During his campaign stops in Pennsylvania, President-elect Donald Trump touted his intention to bring manufacturing jobs back to the state. That’s a worthy goal, but the truth is the Keystone State doesn’t need to wait for a president of either party to start revitalizing its manufacturing sector.
Pennsylvania’s tax structure should benefit all Pennsylvanians, not just some. Unfortunately, our state’s stifling tax burden harms residents. Each year, government spending grows, increasing the pressure for higher taxes. These taxes weigh heavily on the state’s economy and lead to slow job and income growth. Lower taxes are the key to a stronger economy.
How did a registered Democrat and the daughter of former Democratic Governor George Leader find a place on Commonwealth Foundation’s Board?
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A Philadelphia Inquirer editorial urges optimism about the forthcoming state budget debate. It’s certainly well-warranted. Gov. Wolf and legislative leaders have repeatedly expressed interest in redesigning state government to avoid broad-based tax increases. This is a welcomed departure from past proposals to enact large tax hikes on working Pennsylvanians.
However, the governor still won’t completely rule out tax hikes. He’s likely to propose an energy tax to the delight of the Inquirer’s editorial board, which supports the tax as a way to make natural gas companies pay their “fair share.” This political slogan ignores all of the taxes natural gas companies already pay, including an impact fee, which effectively operates as a 6.9% severance tax.
The board also criticizes the tax relief extended to businesses, asserting this policy failed to stimulate job growth. Sure, businesses did see some relief through the elimination of the capital stock and franchise tax, but Pennsylvania’s overall tax burden ranks 15th highest in the nation. Weak job growth should be seen in light of the commonwealth’s broader tax and regulatory climate. The implication here is that a lower tax burden doesn't grow the economy. The evidence suggests just the opposite.
The editorial's assault on the state's tax structure continues:
Instead, the [tax] cuts lowered the public's quality of life by reducing revenue needed to educate children, fix roads, and provide other services. Business tax cuts account for about half the state's $600 million deficit.
These two sentences are plagued with problems. First, as CF has demonstrated in the past, more education spending does not necessarily lead to improved academic achievement. As a matter of fact, policymakers could improve the educational system while spending less on education if they embraced school choice.
Secondly, the state already has a dedicated source of funding to fix roads. That’s why the state’s gas tax jumped 8 cents to kick off the new year. If more money is needed for transportation, why not embrace public-private partnerships or repeal the prevailing wage mandate?
And third, placing blame for the deficit on tax cuts implies state government hasn’t taken enough out of the pockets of taxpayers. This flatly ignores the state’s overspending problem.
State spending has risen 46 of the last 47 years—climbing by $4,010 per person over that time. Had the state kept spending increases in line with inflation and population since 2000, it would have produced a budget surplus during this fiscal year. With spending increases possible each year, is it really reasonable to say Pennsylvania has a revenue problem?
Finally, the editorial suggests raising the minimum wage to improve residents’ quality of life and make Pennsylvania a destination state. But mandated wage hikes haven’t stop residents from fleeing other states. In fact, of the ten states that saw the biggest declines in state-to-state migration, nine had minimum wages exceeding the federal level. The only exception was Pennsylvania.
In contrast, of the ten states experiencing the largest increases in state-to-state migration, only half mandated wages above the federal minimum. The editorial board correctly identifies the importance of higher wages for Pennsylvania, but their policy prescription will ultimately undermine employment opportunities for the people who need it most.
Thankfully, Pennsylvania's dismal economic rankings are reversible. But turning the tide requires rejecting attempts to solve every problem with more government spending. What's the alternative? Robust economic growth driven by entrepreneurs and consumers pursuing their happiness.
Before the holidays, CF publicized the historic decline in Pennsylvania’s population. The state was one of only eight to see an absolute decline in its number of residents. Domestic migration—or the movement of people between states—drove this decline.
In a post early last year, we documented the population trends in twenty states. The ten states that experienced the greatest growth via domestic migration (“destination states”) had a lower average tax burden than the states that experienced the greatest declines (“deserted states”). After adding another year of population figures to the data set, the pattern remains the same.
The table below shows people fleeing high tax states and moving to low tax states.
The destination states imposed an average tax burden of 8.84 percent on residents, according to data from the Tax Foundation. The deserted states imposed an average tax burden of 11 percent—more than two percentage points above the destination states’ collective tax burden.
Of course, taxes aren’t the only obstacle government throws in the way of economic opportunity. It also imposes a variety of unnecessary regulations (licensure laws, compulsory unionism, etc.) on workers trying to pursue a decent living. Together, these restrictions affect the economic freedom of a state—a concept measured by the Fraser Institute in their annual Economic Freedom of North America report.
The report assigned an economic freedom score to each of the fifty states, some of which are included in the table above. As the table indicates, the destination states have a higher average economic freedom score than the deserted states. People want, and are willing to pursue, a better quality of life. And since economic freedom is tied to improvements in the quality of life, it makes sense for people to move to freer states.
If policymakers want to avoid the consequences of the coming demographic changes, they need to give people a reason to live and work in Pennsylvania. Adopting the recommendations in our new policy brief, Embracing Innovation in State Government, is a great start on the road to making Pennsylvania a destination state once again.
An intimidating budget shortfall this year and next has state leaders calling for a change to the status quo. That is: surging state spending. Governor Wolf is pulling back on corporate welfare programs, like Keystone Opportunity Zone tax breaks, while legislative leaders have called for "restructuring" state government. The economic evidence backs this up.
This year's Economic Freedom of North America report from the Fraser Institute shows Pennsylvania's record high spending is undeniably linked with less economic opportunity.
The state ranks a disappointing 30th when it comes to controlling state spending and an abysmal 37th in income and payroll tax revenue as a percent of personal income. In other words, Pennsylvanians have seen their tax burden increase and economic opportunity decrease as state debt and state spending continues to climb.
Overall, this year's index, including data from 1984 to 2014, ranks Pennsylvania 18th among the states.
The report emphasizes a lesson Pennsylvania desperately needs to learn: Unrestrained government spending doesn’t create economic growth—it kills it. But responsible spending growth will allow lawmakers to ease the tax burden for everyone. That’s how you create an environment of opportunity and economic growth for all Pennsylvanians
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The Commonwealth Foundation is Pennsylvania's free-market think tank. The Commonwealth Foundation transforms free-market ideas into public policies so all Pennsylvanians can flourish.
Earlier this month, House Majority Leader Dave Reed challenged his colleagues to change the way Harrisburg operates: “Now is the time to reimagine and redesign government, our state and our future.” A change in Harrisburg’s culture is surely needed. Decades of high taxes, wasteful ...