Rendell Retreats from Natural Gas Tax

Yesterday, Governor Rendell took another of his proposed taxes off the negotiating table. His announcement perfectly demonstrates the points made in my new commentary on Rendell's mixed energy policy.

Governor Rendell's retreat is a good sign as the budget battle continues, but the his statement, "We should have a severance tax, but not at the beginning" foreshadows a similar showdown next year and implies that industries do not grow when they are taxed . . . interesting observation Governor.

Meanwhile the left wing PennFuture defends the tax saying it will hit big (evil) corporations. But the left-wing Pennsylvania Budget and Policy Center defends the tax saying that it will not hit corporations subject to the 2^nd highest corporate income tax rate in the nation, but mostly small businesses.

In reality the natural gas severance tax would have crippled an emerging industry inhibiting thousands of potential jobs and income for rural families in northern PA.

Call to Action: Budget Must Keep PA Competitive

The Pennsylvania Prosperity Project has a new action alert on the Pennsylvania budget, with a form to contact your legislators and ask lawmakers to "focus on making Pennsylvania competitive again" with a a budget "holds the line on spending and taxes."

New Study Shows Devastating Impact of High Corporate Tax Rates

The Tax Foundation, came out with a new study this month on the negative impacts of high state corporate tax rates. The results have coincided with previous research, showing that states with lower corporate income tax rates substantially boost their worker productivity and real wage rates. Given that Pennsylvania has the 2nd highest corporate taxes in the nation, the findings strongly suggest we should reconsider our corporate tax rates.

According to the study, "between 1970 and 2007, a one-dollar increase in the average state-local corporate tax rate caused a $2.50 dip in wages 5 years later, compared with lower-taxed states." The reverse is also true; a one-dollar decrease in the corporate income tax this year would bring a $2.50 increase in real wages 5 years later. With the state budget at an impasse, some lawmakers are suggesting the opposite; actually delaying a reduction in the Capital Stock and Franchise tax in a desperate attempt to fill the budget gap. Delaying relief for Pennsylvania businesses hoping to climb out of this recession could prove to be a disastrous mistake.

Philadelphia Sales Tax Increase Bad for Business and for Pennsylvania

Chris Freind writes on how the proposed increase of Philadelphia's sales tax from 7% to 8% (6% state rate, local rate to double from 1 to 2%) will harm the Philadelphia economy, as well as Pennsylvania.

The reality is that people will simply cross the city line to make their purchases, from TVs to refrigerators to washing machines. So not only will the city fail to realize the anticipated revenue of its tax increase, it will lose the sales tax in its entirety. But this isn't just a Philadelphia issue. When people cross into New Jersey, or better yet, Delaware (where there is NO sales tax), Pennsylvania will lose its 6 percent. And more people will be incentivised to use the internet to shop, yet another way to avoid the tax.

When will elected leaders realize that you cannot tax your way out of a recession? Taxes never lead to prosperity. They simply result in people and businesses fleeing to a friendlier location.

But this obvious truth is lost on Philadelphia's leaders.

Study after study show what the citizens of Philadelphia already know: that our great city is being devastated because of politicians who care more about themselves than the people they serve.

Philadelphia ranks as one of the least desirable places to locate. It levies some of the highest taxes of any city in the country. Its educational product is horrendous. 

Between 2000 and 2007, Philadelphia lost 4.5% of its residents, the largest percentage drop of any Top 25 city. From 1990-2000, the City of Brotherly Love's population losses were the third largest of the 243 cities with more than 100,000 people. Since 1970, the city has lost 265,000 jobs and 450,000 residents.

Lack of Subsidy Spooks Movie Director

The remorse is almost audible in when people talk about the loss of filmmaker M. Night Shyamalan's new movie Devil to Canada, ostensibly because of the budget impasse. What this really means is that stakeholders such as film production units and, of course, Mr. Shyamalan himself are upset that more taxpayer dollars have not funded the multibillion dollar industry, even while state lawmakers are considering tax hikes on working Pennsylvanians.

The film tax credit program is unlikely to have a significant positive effect on employment and incomes in Pennsylvania. Numerous economic studies find that tax incentives for professional sports teams and facilities create no positive net gains in income and employment. A report in the Patriot News contends that the "motion picture industry" employment statistics reveal growth of a mere 556 jobs from 2002 to 2007. That's not the bonanza some would have us believe. Ideally, lawmakers should give that money back to taxpayers and let them invest it as they see fit, rather than letting politicians pick this one bizarre industry to shower with favors and get little payoff.

If rationality is not something lawmakers ascribe to, they should watch some Shyamalan's most recent productions. The Happening, which released in June, 2008 had terrible reviews from most critics.

Pennsylvania Sales Tax Exemptions

There has been some discussion lately about filling the Pennsylvania budget hole with additional revenue by expanding the state sales tax to include currently exempt goods, services, or categories. While past proposals have suggested expanding the sales tax base to lower the rate, or to reduce or eliminate property taxes, the idea is now being used simply to collect more taxes from Pennsylvania residents and businesses, adding to the state's already high tax burden.

For reference here is a complete list of Pennsylvania sales tax exemptions, with the estimated value of the exemption (2007-08 numbers from the Governor's Executive Budget).

Philadelphia Needs Neither Higher Taxes nor Generational Theft

The Pennsylvania House yesterday passed a bill that would allow Philadelphia to raise its sales tax another percentage point and to defer it pension payments for city employees further into the future (HT GrassrootsPA).

Unfortunately, these are both poor policies.  Philadelphia's budget crisis is the result years of reckless spending and tax hikes by Philadelphia’s elected officials.

Philadelphia already has the highest sales tax in the state, and an increase to 8% will give the city a rate one-third higher than the rest of the state. This rate increase will make Philadelphia less competitive than its suburban neighbors, in Pennsylvania, as well as in bordering New Jersey and Delaware (the latter which has no sales tax).

Philadelphia already has the 2nd highest local tax burden among U.S. cities, and is one of only six large cities with a wage tax. Thus it is not surprising that Philadelphia has continued to lose jobs and residents. 

And Mayor Nutter’s proposal to suspend payments to the city’s pension plan is no solution at all. Instead of reforming the city’s bloated and unaffordable pension system, the mayor would just pass that cost on (with interest) to future generations of taxpayers.

Ed Rendell Demands More Taxes

At a press conference yesterday, Gov. Rendell says he will "compromise" on the budget - so long as he gets $1.6 billion in new revenue.  That he, he needs some more taxes.  Also, Rendell continues to insist that the a Personal Income Tax increase is still on the table, even though House Democrat leaders and "blue dogs" declared it dead.  Of course, the next time House Democrat leaders and "blue dogs" stand up to Rendell will be the first. 

Penn State Study Reveals Devastating Effects of Gas Severance Tax

A recent study conducted by researchers at Penn State revealed the negative effects of Gov. Rendell’s proposed “severance tax” on natural gas extraction in Pennsylvania. The northern tier of the state, home to the Marcellus shale formation, is said to yield over 500 trillion cubic feet of natural gas, enough to put Pennsylvania near the forefront of our nation’s gas production.

The study finds that the with the severance tax, “drilling activity would decline by more than 30 percent and result in an estimated $880 million net loss in the present value of tax revenue between now and 2020”.  The authors conclude that the severance tax (at this stage in development) would inhibit the growth of the natural gas industry in the Marcellus shale, which they estimate could generate 175,000 jobs in 10 years.

PennFuture, a climate change alarmist group, criticized what they described as “fuzzy logic” and “even fuzzier math” in the Penn State study.  Unfortunately PennFuture seems to have not read the study, alleging that the study’s main finding is "that a severance tax will drive up the cost of the gas, causing Pennsylvania drillers to lose customers to cheaper gas providers".  That is of course, not the main finding of the study, or a finding at all. 

Rather the finding is that the tax would increase the cost to companies that drill, a cost they can't pass on to costumers, as natural gas prices are set by international markets, and thus they would be less likely to invest in drilling in Pennsylvania.   It should come as no surprise, however, to see PennFuture defending a new tax, part of which is supposed to go to "combat climate change" - in other words, would help fund PennFuture.

Do Voters Want Higher Taxes?

On his blog with the Times Herald, state Senator Daylin Leach makes a couple of absurd claims.

First he suggests that residents are more concerned about potholes than high taxes, and while he may get an email about higher taxes, he will get a "very insistent personal visit" if there is a pothole in the street. Given there are likely hundreds of potholes in his district, and each one affects perhaps a thousand local residents, he must get tens of thousands of visitors concerned about potholes each week.

Second, he suggest that individuals are willing to pay higher taxes. He cites a recent Quinnipiac poll of Pennsylvanians - but selectively, citing only one question that supports his position (and not those giving the legislature a 27% approval rating or primarily blaming Gov. Rendell for the budget impasse). Here are the tax questions:

To balance the state budget next year, if you had to choose, which would you prefer - raising taxes to keep state services at their current level or cutting state services to keep taxes at their current level?
Raise Taxes: 35%
Cut Services: 55%

To balance the state budget, if you had to choose, would you prefer raising - the state sales tax or the state income tax?
Sales Tax: 62%
Income Tax: 24%

Governor Rendell has proposed temporarily raising the state income tax from 3.07 to 3.57 percent. Do you support or oppose this proposal?
Support: 33%
Oppose: 63%

Would you be willing or unwilling to pay more in state taxes to avoid state employees from losing their jobs?
Willing: 44%
Unwilling: 51%

Would you be willing or unwilling to pay more in state taxes to avoid cuts in state spending on such things as healthcare and public schools?
Willing: 53%
Unwilling: 43%

Leach thinks the last question is most reflective of taxpayers true views, because it "identifies services." So even though there is overwhelming opposition to Gov. Rendell's proposed PIT increase, and residents would prefer cuts in services and even layoffs to state workers, Leach thinks they still want higher taxes to avoid cuts to public schools and health care.

Here is the problem with Leach's reasoning - public schools and health care aren't getting cuts. Medical Assistance is getting an increase in the state budget, even with federal stimulus funding that increases the federal funding of the program. Public schools will get an 12% increase in spending under the Senate budget. So the hypothetical question isn't really based on the debate in Harrisburg.

Would voters support a tax increase if they knew that it was to increase education spending above the 12% increase they would otherwise receive? What if they knew school districts had $2.4 billion in reserve balances they weren't spending? What if they knew the true spending by public schools was $13,000 per-pupil, when most voters estimate it closer to $2,000? What if they knew that most of the proposed tax increase wasn't going to education?

Leach then tries to tie in other services he thinks voters like, and would support a tax increase for. But what if the questions asked about tax hikes to fund WAMs? Or for per diems for lawmakers? Or for public relations? Or for gifts for legislators? Or for Hollywood studios? Or for corporate welfare?

Of course, if these people want to pay more, they can. Anyone who wants to pay more can send their checks to the Pennsylvania Treasurers office, or their local school. They don't need to compel their neighbors to contribute as well.

Obama Surtax Effects in Pennsylvania

The Heritage Foundation has the breakdown of how many Pennsylvania residents and small businesses would be effected by the "surtax" to pay for nationalize health care (HT to PA Water Cooler)

The Tax Foundation looks at the effect the surtax would have on marginal rates - noting that in Pennsylvania, the top tax rate (the government's take on each additional dollar earned by those in the top bracket) would exceed 51%. They also provide analysis on how much of that tax increase would fall on small businesses.

Pennsylvania Budget Proposals Compared

Here are some resources for comparing the various Pennsylvania state budget proposals.

• Pennsylvania House Democrats Budget, By the Numbers
• PA House GOP Budget by the Numbers
• PA Senate Budget by the Numbers (with revised line items here; revised balance sheet here).
  
• Pennsylvania Deficit Watch, June 2009; with Gov. Rendell's proposed budget 

• Excel file of proposed line items (not updated with either the House Republicans', House Democrats', or revised Senate Republicans' plan)
• How Much Did Pennsylvania Spend Last Year?
• Pennsylvania State Budget on Sunshine Review

Pennsylvania Budget Facts 2009:

• Pennsylvania State Budget Overview
• Spending Increases by Department
• State Education Spending
• Personal Income Tax
• Natural Gas Severance Tax
• Cigarette Taxes

"Blue Dog" Democrats Still Against Pennsylvania Tax Increase

State Rep. John Pallone, one of Pennsylvania's "Blue Dog" Democrats, has penned a statewide letter to the editor noting that he, along with about 20 other unnamed House Democrats, should also receive credit for fending off a state tax increase.  Pallone writes,

Let me make it perfectly clear: I AM NOT IN FAVOR OF A TAX INCREASE and will continue to fight against a tax increase while making every effort to support adequate funding for fundamental and essential programs throughout Pennsylvania.

Pallone was one of only two Democrats to vote against HB 1416 last week - a budget that would have required a tax increase.  What remains to be seen is how many of his "blue dog" colleagues were voting simply to "advance the process" (and avoid retribution from their leadership, which often occurs), and how many would  - when the real budget vote occurs - vote to pass a budget requiring higher taxes.

Climate Change Alarmists Seek to “Educate” NEPA Taxpayers

The Mertz-Gilmore Foundation, a self-described “sustainable environment” grant making institution based out of New York City, recently announced its plan to give a $50,000 grant to PennFuture, to “support outreach and education in northeastern Pennsylvania to build public support for a state-wide cap on global warming pollution”.

Being the nation’s 4^th largest provider of coal, the effects of cap-and-trade legislation would be devastating to Pennsylvania’s already-fragile economy. Not only is PennFuture hungry for your tax dollars, but even the EPA is questioning the evidence behind global warming.

Thanks but no thanks PennFuture; we feel the hardworking people of northeastern Pennsylvania can do without your “education”.

PA House Democrats Against Tax Hikes

Contrary to the Rendell administration's claims that many Republicans will support a personal income tax increase, the opposite it likely true.  John Micek writes that there are maybe 20 Pennsylvania "Blue Dog" Democrats who are dead set against it.  But as he notes, will not say so publicly, because "the first rule of being a Blue Dog is not to talk about being a Blue Dog."

John Baer also has an interesting article in the firmness of opposition against an income tax hike, including a comment by Rep. Mark Cohen furthering the belief that the budget will pass the Pennsylvania House easily (if it ever comes to a vote) without a tax hike.

Tax Code Helped Cause Financial Crisis

Budget & Tax News reports on a new study on the effect of tax policy on the financial crisis.

[Author Sam] Eddins also addresses the issue of credit default swaps, one of the more controversial financial instruments, which many economists argue played a role in bringing on the credit crisis. Eddins shows those swaps were influenced by tax policy.

“The purpose of debt securitization products, when viewed through a TAFT lens, is not only diversification and partitioning of risk but also tax minimization,” Eddins writes.

“Credit default swaps are revealed to be a massive tax arbitrage that shifted government tax receipts to Wall Street bonus pools and necessitated the creation of massive quantities of low credit quality debt,” Eddins continues. “The structure of this trade ‘insulated’ Wall Street agents from the credit risk while allowing them to arbitrage the tax savings of their clients as long as counterparties remained solvent.”


The central failure of the credit crisis was not with the market, according to Eddins, and individuals in the markets acted consistently and rationally given the circumstances.

“Rather it stands as an example of the unintended consequence of a tax policy that distorted incentives within the free market system. Regulation cannot control investors from acting in their self interest,” Eddins writes.

The full study is here.  It is complex, but adds one more reason to the list of ways government caused the financial crisis.

Do Rendell's Budget Numbers Add Up?

Mario Cattabiani and Angela Couloumbis take a look at some of Gov. Rendell's latest budget rhetoric, namely his claim that 50% of Pennsylvanians don't pay the Personal Income Tax, which he is planning to increase.

They find that statement might be technically true, if you count all the children who don't pay the income tax, or folks in prison, or (as discussed before) the growing number of unemployed, who don't currently pay the income tax, but would really like to (i.e. if they had a job).

They also question Rendell's claims that everyone can easily pay higher taxes without hardship, that 800 troopers would have to laid off, and that his $2 billion in "cuts" has resulted in a $1 billion increase in spending

Rendell's spokesman, Chuck Ardo, admits Rendell isn't telling the whole story on the budget:

"The governor uses numbers to make a point," he said. "His numbers are not inaccurate, although sometimes they do not tell the whole story."

Pennsylvania Lawmakers Against Tax Hikes

The Commonwealth Foundation today launched a new effort to collect names of Pennsylvania lawmakers who agree with President Obama when he said "In an economy like this, the last thing we should do is raise taxes on the middle class."

Here is the most recent list of lawmakers who support this statement. If your legislator in not on the list, you can find their contact information and email them here.

Several legislators joined the Commonwealth Foundation in the Capitol Rotunda earlier today to affirm: 1) “Yes, We Can!” balance the budget, protect public safety and human services, and educate our children without raising taxes; and 2) “We Agree!” with President Barack Obama’s statement.

The Pittsburgh Post-Gazette was one of many media outlets that carried the story as it happened:

"In a rare move, the Republican legislators, led by House Minority Leader Sam Smith of Punxsutawney, said they agreed with a statement made last September by then-Democratic presidential candidate Barack Obama, who said now is "the wrong time to raise taxes on the middle class.''"

The Real Effect of Rendell's Taxes on Small Business

While Gov. Rendell continues his propaganda campaign for higher taxes (see WGAL for a related news story on the thousands Rendell has spent in taxpayer funds lobbying for more taxes), the NFIB has issued a response to Rendell's claim that his taxes would only amount to a few hundred dollars a year, or few dollars a week, or a cups of coffee per day, or a penny per second, or whatever makes the tax increase seem small.

While I have already written on how hypocritcal Rendell's tax plan is, it is useful to see what the impact would be on a real small business.

From NFIB:

The data included in the spreadsheet was taken from an actual small business with gross sales $784,000 and a payroll of $384,252.The two owners of this company each take home a salary of $45,000 per year. ...

The attached spreadsheet shows a 16-percent increase in PIT would take away $1,741 in taxes on salaries per year and $1,044 in taxes on money available for investment per year.

The proposed retroactive increase and postponed phase-out of the Capital Stock and Franchise tax would take away an additional $1,290 in taxes in year one and cost nearly $11,200 over five years.

In addition, the governor's proposed 2-percent tax on health insurance premiums would take away an additional $720 per year.

impact of proposed 2009 tax increase

Rendell's "Pay the Inmates, not the Guards" Strategy

The Morning Call's John Micek has a follow-up article to yesterday's revelation that inmates would be getting paid while the guards would not during the current budget impasse.

Micek quotes me at the end of the story...

Matthew Brouillette, president of the free-market favoring Commonwealth Foundation, a Harrisburg think-tank, said the fiscal effect of a $1 million-a-month inmate payroll amounted to a ''rounding error'' in a state budget deficit now pegged at $3.2 billion.

...but he didn't get my full quote in there. Here's what I said to him in my email:

The governor knows that if he can get the guards mad enough, they will lobby their legislators for his tax increase. Would legislators listen to inmates complaining about their loss of 19 cents an hour? I don’t think so. But they will listen to prison guards showing up at their offices with sleeping bags and tin cups.