Free-Market Approaches to Fiscal Policy

Good morning. My name is Nathan Benefield; I am the Director of Policy Research for the Commonwealth Foundation, a research and policy institute in Harrisburg. I want to thank the members of the committee for this opportunity to share our thoughts.

Our view is that the overall growth of state spending must be reigned in. Over the last several years, state government spending has been growing much faster than citizens’ ability to pay. From 1990 through 2006, the General Fund Budget grew 40% in inflation-adjusted dollars—while the personal income of Pennsylvanians grew only 25%. The Governor’s proposed budget would increase spending from state funds by almost 37% since 2002, during which time the average weekly wage for Pennsylvania workers grew only 14%.

This unrestrained growth in state spending has led to higher tax burdens for Pennsylvania’s workers and businesses. The Tax Foundation reports that as a percentage of income, Pennsylvania’s state and local taxes grew 13% since 1990 and Pennsylvania went from having the 9th lowest tax burden to ranking among the top half of states in 2006. Today, Pennsylvanians pay more in taxes than they spend on housing, food, and clothing combined.

In order to alleviate the burden of higher taxes, lawmakers must set priorities, restrain the growth of spending, and fund only the core functions of government. Spending should be consistent with the principles of limited government, economic freedom, and personal responsibility. In evaluating spending proposals, lawmakers should consider:

Is this a proper function of government?
Would we better served by leaving this program to voluntary activity?
Does increased government spending crowd out private sector alternatives?

Last year, the Commonwealth Foundation published the Pennsylvania Piglet Book, which identified over $800 million from the General Fund and over $2 billion from the operating budget in wasteful programs. We identified four categories of waste: corporate welfare to politically selected businesses; programs which should be left to private enterprise; programs that reduce personal responsibility; and programs which encourage agencies and local governments to spend more money than they otherwise would.

We are particularly concerned with corporate welfare spending. Often these grants and low-interest loans are issued with the claim they will create a certain number of jobs. Yet no one ascertains that these promised jobs ever materialize, and no one is held accountable if they don’t.

Though guised as “economic development,” these programs have not improved Pennsylvania’s economic climate. Pennsylvania ranks 43rd in population growth, 43rd in personal income growth, and 36th in job growth since 2002. In contrast, an analysis by the Commonwealth Foundation shows that states cutting taxes most had job growth four times the rate of states (including Pennsylvania) raising taxes most since 1970. Eliminating corporate welfare and providing a lower tax burden would be a better policy for revitalizing the Commonwealth’s economy.

We can apply also these principles in transportation. We support Governor Rendell’s proposal to lease the Pennsylvania Turnpike. A lease would generate funds for use on other projects, and reduce the need for higher taxes on our residents. A lease would also allow for better quality of service and divest the state from the expense of maintenance. Public-private partnerships in transportation have been successful in other states and internationally, and Pennsylvania must look to a similar approach here.

We would encourage legislators to consider public-private partnerships for entities such as the Liquor Control Board, mass transit agencies, and PHEAA. These services are provided by the private sector in many states, and there is little rationale to justify public monopolies in these services. Privatizing these agencies could provide a windfall for the state and alleviate the need for higher taxes and fees. Privatization efforts would also reduce graft and abuse in these quasi-private entities, which offer too great a temptation to misuse public monies.

Furthermore, we suggest free-market solutions in education by expanding Pennsylvania’s Educational Improvement Tax Credit, or EITC. This program gives business tax credits for donations to approved scholarship organizations and education improvement organizations. Last year, the cap on the scholarship portion of the EITC was expanded to $36 million, which provides an estimated 33,000 students with scholarships to the school of their choice this year.

This program is immensely popular among parents, but supply is not meeting demand. Businesses willing to donate are denied a tax credit under the cap on the program, while hundreds of low-income families are denied a scholarship to send their children to a better or safer school.

Over 14% of Pennsylvania students attend non-public schools, and many more would, had they the means to do so. Yet Governor Rendell proposes a $539 million increase in funding for public schools, and an EITC increase of only $1.4 million. If the Governor’s proposed increase were applied proportionately by enrollment, we would increase funding to school districts by $465 million while expanding the EITC by $74 million. An EITC expansion would encourage the private sector to continue providing educational services while offering low-income families greater choices in education.

Finally, the Commonwealth Foundation wants to encourage lawmakers to seek free-market solutions in healthcare. While the Governor’s “Cover All Pennsylvanians” plan attempts to tackle the rising cost of healthcare, it goes about it the wrong way.

Health insurance is primarily provided by employers and individual purchasers. Policymakers must consider the effect a new government program—continuing in perpetuity—will have on the private healthcare market. Instead of a government insurance program funded by higher taxes, lawmakers should look to reduce the rising costs of healthcare and make it easier for individuals and businesses to afford private coverage.

Healthcare reform should make health insurance more affordable for both the uninsured and those already buying coverage. This requires greater choice and competition in health insurance and in the provision of healthcare. Some free-market reforms should include:

Expanding insurance pools for small businesses and individuals
Extending tax benefits to include those who purchase health insurance as individuals and for those who pay cash for healthcare
Allowing people to purchase insurance from out-of-state insurers
Making healthcare prices more transparent for consumers
Reducing insurance coverage mandates
Allowing individuals to purchase high-deductible insurance plans and expanding incentives for Health Savings Accounts
Enacting tort reforms, including reasonable limits on non-economic damage lawsuit awards

These are some examples how we can enable the private sector to provide solutions to policy problems, rather than depend on higher taxes and spending. I hope this perspective is kept in mind as spending proposals are considered.

I thank you for the opportunity to share our thoughts with you, and look forward to discussing these issues further.

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Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation(www.CommonwealthFoundation.org), an independent, non-profit public policy research and educational institute located in Harrisburg, PA.