Freedom in the 50 States Pennsylvania Perspective

Freedom in the 50 States

Pennsylvania’s Perspective

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$60,000

$50,000
State and Local Tax Revenues

$40,000

$30,000

$20,000

$10,000
Pennsylvania’s state and local tax revenues
have grown 5.7% annually (on average).
$0
1977

1979
1980

1982

1984
1985

1987

1990

1992
1993

1995

1997
1998

2000

2002
2003

2005

2008
1978

1981

1983

1986

1988
1989

1991

1994

1996

1999

2001

2004

2006
2007
Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation
2


14%

12%

10%

8%

6%
But, state and local tax revenue has remained
constant at 9.6% (+/- 0.6%) of GSP…
4%

2%

0%
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
3


14%

12%

10%

8%

6%

4%

…despite large fluctuations in unemployment...
2%

0%
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
4


14% 3.5%

12% 3.0%

10% 2.5%

8% 2.0%

6% 1.5%

4% 1.0%

2% 0.5%

…despite fluctuations in income tax rates...
0% 0.0%
1978
1979

1981

1983
1984

1986

1988
1989

1991

1993
1994

1996

1998
1999

2001

2003
2004

2006

2008
1977

1980

1982

1985

1987

1990

1992

1995

1997

2000

2002

2005

2007
5


14% $500,000

$450,000
12%
$400,000

10% $350,000

Real GSP (millions 2000$)
$300,000
8%

$250,000

6%
$200,000

4% $150,000

…and despite real economic growth. $100,000
2%
$50,000

0% $0
1977
1978

1980
1981

1983
1984

1987

1990
1991

1993
1994

1996
1997

1999
2000

2003

2006
2007
1979

1982

1985
1986

1988
1989

1992

1995

1998

2001
2002

2004
2005

2008
6


This suggests that tax policies aimed at raising revenues will fail
because the state has no (or little) control over its share of GSP.

Tax Revenue = (State’s Share of GSP) (Gross State Product)

Fixed at 9.6% of GSP
Fluctuations in tax
revenues are driven by
fluctuations in this.

7


How does tax policy affect tax revenue?

Old School

Tax Policy Tax Revenue

Economic Activity Tax Revenue

New and Cool

Tax Policy Economic Activity Tax Revenue

8


Is this disconnect between tax policy and tax revenues
unique to Pennsylvania?

9


Effect of Top Marginal Income Tax Rates on Tax Revenues (2006)
$7,000

$6,000
State and Local Tax Revenue per capita

$5,000

$4,000

$3,000

$2,000

$1,000
Across states, there is no apparent relationship
between state income tax rates and tax revenues.
$0
0% 2% 4% 6% 8% 10% 12%

Top Marginal Income Tax Rate

10


Effect of Sales Tax Rates on Tax Revenues Across States (2006)
$7,000

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000
Across states, there is no apparent relationship
between state sales tax rates and tax revenues.
$0
0% 1% 2% 3% 4% 5% 6% 7% 8%

State Sales Tax

11


Effect of GSP on State and Local Tax Revenues Across States (2006)
$7,000

$6,000

$5,000

$4,000

$3,000

$2,000
Across states, there is a relationship between GSP and tax revenues.
$1,000
On average, each additional $1 in GSP per-capita generates $0.08 in state
and local tax revenue per-capita.
$0
$20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000

GSP per capita

12


Pennsylvania’s current budget situation is the result of years
of spending growth outpacing economic growth.

13


10%
Over the past six years, PA’s general fund expenditures
9%
have grown at 1.4 times the rate of the state’s economy.
8%

7%

6%

5%

4%

3%

2%

1%

0%
2004 2005 2006 2007 2008 2009

Growth in GF Appropriations Growth in GSP
Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Pennsylvania Office of the Budget
14


Review

1. The state cannot affect tax revenue directly – revenue is always
around 10% of GSP.

2. The current budget situation stems from state spending growing
faster than GSP.

3. The only way to grow tax revenue is to grow GSP.

4. Therefore, the only way to balance the state budget is either to:
a. Cut spending, or
b. Grow the state economy.

15


Cut Spending

Put Public School Teachers on Defined Contribution Retirement

 Public school teachers currently have defined benefit
retirement plans.

 Cost is 3.6 times the cost of a comparable private sector
retirement plan.

 Estimated savings: $400 million annually.

16


Cost of Public School Teachers versus Nurses in Pittsburgh
$350,000

The total cost of a nurse is $5.0 million.
$300,000

$250,000
Annual Cost of Employee

$200,000

$150,000

$100,000

$50,000

$0
22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78

Age

Nurse

Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract
17


Cost of Public School Teachers versus Nurses in Pittsburgh
$350,000
The total cost of a nurse is $5.0 million.
The total cost of a public school teacher is $9.6 million.
$300,000
In present value terms, each teacher costs the same as 2.6 nurses.
$250,000
Annual Cost of Employee

$200,000

$150,000

$100,000

$50,000

$0
22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78

Age

Public School Teacher Nurse

18


Cut Spending

Privatize Pennsylvania State Stores

 Segal and Underwood (Reason Foundation) estimate that
Pennsylvania could raise $1.7 billion from the sale of its liquor
stores.

 Pulito and Davies (Commonwealth Foundation) estimate that
privatization will have no deleterious social effects.

19


35%
State control has no effect on the incidence of underage
drinking.
Among 12-20 Year Olds

30%
Alchohol Use Among 12-20 Year Olds

25%

20%

15%

10%
Alcohol

5%

0%
NABCA Full Control Moderate Light Control License
Control
PA is a “full control” state
Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief.
20


2.0
Drivers in Fatal Crashes per 100 DUI Arrests State control does not reduce DUI fatality rates.
1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

-
NABCA Full Moderate Light License
PA is a “full control” state
Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief.
21


Grow the State Economy

Cut Pennsylvania’s sales tax to 4%.

 OMG! We can’t afford that!

Sales tax 2% Tax revenue $3 b.

22


Grow the State Economy

Cut Pennsylvania’s sales tax to 4%.

 Evidence from across the states suggests that a 1-percentage
point reduction in the state sales tax is associated with a $400
to $1,200 increase in per-capita GSP.

Sales tax 2% GSP $10 b. to $30 b. Tax revenue $1 b. to $3 b.

23


How do you grow the economy?

Centralized approach
 Increase federal/state spending
 Problem: Shifts economic activity from the future to the present.
 Problem: Resources allocated according to political value.

Decentralized approach
 Reduce burdens on consumers and producers
 Solution: Creates activity rather than merely shifting activity.
 Solution: Resources allocated according to economic value.

24


Present Value of Lifetime Employee Costs
$1,600,000

$1,400,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$0
Salary Health Benefit Retirement Benefit

Public School Teacher Nurse

25


Freedom in the 50 States Pennsylvania Perspective

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