Freedom in the 50 States Pennsylvania Perspective

www.antolin-davies.com

Freedom in the 50 States

Pennsylvania’s Perspective

http://mercatus.org/


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Pennsylvania’s state and local tax revenues have grown 5.7% annually (on average).

Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation2



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




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…despite large fluctuations in unemployment...

4Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation



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…despite fluctuations in income tax rates...




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Re

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…and despite real economic growth.




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

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

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

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Tax Policy Tax Revenue

How does tax policy affect tax revenue?

Economic Activity Tax Revenue

Tax Policy Economic Activity Tax Revenue

Old School

New and Cool

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

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Top Marginal Income Tax Rate

Effect of Top Marginal Income Tax Rates on Tax Revenues (2006)


Across states, there is no apparent relationship between state income tax rates and tax revenues.



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State Sales Tax

Effect of Sales Tax Rates on Tax Revenues Across States (2006)


Across states, there is no apparent relationship between state sales tax rates and tax revenues.



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GSP per capita

Effect of GSP on State and Local Tax Revenues Across States (2006)


Across states, there is a relationship between GSP and tax revenues.

On average, each additional $1 in GSP per-capita generates $0.08 in state and local tax revenue per-capita.



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

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Growth in GF Appropriations Growth in GSP

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

Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Pennsylvania Office of the Budget14



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, orb. Grow the state economy.

Review

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

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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.

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Cost of Public School Teachers versus Nurses in Pittsburgh

Nurse

The total cost of a nurse is $5.0 million.

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



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Cost of Public School Teachers versus Nurses in Pittsburgh

Public School Teacher Nurse

The total cost of a nurse is $5.0 million.The total cost of a public school teacher is $9.6 million.

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

In present value terms, each teacher costs the same as 2.6 nurses.

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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.

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NABCA Full Control Moderate Control

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Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief. 20

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State control has no effect on the incidence of underage drinking.

PA is a “full control” state



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Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief. 21

State control does not reduce DUI fatality rates.

PA is a “full control” state



Grow the State Economy

Cut Pennsylvania’s sales tax to 4%.

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Sales tax 2% Tax revenue $3 b.

OMG! We can’t afford that!



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.

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



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.

How do you grow the economy?

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Salary Health Benefit Retirement Benefit

Present Value of Lifetime Employee Costs

Public School Teacher Nurse

Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract 25


Freedom in the 50 States Pennsylvania Perspective

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