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We All Lose Under Wolf Tax Proposals

May 07, 2015 Business Tax Relief

For a moment in time, Pennsylvania was becoming more economically competitive. For three straight years, our commonwealth climbed over other states in a comparison of competitive vigor called Rich States, Poor States by the American Legislative Exchange Council, ALEC. (View summary HERE!) Then during 2014, we dropped hard – only two other states lost as much ground. We are in danger of falling even further in the “Economic Outlook Rank” category of the study, nearly hitting bottom if any of the tax increase proposals by Governor Tom Wolf are approved, says Jonathan Williams, Vice President, Center for State Fiscal Reform at ALEC.

“In 2010, Pennsylvania ranked 43, then moved all the way up to 33 over the next three years,” Williams said. “Then over one year, 2014, dropped back down to 41. The large tax increases being proposed would almost surely push the state below the 2010 level, the worst ranking it ever had.”

The hard numbers that account for Pennsylvania’s poor ranking are listed below. Some of the most telling: we rank 49th in corporate income tax, we are not a right to work state, and we impose estate/inheritance taxes – a disadvantage that’s especially bad news for small business.

We aren’t doomed to the remain in the sad category of a defunct rust belt state, destined as some cynics on the left like to believe to rely more and more on public spending as businesses locate in the South and Southwest. They aren’t locating more in some states for the weather, but for the better business climates. Pennsylvania could yet become one of those desirable states. Rich States, Poor States shows, for example, that our neighbor Ohio, a strong rival in natural gas production, climbed steadily in the rankings over the past few years. It ranked 47 in 2008 but by 2014 came in at 23rd. One reason for the climb is that the state’s corporate income tax structure is now the fifth most agreeable in the nation.

“Spending restraint, pro-growth business tax relief, and other important reforms are needed to lower the baseline costs of creating and keeping jobs here in Pennsylvania,” said PMA President David N. Taylor. “We say it all the time, competitiveness is a moving target and we must always craft public policy that makes it the smart business decision to locate, hire, invest, and expand here rather than somewhere else.”

Besides impeding our ability to compete, the Wolf tax proposals aren’t what they’re being sold as: a break for the elderly, the poor and the middle class. The state’s Independent Fiscal Office (IFO) recently released a report that broke down the tax increase proposals along six income groups. The net result is that everyone will pay more. Overall, the tax plan, which includes an expansion of the six percent state sales tax and an increase in the personal income tax, will by FY 2019-20, increase net state and local tax revenues by $5.2 billion.  It’s $9.8 billion in tax increases offset by $4.6 billion in tax and rent relief.

If you count tobacco taxes, then the total tax burden for people making:

•$0 to $24,999 would increase by $8 million;
•$25,000 to $49,999 would increase by $316 million;
•$50,000 to $74,999 would increase by $503 million;
•$250,000 and above would increase by $1.01 billion.

Even if you don’t count tobacco taxes, then the total tax burden for people making:

•$0 to $24,999 would decrease by $118 million;
•$25,000 to $49,999 would increase by $167 million;
•$50,000 to $74,999 would increase by $409 million;
•$250,000 and above would increase by $983 million.

In a statement, the governor’s office rejected the IFO’s assessment regarding middle-class families and seniors, saying their Budget Office has access to more reliable information. The argument defies the point of creating the IFO in the first place – to stop the manipulation of budget numbers particularly this time of the year when the General Assembly and the governor’s office hammer out a state spending plan. The source for the information is the same, the spin is different.

Chairman of the House Appropriations Committee, Bill Adolph (R-Delaware) was correct when he said, “The IFO’s report on the governor’s proposed tax increases is a telling portrayal of how the governor’s massive tax increases will force all Pennsylvania taxpayers to pay more for everything from day care, nursing home care, utilities, newspapers and more, yet fail to deliver on the net tax decreases promised by the governor.”

The news gets worse when you consider what the economists call the distortion effect of stifling incentive and productivity. American Enterprise Institute scholar and economist Alan D. Viard said that’s why it’s important for elected officials to make the case why additional taxes are needed. “Obviously some taxes are necessary as some functions of government are necessary,” Viard said. “It’s not an exact science at all to say how the tax revenue will benefit society, but as elected officials they should present the public with something.”

That explanation has been lacking. We do know the governor plans to increase the basic education subsidy with the additional revenue but in making his argument he relies on his own kind of distortion saying that Pennsylvania ranks near the bottom in the nation in funding. As Speaker of the House Mike Turzai (R-Allegheny) explained at the Pennsylvania Leadership Conference last month, the Wolf argument ignores the fact that school funding is a product of both the state and local school districts, which are themselves, much like local governments, instruments of the state. “We are spending $27 billion on K-12 this year,” Turzai said. “That puts us 6th highest in the nation in overall spending and 13th highest in per pupil spending.”

It’s a triple play under the Wolf tax proposals: Everyone pays more, the state’s competitiveness worsens, and blind allegiance to ever-larger state government prevents a rational discussion on whether vital public interests are actually being met.