offer $75 million in tax credits for K-12 scholarships.

The Bad

  • Spending growth 5 times the rate of inflation and population growth. The $1.6 billion increase represents a 5 percent increase in a year when inflation is less than 1 percent. This represents the biggest spending increase in a decade. The General Fund has grown by $2.5 billion in Gov. Wolf’s first two years, approaching the $2.85 billion General Fund increase passed during the prior eight years.
  • $650 million tax increase. The $1 per pack cigarette tax hike makes up the bulk of the new revenue. This tax is an unreliable revenue source, would disproportionately harm the poor and do little to dramatically reduce the number of smokers in Pennsylvania. The tax could potentially hit 2 million adults.

  • The budget remains unbalanced. The budget counts on $200 million in loans from other funds and $100 million from expanding online gambling—legislation that hasn’t passed the legislature yet. Pennsylvania's Constitution does not say the legislature can pass something pretty close to a balanced budget or a promise to balance the budget in the near future. It requires a balanced budget. By not balancing the budget and depending heavily on unreliable revenues from sin taxes, the risks of a large budget deficit and a renewed push for broad-based tax hikes in 2017 is high.
  • Does not include vital spending reforms. Lawmakers did not address the $800 million in corporate welfare identified in the budget. Nor did they tackle reforms to slow the unsustainable growth of human services spending. There is much more the legislature and Gov. Wolf can do to prioritize the use of taxpayers’ dollars before calling for higher taxes on families.

For a more detailed version of our analysis, read our Policy Points on the 2016-17 budget.


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