Third and State
A profile of a teacher in this morning’s Philadelphia Inquirer brings to life the real-life consequences, for teachers and for children, of the deep funding cuts in the School District of Philadelphia in the past several years. Multiple obstacles to effective teaching -- including large classes and an assignment to teach special education without having trained for it and without mentoring or other support -- finally led a committed young professional to change careers. Still determined to serve others, she will train to become a nurse.
The scale of education funding cuts, which disproportionally hit Philadelphia, was documented in a recent PBPC report on school funding. These cuts -- and the draining of funds from public schools by charter schools, many of them underperforming -- led to the crisis summarized in the Inquirer profile.
The story paints a picture of a system that is taking its best teachers down with it. The teacher profiled fears that, deliberately or not, we are switching to a "high turnover" employment model, with teachers routinely leaving just about the time that they have the experience they need to be their most effective in the classroom.
The Corbett-Tobash pension plan – which the Governor is now selling on a statewide tour – would further destabilize teaching careers (as explained on page 14 of our pension primer analyzing the Corbett-Tobash plan). Under this plan, according to pension consultants to the Governor and the PSERS retirement system, benefits would be cut 40% or more for many career teachers. Given teacher salaries already 25% or more below comparably educated private sector employees on average -- further below in financially stressed urban districts (in which public salaries are lower than affluent suburbs by private sector salaries are higher) -- why remain a public school teacher?
The best teachers provide the best education, and the best teachers improve with experience. Our public schools, including in Philadelphia, need the resources to attract and retain the best teachers with adequate funding and an competitive benefit package. Where's the state plan for that?
Since 1998 when it passed the Internet Tax Freedom Act (ITFA), Congress has banned state and local governments from enacting new taxes on internet access or including internet access in existing sales taxes. Now Congress is considering making the ban permanent. The House Judiciary Committee recently approved a bill that would do just that.
Permanently taking away the option of taxing internet access from states and local governments takes away the ability to raise new revenue from a growing sector of our economy for important public services like education. The Center on Budget and Policy Priorities estimates Pennsylvania loses $270,169,360 a year by failing to tax internet access.
With revenues from other sources falling, especially from corporate taxes, Pennsylvania policy-makers need the ability to consider other options to fund crucial state government services and balance the budget. This year’s state budget will not fund state government for the full fiscal year, but that could have been eased with new revenue by simply extending the sales tax to internet access.
Permanently banning taxes on internet access is the exact wrong way to go. Congress should instead lift the ban and let state and local governments decide whether or not to tax internet access.
You can help make sure Pennsylvania and your local government have the choice to raise new funds for important public services and education from an internet access tax by contacting your member of the U.S. House of Representatives and urge him or her to oppose IFTA.
Our recent blog on 'the Non-Sharing Economy' prompted a response from Roy Wells at Triad Strategies. Triad is the Harrisburg lobbying and public relations firm secured by Lyft to make the case that its services should not be subject to the same rules that govern cabs. We appreciate Roy's weighing in and giving us the opportunity for a deeper back-and-forth.
The core issue, as Mark Price explained, is that Lyft and Uber compete head-to-head with cabs. If, however, they are subject to a different and less costly set of regulations that will put downward pressure on cab driver wages (which are already pretty low). Dean Baker of the Center for Economic and Policy Research (CEPR) makes a similar argument in a blog published last month. Dean also suggested that it may be appropriate in some cities to modernize regulations governing both cabs and so-called ride-sharing services. Given unhappiness with Yellow Cab, Pittsburgh may be one of those cities.
Dean and KRC are not saying that we should stop Lyft or Uber from entering the market. We are saying that we need a level playing field. Or as Mark Price explained in his earlier blog: "There is no reason that Lyft, Uber and traditional taxi cabs can’t compete with one another to the benefit of riders. All we need is a common set of rules for traditional cabs and Lyft and Uber..."
Given the need for common rules, the Pittsburgh Post Gazette is off base in its call for "different rules" for taxicabs and ride-share services. There's no ambiguity regarding whether taxicabs and ride-share services compete in different markets: the services pitch themselves as a cheaper, more customer friendly version of taxicabs.
The idea that reducing regulation within a transportation market can lead to a race to the bottom in wages and benefits isn't just theory. This is what happened in parts of the U.S. trucking industry after it was deregulated in the late 1970s. Shipments of a truck full of goods from point A to point B became a game of how little per mile drivers would accept. Many of the drivers ("owner-operators") participating in this downward spiral owned their own vehicles. Some effectively worked for close to the minimum wage once you take into account capital, maintenance, and operating costs for their vehicles -- and would then drive unsafe numbers of hours to try to maintain a decent income. See Mike Belzer's Oxford University Press book Sweatshops on Wheels for all the details. (A March NLRB settlement points to the possibility of owner-operators in trucking being able to unionize, potentially ending what a recent Huffington Post story calls "30 years of ruthless exploitation.")
Are we setting up a downward spiral in compensation (after costs) in the taxi-cab industry and within the new ride-share sector itself? (The price wars between Uber and Lyft make this more likely.)
Will "owner-operators" find themselves working for close to the minimum wage?
What mechanism is in place to prevent that?
Spend a few minutes reading employee ratings of Lyft on "glassdoor" (a website at which employees can rate their employer), and you will see that the danger of this downward spiral is already plain to some Lyft drivers. It is also clear that some employees think the company is great.
How about crafting regulations that would make positive views that many employees now have of their jobs the dominant one after these companies grow much bigger in Pitttsburgh or elsewhere? For example, we could set a driver minimum wage (like Australia's "safety wage" in trucking, set high enough the drivers don't have to work unsafe numbers of hours to earn a decent living); or how about a regional union that includes taxicab drivers and ride-share drivers and that negotiates wage rates and reimbursement for use of your own rate at the IRS rate (currently 50 cents a mile)? Maybe these regulatory approaches would allow the positive innovations of ride-share apps to flourish while creating more full-time middle-class jobs and flex jobs that still pay decent wages.
Not interested...? Because, as Dean Baker would say, that sounds "complicated"? Or because Lyft is interested in making money and favors PUC regulations and state legislation that open the door to that without addressing job quality issues, directly or indirectly...?
The broader challenge posed by the ride-share debate is to figure out how to embrace new technology and the efficiencies and new services it promises, but in a way that sustains the American Dream of opportunity. In the economy as a whole as in the local ride services industry we haven't figured that one out yet.
The companies Uber Technologies Inc. and Lyft Inc. offer smart phone apps that allow you to find drivers available for hire. The companies have expanded rapidly in the last year and are just now hitting the City of Pittsburgh.
Investigators from the Pennsylvania Public Utility Commission responsible for regulating taxi cabs caught the companies operating in Pittsburgh and two judges have issued orders for the companies to stop offering their services in the city.
As Josh Eidelson in Business Week notes, the conflict in Pittsburgh is not a new experience for the companies. They have also met with resistance in some other states and localities in which the firms began offering services without first obtaining regulatory approval.
Serious financial heavyweights back both companies, with Google among those investing in Uber and the hedge fund Third Point Capital among Lyft’s backers. Third Point Capital came to public attention recently, as Matt Taibbi explains, because it collected fees from public pension funds while its chief executive made philanthropic donations to organizations actively campaigning to eliminate public pensions.
Lyft has secured a Harrisburg lobbying and public relations firm to make the case that its services are different from those on offer by cabs and therefore not subject to the rules that govern cabs. That argument falls flat as it is clear these companies compete head-to-head with traditional taxi services. Taxi services are regulated to ensure clean and safe taxi services which also has the effect of elevating driver incomes.
Today in Pennsylvania the typical cab driver makes about $22,000 a year which is just above what workers would make working full time at $10.10 an hour. While we actively campaign to raise the minimum wage to at least $10.10, the expansion of Lyft and Uber raises the risk that the incomes of drivers may stagnate or fall. That’s because if these companies get their way in Harrisburg and are allowed to enter the state without being required to follow a reasonable set of safety and insurance rules that govern existing taxi services that will allow lower fares and lower safety standards to displace traditional cabs. That’s not competition that’s a race to the bottom that puts passengers at risk.
There is no reason that Lyft, Uber and traditional taxi cabs can’t compete with one another to the benefit of riders. All we need is a common set of rules for traditional cabs and Lyft and Uber with the aim of guaranteeing passenger safety.
Lyft and Uber are following the same “business model” as oil and gas companies that came to Pennsylvania early in the shale boom and have been engaged in a full-court lobbying campaign (including full-page ad buys in The Patriot News) in recent weeks to head off a common sense severance that benefit everyone not just gas company stockholders. If the sharing economy is just an expansion of economic activity in which business lobbyists buy the policies they want that also translate into stagnant or falling incomes for most people there’s nothing very new about it. Perhaps we should call it the “not sharing” economy.
Last night, the House of Representatives passed a budget plan for 2014-15. However, how this plan is paid for is still a mystery. One commonsense idea that could still be included in the budget is the passage of severance tax on natural gas drillers. For 2014-15 a 5% tax could raise over $400 million in new funds above the current impact fee. This could go a long way in restoring funding cut out of the House budget plan.
If you've been in Harrisburg recently or picked up a copy of the Patriot-News, you would have likely seen an ad from deep pockets of one of the shale drilling interest organizations trying to fend off such a tax - warning of risk to jobs, investment, and perhaps even baldness if the tax is passed. Don't buy these claims. The shale interests look at this PR campaign as a cost effective way to avoid a tax that they pay in other major energy producing states.
To help set the record straight, we've put together some of the major findings we've uncovered on shale jobs and taxes over the past few years and you can find it here.
While there has been job growth in the oil and gas industry in PA since the development of the Marcellus Shale began, it is still a very small part of the state's workforce. Budget cuts at the state level have wiped out about as many teaching and other public sector jobs as have been created in the oil and gas industry.
The tax payments made by drillers (the ones that would actually pay a severance tax) had a big spike in 2011. However, since then, corporate net income payments have fallen to pre-Marcellus levels. Many drillers have organized as pass-through entities which can help them shield income from corporate income taxes by passing it directly to individual owners (who pay tax at PA's low 3,07% PIT rate, rather than the 9.99% CNIT rate). Despite the billions of dollars being generated in gas sales from the shale, state tax collections haven't seen the same boom.
Finally, independent analysts have looked at what a severance tax would do to the bottom line of drillers and tried to assess if it would scare them to greener pastures. Both concluded that the wells would still be highly profitable with a severance tax and the development would continue. This echoes academic research done on the subject in the Western US and practical experience of what has happened in Texas and North Dakota with severance taxes and the shale boom.
As the debate continues, we will write more about the halmarks of a well structured severance tax, as well as try to keep you up to date with the budget developments.
We're closing in on the end game of the Pennsylvania budget process and lawmakers are considering two different pension proposals -- both of which would be a step backward. Here's an update on these options, with links to where you can find more information.
Most discussion over the past several months has focused on the Corbett-Tobash "hybrid pension plan." This would replace existing pensions with a much smaller guaranteed pension and 401(k)-type savings accounts that cover any salary over $50,000 and service over 25 years. The governor favors combining this pension re-design with reductions in state and school district pension contributions over the next five years.
The bottom line on the Corbett-Tobash plan is that it doesn't solve PA's pension underfunding problem but it does cut pension benefits deeply for new employees. It achieves this unsavory combination because savings from benefit cuts are offset by four cost increases.
- First is the long-term cost of the governor's proposal to cut pension contributions (to "lower the pension collars") in the next five years.
- Second is the inefficiency of 401(k)-type accounts which have higher costs and lower returns that translate into a third to nearly a half less retirement benefits for the same contributions.
- Third is a potential "transition cost" because the Corbett-Tobash pension plan drains contributions for new employees into the existing defined benefit plan; with the pension obligations of these plans shifting over time towards retirees and near-retirees, the PSERS actuary (Buck Consulting) suggests that the funds would invest in more conservative ways, lowering investment returns -- leading to a need for more taxpayer contributions.
- Fourth is higher future wages will likely be necessary to retain employees given low public-sector salaries, a slashed pension, and a weak incentive to stay beyond 25 years.
For more information, you can find talking points on the Corbett-Tobash plan here. You can find our brief on Corbett-Tobash here. And an op-ed here.
Now to the second pension proposal reportedly being considered: with the Corbett-Tobash plan unable to command a winning majority so far, there are rumors that lawmakers might go back to the governor's proposal to switch new employees completely to 401(k)-type savings accounts. Don't go there girlfriend! Or lawmakers.
Here's why: with an immediate closing of the existing defined benefit pensions to new employees, actuaries estimated the transition cost from lower investment returns under the original Corbett 401(k)-type plan at about $40 billion (on a nominal dollar, cash flow basis -- it's lower, but still large, measured in dollars in hand today). Add to this the inefficiency of 401(k)-type savings plans, the deep cuts in benefits (even with the same contributions, remember, a third to a half less in benefits), and an erosion in educational and service quality (because of higher employee turnover) -- and you've got another clunker. You can access our talking points on the original Corbett 401(k)-type plan here.
As we said in the title of this blog. It's time to go back to the drawing board on pensions.
Our proposed framework for addressing Pennsylvania's pension debt is at the end of our brief critiquing the Tobash plan.
I just read this Mother Jones story on a letter from the National Association of Mutual Insurance Companies (NAMIC) that focuses on whether or not auto insurance is affordable for low income consumers. In making the case for the affordability of the auto insurance products of its members, NAMIC quoted statistics from the Consumer Expenditures Survey:
These data reveal that households in the two lowest quintiles spent nearly as much on alcohol and tobacco products combined as on automobile insurance, and that they spent more on audio and visual (A/V) equipment and services than on automobile insurance.
So if people got enough cash to buy booze then surely their car insurance is affordable?
Painfully, Mother Jones goes on to note that NAMIC got its numbers wrong; low income consumers actually spend more on car insurance than cigarettes and booze. Of course that’s not the point, NAMIC is trying to change the conversation about car insurance affordability by implying that low-income consumers make bad spending choices. If they can’t afford car insurance, it’s their fault.
Which brings us back to Pennsylvania where our own Pennsylvania Manufacturers’ Association released a survey of manufacturing executives which claimed to find that 16% of Pennsylvania workers couldn’t pass a drug test. That’s more than 4 times the rate found by Quest Diagnostics which maintains a database of 125 million drug tests.
Drug addiction is a pressing problem in Pennsylvania but no reasonable person could conclude that our drug problem is more than 4 times greater than the national average [see update below]. The purpose of the Manufacturers Association survey is to provide some empirical support for the claim that high unemployment is the result of widespread drug use rather than the lingering effects of the worst recession since the great depression. If the unemployed can’t find jobs, it’s their fault.
This 2011 report from Quest summarizes the percentage of positive tests for the presence of drugs by sub state region. You will note all most all regions in Pennsylvania are blue, grey or white indicating a percentage of positive test results for the presence of drugs in less than 4.3 percent of tests (click this link to see a bigger version of the map).
As lawmakers continue debating how to close a $1.5 billion budget gap, there is a particularly valuable and compassionate policy option still on the table: Medicaid expansion. Under the Affordable Care Act (ACA), the federal government will commit to paying 100% of coverage costs for new enrollees under Medicaid expansion, through 2016. This has the combined effect of easing the financial burden of the state, and giving hundreds of thousands of Pennsylvanians access to health care coverage.
In an editorial posted to the Patriot News last week, Jennifer Clarke and Laura Smith of the Public Interest Law Center of Philadelphia (PILCOP) urged legislators to adopt a bill expanding Medicaid and allowing the state to move past ‘Corbettcare’.
The bill, introduced by Rep. Gene DiGirolamo (R-Bucks), has been approved by the House Human Services Committee and is pending a floor vote. A similar bill to allow the state to expand Medicaid passed the state Senate by a vote of 40-10 last year, only to die in the House in a dramatic floor vote in the waning days of session.
Expanding Medicaid will allow Pennsylvania to close its budget gap and strengthen its economy. The Independent Fiscal Office has reported that savings and new revenue from the federal government will add $620 million to the state’s 2014-15 budget. The RAND Corporation has also found that expansion can spur job creation. Plus a majority of Pennsylvanians support Medicaid expansion, 59% according to an April 2014 poll by Public Policy Polling.
Because of Governor Corbett's decision not to expand Medicaid, Pennsylvania is missing out on an estimated $5 to $10 million in federal funds with each passing day.
The Corbett administration has complained about costs associated with implementation of the Affordable Care Act, but neglect to mention state savings from the ACA, which are in addition to savings from Medicaid expansion.
A new analysis from the House Democratic Appropriations committee has calculated those savings at $590 million in 2014-15:
- $339 million from drug rebates in the managed care program
- $75 million in enhanced federal match through the ACA balancing incentive program, which promotes greater use of home and community-based services
- $60-$70 million in savings in the PACE senior prescription drug program
- $116 million from 100% federal funding for individuals who are currently receiving health care in state funded programs.
The savings from Medicaid expansion will have an immediate benefit for Pennsylvania. “If we begin expansion immediately, we could still save more than $240 million in 2014/15 – which is $127 million more in savings than under Gov. Corbett’s Healthy PA plan.”
Now is the time to expand Medicaid, close the budget gap, and offer health coverage to those most in need. Rep. DiGirolamo’s bill does just that.
 Jennifer Clarke and Laura Smith, “Forgett Corbettcare, DiGirolamo’s Medicaid bill is the way to go”, June 20, 2014 http://www.pennlive.com/opinion/2014/06/forget_corbettcare_digirolamos.html
 Joseph Markosek, “Affordable Care Act Savings Exceed $590 Million in the 2014/15 Budget”, June 23, 2014 http://www.pahouse.com/HACD/series/2800/DPW_ACA_Savings_MSG_062314.pdf
The Pennsylvania employment situation report, released today by the Bureau of Labor Statistics, showed that the number of “jobs” in Pennsylvania – nonfarm payroll employment as measured by a survey of employers – grew by a robust 24,700 in May, and the state unemployment rate fell by one-tenth of a percentage point to 5.6 percent. The job jump in May was enough to improve PA’s long-term job-growth ranking – but only by one place, to 48th out of the 50 states going back to January 2011.
Job growth of more than 24,000 in May, after a gain of 12,300 in April, is unusually strong for Pennsylvania. This raises the question of how much confidence we should put in it. Since it is only a month’s data, we can’t draw strong conclusions.
One particular puzzle about the May job growth data is that employment (technically, “resident employment”) measured by the household survey (rather than an employer survey) declined in May by 6,000 jobs.
While the employer and household surveys can be contradictory in any one month, they tend to move in the same direction over the long term – which doesn’t help us make sense of today’s numbers.
Turning to the details of job growth in May measured by the employer survey, job growth was broad-based across industries, with construction continuing its rebound, and manufacturing and the public sector adding jobs as well. Over a 12-month period, however, manufacturing is down 4,900 jobs, and the public sector down by 4,500 jobs.
The fall in the unemployment rate in May results from a decline in the labor force, down 12,000 this month and 43,000 since May 2013. Over the last 12 months, the unemployment rate has fallen by 1.9 percentage points, due to a combination of job growth (a good thing) and labor force decline (not usually a good thing because it indicates more people have become discouraged about being able to find a job).
While the April and May job gains are encouraging, we need to see continued employment increases over several more years to get back to the strong job market in December 2007, prior to the Great Recession. In fact, even with May’s bump up, Pennsylvania still has 18,000 fewer jobs than in December 2007. In addition, the population has grown 3.7% since December 2007, so we need another 212,200 jobs to keep pace with population growth. This makes for a total jobs deficit of 230,200.
How is Pennsylvania’s job growth ranking over the long term? In a brief we released earlier this week, we reported Pennsylvania’s 49th place job-growth ranking since January 2011. The strong May numbers improves Pennsylvania’s ranking to 48th. Over a shorter 12-month period, the new May numbers made a bigger difference, improving the state’s ranking from 42nd to 33rd.
One more detail: the PA Department of Labor & Industry points out in its release that private jobs are now at an all-time high, above the level of December 2007 (and every other month). That is factually true, but it doesn’t mean much given the increase in population of 3.7% since December 2007. For private job growth to reach the level of December 2007 plus the increase needed to keep pace with population growth would require another 164,900 jobs.
New Jersey’s 76ers Deal a Slam Dunk? Maybe for the Sixers, Not so clear for New Jersey or Pennsylvania
The Philadelphia 76ers have been scouting locations for a new training facility, and New Jersey has lobbied considerably to have the team relocate across the river to the Garden State. To sweeten the deal, the New Jersey Economic Development Authority (EDA) will cover the total cost of the new facility. The state will reimburse the team through an $8.2 million annual tax credit. The 76ers have accepted the state’s generous offer which works out to $328,000 in NJ state tax dollars per job, according to our friends at the New Jersey Policy Perspective (NJPP). But with this deal, the devil is in the details.
Philadelphia has not sat on its hands as the Sixers shopped for the best subsidy deal. Mayor Nutter said the City made a number of offers to the 76ers, including a site at the city’s Navy Yard which would have been nearly tax-free due to the Keystone Opportunity Zone and other incentives. But he was quick to note New Jersey’s tactic of “literally throwing money at the 76ers.” This form of economic “growth” fueled by cross border subsidies is not only bad Philadelphia which is losing an employer who it continues to subsidize with an arena funded in part by taxpayers, but also for New Jersey, who is now putting itself on the hook for a stream of tax-funded subsidies.
For what, practice?
While the Sixers will continue playing in Philadelphia, New Jersey’s aggressive approach in hosting their new training facility represents a flawed attempt at spurring economic growth. According to NJPP, the Garden State’s Economic Development Authority has awarded $4 billion in tax breaks to big companies, but the acclaimed benefits are not reaching the people of New Jersey, even as that state’s financial crisis worsens.
New Jersey’s deal with the 76ers was made on an economic return expectation that may never come to fruition. The state is estimating $76.6 million in economic benefit over the course of the 35-year agreement. However, the team is only required to stay in Camden for 15 years. If the 76ers choose to relocate to a new facility at the 15-year mark, the state may suffer a $14.5 million loss on its investment. (See Figure 1).
Source. New Jersey Policy Perspective
The approach taken by New Jersey is being widely criticized including an op-ed in today’s Inquirer, and rightfully so. It does not represent real economic growth, but rather luring business across state lines – triggering a race to the bottom by state and local governments only benefiting the specific businesses with enough notoriety to set off the bidding war. The long-term economic benefits of such maneuvers are difficult to measure and uncertain. Rather than take approaches to economic growth that are thinly veiled economic poaching , such as the 76ers proposal, New Jersey, Pennsylvania, and other states should seek real approaches to growing the economy that are grounded in real return prospects – like investing in early childhood programs, improving education, and strengthening infrastructure.
 Mike Soszynski, “$82 Million EDA Subsidy of 76ers Facility in Camden Spurs Debate on Tax Breaks”, New Jersey Policy Perspective, June 11, 2014, http://www.njpp.org/articles/82-million-eda-subsidy-of-76ers-facility-in....
 Kathy Matheson, “Report: 76ers to build N.J. facility”, ESPN, June 6, 2014, http://espn.go.com/nba/story/_/id/11043359/philadelphia-76ers-plan-practice-facility-new-jersey.
 Mike Soszynski, “$82 Million EDA Subsidy of 76ers Facility in Camden Spurs Debate on Tax Breaks”, New Jersey Policy Perspective, June 11, 2014,http://www.njpp.org/articles/82-million-eda-subsidy-of-76ers-facility-in-camden-spurs-debate-on-tax-breaks.
 John Whiten, “Graphic: What Happens if the 76ers Take New Jersey’s Money and Run?”, New Jersey Policy Perspective, June 13, 2014, http://www.njpp.org/blog/graphic-what-happens-if-the-76ers-take-new-jerseys-money-and-run.
 Gordon MacInnes and David Sciarra, “Invest in Camden’s students, not the Sixers,”Philadelphia Inquirer, June 17, 2014, http://www.philly.com/philly/opinion/inquirer/20140617_Invest_in_Camden_....
Deep cuts to critical human services, health care, and education loom in 2014-15 as lawmakers attempt to bridge a $1.5 billion and growing funding gap.
Despite an improving economy, tax collections have fallen far short of revenue targets in 2013-14. The Governor’s initial projections revenue growth have proven to be overly optimistic for this year and for 2014-15.
A key factor in the revenue gap is the impact of cuts to state business taxes. Over the past decade and a half, in good times and bad, business tax cuts continue to be enacted by the General Assembly. In order to make the budget balance and have additional needed resources, the growth rates of other taxes – in particular, sales tax and personal income taxes on wages, have been quite rosy. When they fail to meet these growth expectations, mid-year budget gaps appear.
General Fund collections are $250 million less in 2013-14 than the year before through May, fueled by a decrease in corporate taxes of more than $320 million. This is in sharp contrast the expected $560 million tax revenue was projected to grow in 2013-14. Because of this loss of revenue, increases in education, early childhood, and other critical investments in the 2014-15 budget are on the chopping block.
More automatic cuts are on the docket, triggered January 1, 2015, unless the General Assembly acts to stop them – further cuts to the capital stock and franchise tax rate and the expansion of net operating loss deductions.
These tax cuts have been a critical reason corporate taxes haven’t yet recovered from pre-Recession levels (see below). The most recent Independent Fiscal Office estimates peg 2014-15’s total corporate collections as being $711 million less than they were in 2006-07. Even more troublesome is that corporate tax collections are expected to fall over the next several years. As corporate taxes shrink, more of the responsibility for paying for the budget gets shifted to personal income and sales tax payers.
These tax cuts are costly and impact on our ability to fund critical services, and they haven’t produced the jobs that were promised. As it finalizes the budget, the General Assembly should take a balanced approach – including new and recurring revenue sources. They certainly should stop making matters worse and suspend currently scheduled business tax cuts.
As Pennsylvania legislators scramble to identify ways to balance the budget (no small task with a $1.5 billion deficit) one substantial source of revenue is once again up for discussion – a severance tax on natural gas production. A new report released by the Pennsylvania Budget and Policy Center found that natural gas company impact fee payments in Pennsylvania result in one of the lowest production tax rates in the country, just 1.9%. In 2013 they paid $223 million in impact fees while the market value of natural gas production topped $11.8 billion.
Despite booming production, corporate tax payments from these companies have dropped significantly, with total receipts dropping from a high of $443 million in 2011 to $265 million in 2013. Most natural gas drilling companies were able to minimize or avoid altogether paying Pennsylvania’s corporate net income tax (CNIT) by organizing themselves as pass-through entities. Gas drilling companies paid only 0.5% of the total CNIT collected, and the drilling companies paid only 9% of the total remitted by the oil and gas industry. The balance came from pipeline, distribution and other support companies that work with the gas drillers.
The gas drilling industry argues that, because of other taxes levied by Pennsylvania, they cannot afford the added burden of a severance tax. These companies enjoy numerous tax credits and incentives at both the state and federal level. Because of their low operating costs and prime location near premium markets, researchers from Carnegie Mellon noted, “The goose that lays the golden egg is going nowhere.” A business exodus spurred by the enactment of a severance tax is very unlikely.
The absence of a fair severance tax is a bad deal for Pennsylvanians. A 5% severance tax in addition to the impact fee on natural gas companies can raise an additional $400 million for Pennsylvania. A $1.5 billion budget deficit and weak revenue collections is forcing legislators to make difficult choices. Rather than make devastating cuts to education, healthcare, and key investments for future economic growth, our lawmakers should consider a balanced approach that includes raising new revenues. Adopting a modest severance tax is not punitive or unfair. It is sound policy in a time of tight budgets.
According to recently-released data, CEOs and executives in the United States have been recovering well since the end of the recession, while most workers are being left even further behind. The Economic Policy Institute released a study today documenting compensation in 2013 for CEOs at the top 350 firms in the United States. Their data is especially valuable because it provides a consistent historical series of CEO pay trends back to 1965.
In 2013, compensation for the average CEO (using a measure that includes the value of stock options that were realized during the year) was $15.2 million, an increase of 2.8 percent over the year and more than 20 percent since 2010.
Over the long term, pay for these top executives has soared and is now 937 percent higher than in 1978. This pay escalation was much faster than both the growth of the stock market and income of other high-wage earners, signaling that the extreme increases in CEO pay are not due to improving CEO productivity but because significant rents are embedded in executive compensation.
Meanwhile, the compensation of a typical worker has only grown by 10.2 percent since 1978. While CEO pay increased more than 20 percent since 2010, inflation-adjusted typical worker compensation has actually fallen slightly. To put this in perspective, we look to the CEO-to-worker compensation ratio, which measures the gap between CEO pay at the top 350 U.S. companies and the compensation of the workers in the industry of each respective CEO.
In 2013, the CEO-to-worker compensation ratio was 295.9-to-1, meaning that top executives made nearly 300 times the amount their average workers earned. The 2013 ratio is far above the ratio in 1965 (20-to-1), 1995 (122.6-to-1), and last year (278.2-to-1).
While data availability and sample size issues do not allow us to compute this measure at the state level, local sources have started to look at CEO pay for some companies that are headquartered in Pennsylvania. For example, the Pittsburgh Post-Gazette has begun compiling the “Fortunate 50” – a list of compensation for highly-paid executives at firms headquartered in the Pittsburgh area.
While the Post-Gazette’s measure of compensation is computed using slightly different methodology than the EPI study (most notably, the value of stock options realized during the year is not included), compensation for area executives averaged $5.7 million, down about 15 percent over the year.
However, if the options-realized value was included, it is likely that these executives would have seen a jump in pay comparable to the national increase detailed in the EPI study. In fact, according to this table from the Post-Gazette, Pittsburgh executives took advantage of the rebounding stock market and exercised millions of dollars in stock options in 2013, some cashing in more than $15 million.
Average worker pay (not compensation) grew 2.4 percent over the year in the Pittsburgh metro area. Again, accounting for the stock options that executives in the area realized this year would likely show that executive pay growth in Pittsburgh, as in the nation, is far outpacing average worker wages. Skyrocketing CEO compensation is one of the largest contributors to runaway income inequality in both the state and the nation.
 Facebook was excluded from the sample for being a high outlier. Including the company would increase average CEO pay in 2013 to $24.8 million.
 Average weekly earnings from Current Employment Statistics data.
The Bureau of Labor Statistics (BLS) reported last Friday that total nonfarm employment increased by 217,000 in May, following a 282,000 increase in April. So far this year, 214,000 jobs have been created on average each month, compared to a 204,000 average monthly gain during the same time period in the previous year. The nation’s official unemployment rate remained unchanged from last month at 6.3%. The Labor Force Participation Rate and the Employment-to-Population ratio remained unchanged in May.
Here is a synopsis of what D.C.’s top labor economists had to say about the Employment Situation Summary for May.
- Heidi Shierholz, Economic Policy Institute (EPI) — Economy Is Healing but Far from Healed:
This morning’s jobs report show payroll employment increased by 217,000, passing the pre-recession peak. This might sound like good news, but it is important to remember that return to the pre-recession level of employment does not mean we are back to health in the labor market.
The economy is healing, but far from healed. Almost six-and-a-half years have passed since the start of the recession, and in that time the working-age population grew by 14.5 million. That means we needed to have added millions more jobs than we have. More precisely, we now need 7 million jobs to get back to health in the labor market given growth in the potential labor force since the start of the recession. At the current pace of job growth, it will take nearly four more years to fill in that gap.
- Dean Baker, Center for Economic and Policy Research (CEPR) — Economy Adds 217,000 Jobs in May; Unemployment Stable at 6.3 Percent:
The May employment report showed another healthy month of job gains, with the economy adding 217,000 jobs. This brings the three month average to 234,000. If this rate is sustained, it will lead to a substantial decline in unemployment in the months ahead. However, this is difficult to reconcile with the weak growth the economy has seen in recent quarters, hence the fall in reported productivity in the first quarter. The job gains were concentrated in health care (33,600), restaurants (31,700), social assistance (21,300) and employment services (20,200).
To the surprise of many, the unemployment rate was unchanged in May. This is due to the fact that the 0.4 percentage point plunge in labor force participation reported for April was not reversed. The labor force participation rate remained at 62.8 percent.
- Chad Stone, Center on Budget and Policy Priorities (CBPP) — Statement on the May Employment Report:
More than six years after the Great Recession and the worst jobs slump since the 1930s began, today’s jobs report shows that payroll employment has finally topped its level at the start of the recession (see chart). Still, with essentially no net job growth since December 2007 but a growing working-age population, many more people today want to work but don’t have a job.
The job losses incurred in the Great Recession have been erased. There are now 620,000 more jobs on private payrolls and 113,000 more jobs on total payrolls than there were at the start of the recession in December 2007. Because the working-age population has grown over the past six and a half years, however, the number of jobs remains far short of the number of jobs needed to restore full employment. The pace of job creation so far this year (214,000 jobs a month) is the highest five-month average in over a year, and, if maintained, would gradually restore normal labor market conditions. Faster job growth would clearly be better, though.
Even though the state estimates for May will be released until June 20th, the Federal Reserve Bank of Philadelphia developed unemployment estimates for Pennsylvania, New Jersey, and Delaware in order to alleviate uncertainty.
The Federal Reserve Bank of Philadelphia – State Unemployment Rate Nowcasts: May 2014:
Using an analytical method created by Bank researchers, we expect unemployment rates for May to decrease from 5.7 percent to 5.6 percent in Pennsylvania and from 6.9 percent to 6.7 percent in New Jersey and remain unchanged in Delaware at 5.8 percent.
The employment report for Pennsylvania in May will be released by the BLS next Friday June 20, 2014. The Pennsylvania Department of Labor and Industry typically (but not always) releases the job numbers the day prior to the official BLS release.
The House Commerce Committee is set to vote on June 17th on SB 622 the Debt Settlement Services Act. This legislation covers the licensing and regulation of debt settlement companies in Pennsylvania.
Debt settlement services run television commercials in which companies with comforting names that include words like free, freedom, and relief offer consumers a chance to cut their debt by up to 50%!
Does that sounds too good to be true?
The Consumer Financial Protection Bureau puts it bluntly, “Some debt settlement companies promise more than they can deliver.” These firms often fail to settle enough debts to allow consumers to be financially better off than before they engaged the service. Bottom line - this type of “service” is really predatory finance.
Remarkably SB 622 contains no provisions to regulate the fees charged and requires no assessment of whether the consumer will in fact be better off before defaulting on all their loans.
Wait what? Default on all their loans?
Yes! Step one in a debt settlement is a risky gambit where consumers are told by the debt settlement company to default on all their debts. The company then attempts to negotiate with the creditors who in the meantime have assessed charges for defaulting on the debt. The industry’s own data suggests two-thirds of the consumers who use this service fail to settle all of their debts and face substantial fees, an average of 22.5% on their outstanding balances. And of course if the debt settlement company fails to settle all of a customer’s debts the remaining creditors are likely to take legal action because, based on the advice of a debt settlement company, the consumer defaulted on all of his or her loans.
This is a pretty complicated scheme targeted at a consumer who took on too much debt. That brings us back to predatory finance. There is a lot of money to be made in taking advantage of people under financial stress.
Exposing vulnerable consumers to complicated financial services absent common sense rules is a recipe for disaster. When consumers in financial trouble get deeper into financial trouble because of unscrupulous business practices, the likelihood that financial damage will spread to the local community and economy through more unpaid bills rises.
Please reach out to your representative in the House and urge them to oppose the bill. In particular members of the House Commerce Committee need to hear from you.
WESA in Pittsburgh has a radio feature airing today on union organizing among contingent faculty in higher education. It includes some excerpts from an interview with me. You can listen to it and access a transcript here.
Reporter Josh Raulerson places contingent faculty organizing in the context of innovative union efforts throughout the "non-mobile services" -- services which can't easily relocate because they have to locate near the customer. These non-mobile services -- health care, education, retail including supermarkets, janitorial services, child and elder care, hospitality, eating and drinking including fast food -- account for most jobs and for an even higher proprtion of low-wage jobs. Metro area-wide unions and collective bargaining that establish new wage and benefit norms in these non-mobile sectors could take a giant step towards reversing the growth of inequality.
As we've said before -- and we'll say again (we're not too proud to take a page from the right's "repeat yourself" machine) -- what is exciting about the multiplying examples of area-wide organizing in services (in Pittsburgh, in fast food nationally, among contingent faculty in Philadelphia, etc.) is that they are beginning to chip away at the idea that growing inequality is irreversible.
The theory of change here is to get to a critical mass of successful living examples of area-wide service sector organizing -- enough sectors in enough metro areas that working people see generally that revitalizing the middle class requires only that LOTS of people get on board this new model of unionism. As well as lifting wages and benefits, this model of unionism can and should play a central role in training, job-matching, and careers (similar to building trades unions). As a result, this model of unionism can not only fix inequality but can also help employers compete based on skill, service, and productivity -- along the "high road" or using what we now call the "good jobs strategy."
Anyway, listen to the WESA story here and let us know what you think.
As you may have heard by now, Seattle has adopted a city minimum wage of $15 an hour. As with all minimum wage increases, this one will be phased in over three to seven years depending on the size of the business.
Arindrajit Dube, a rising star in labor economics has an excellent editorial on the proposal that I would encourage you all to read.
One of the great challenges of public policy work as a labor economist is squaring off in the media with business lobbyists and/or public relations professionals for industry associations who consider “nuance” to be a dirty word. Being honest about what we do and don’t know about a policy or labor market trends is right and honorable, but often a loser in policy debates when our opponents have no ethical qualms about being misleading. Still, at the end of the day, the best and most effective policy work is tethered to research and open to changing course when the policy doesn’t lead to good outcomes.
In this regard Dube, who more than most commentators can take credit for advancing our understanding of the impacts of the minimum wage, stands out for his measured honesty and pragmatism:
Finally, we should acknowledge the limits of our knowledge about how local economies respond to a minimum wage. In my opinion, the best evidence suggests that state and federal minimum wage increases have had a very small impact on employment, while moderately reducing turnover, poverty and inequality. The limited evidence from other cities corroborates this. However, we cannot reliably apply those estimates to predict the effects of an increase the size of Seattle’s. The good news is that the somewhat long ramp-up period in Seattle will provide us with an occasion to learn from this experiment and offer opportunities for course corrections.
Dube is a great model for aspiring economists and public policy researchers not to mention policy makers.
While Seattle begins its bold effort to reduce inequality the campaign for a more modest increase in the minimum wage to at least $10.10 an hour here in Pennsylvania continues. Remember to reach out to your representatives in the House and Senate and share this petition with your friends.
Tax revenues continue to nosedive in May. Now $174 million less than last year due to corporate tax cuts. 2014-15 shortfall continues to grow.
For the sixth straight month, General Fund revenues fell short of estimate in May, missing the target by $108 million, or 5.5% for the month. The year-to-date revenue deficit grows to $613 million, or 2.3% below estimate (excluding the early transfer of liquor store profits in March). The deficit is now larger than the $581 million the Independent Fiscal Office had forecasted for the fiscal year just one month ago, as tax collections in nearly every category fell short of estimate in May.
Unfortunately, things did not have to be this way.
Looking at revenue growth from the prior fiscal year, it is apparent that this funding crisis is largely self-inflicted. Tax revenue has dropped $173 million from this point in 2012-13. While sales tax shows modest growth and personal income taxes are flat (due in large part to wealthy taxpayers recognizing capital gains on their 2012 returns to avoid a federal tax hike), corporate taxes have fallen $322 million, or 6.9% from last year. Some of the largest portions of this loss of revenue come from the capital stock and franchise tax (down $255 million) and bank taxes (still down $35 million after some late payments in May), both of which had tax rate cuts as part of the 2013-14 budget.
The anemic revenue collections in May push the funding shortfall for the 2014-15 budget to over $1.5 billion. Without new and sustainable revenue, the cuts that would be required to balance the budget could be catastrophic – at a time when the overall economy continues to grow. All gains proposed by Governor Corbett for early childhood programs, education, and other human services would likely be reversed and many non-mandated services could be slashed.
At a time when other states are starting to see healthier revenue gains, Pennsylvania is falling behind – making it more difficult to restore previous cuts to education, health care, and critical human services. With less than a month left to enact a new spending plan for 2014-15, it is clear that Pennsylvania must take a balanced approach and consider new revenues to bridge the $1.5 billion funding gap.
 Pennsylvania’s tax revenue growth ranked 30th highest out of 46 states reporting revenues in the 1st quarter of 2014 according to data compiled by the Rockefeller Institute, http://www.rockinst.org/pdf/government_finance/state_revenue_report/2014-05-06_Data_Alert.pdf.
1314 Revenue Tracker by Month May 2014
May 2014 Revenues to Estimate
May 2014 Revenues to Prior Year
CMS Is Not Asking for Its Money Back
A report issued by the Office of Inspector General (OIG) at the U.S. Department of Health and Human Services on Pennsylvania’s tax on Medicaid managed care services has a relatively sensational title. But the reality is the federal government is not going to force Pennsylvania to eliminate its Gross Receipts Tax (GRT), or even modify it, anytime soon.
The report comes at a critical juncture for Medicaid expansion. Lawmakers are reportedly revisiting the idea, which would generate immediate substantial savings that could help to close a $1.5 billion-and-growing budget gap (not to mention giving health coverage to half a million working people). It would also give Pennsylvania’s economy a desperately needed boost.
A bill that would allow Pennsylvania to expand Medicaid sponsored by State Rep. Gene DiGirolamo was reported by the House Human Services Committee on Wednesday, June 4.The OIG report is no reason to slow the Medicaid expansion train down.
Buried in a lengthy Capitolwire article is the good news:
“[The federal government], if it determines the tax is inappropriate, does not intend to force Pennsylvania to “offset,” meaning repay, the revenues the GRT generated and which were used to pay for Medicaid managed care services since the creation of the GRT. Nor will the state be forced to repay - as was suggested by the OIG report - the federal matching funds received by the state due to those GRT-funded state managed care expenditures after Fiscal Year 2011-12.”
It is important to tamp down the hysteria and look at the facts. The feds are bending over backward to work with Pennsylvania in their negotiations over a potential Medicaid expansion.
The federal Centers for Medicare & Medicaid Services (CMS), which oversees Pennsylvania’s Medicaid program, has not found Pennsylvania’s GRT to be “impermissible.” The OIG report confirms that states may be permitted to use revenue from health care-related taxes to help finance the states’ share of Medicaid. The decision about whether a GRT is impermissible rests with CMS, and CMS has not made that determination in Pennsylvania.
Pennsylvania changed its managed care assessment in 2009 to comply with federal law. Medicaid managed care companies are subject to Pennsylvania’s 5.9% GRT, the same tax that is paid by telecommunications and electric companies and transportation entities.
The events that triggered the OIG investigation were anomalies. Certain federal requirements do not apply to states with GRTs under 6.0%, but during the recession, Congress lowered the threshold rate to 5.5%. After September 30, 2011, that threshold (called a “safe harbor”) reverted back to 6.0%.
A second trigger occurred when Pennsylvania GRT taxpayers were assessed a 0.16% surcharge in 2011, which put Pennsylvania above the 6.0% threshold for a second time. Once Pennsylvania was over the GRT safe harbor threshold, certain prohibitions (on sharing revenue with the managed care payers) that are not applicable to a state GRT under 6.0% kicked in.
CMS has issued no guidance on what a permissible GRT looks like. CMS has not issued guidance to help states determine if their GRTs are permissible. Last year, CMS told Pennsylvania Medicaid officials that it had no plans to issue the guidance, and that it did not plan to scrutinize Pennsylvania’s GRT. And CMS has authority to waive existing GRT requirements, including requirements that the GRTs be broad-based and uniform.
According to an article in Bloomberg news, the Department of Health and Human Services will “work with Pennsylvania to develop an approvable tax structure.”
The article also notes that 49 states have some form of assessment on managed care nursing homes or other health services that help to draw down additional federal Medicaid dollars.
The OIG report will have no impact of the 2014-15 budget. The OIG report focuses only on the unique circumstances surrounding the GRT in 2011 and 2012. It has no impact the upcoming budget.
There are some unknowns ahead. What is known is that Pennsylvania has a budget shortfall and can not afford to walk away from billions of dollars in new federal funds that could jumpstart the terribly sagging economy, and can not afford to ignore the savings that would come immediately from the Medicaid expansion.
Last week, the Public Employee Retirement Commission (PERC) released a cover memo and reports from four actuaries analyzing the newest public pension proposal championed by Governor Corbett, one put forward by Rep. Mike Tobash. We put out a press release and brief on this proposal Monday.
PERC's 150-page door stop was not light reading. As I said in a press call with reporters, the movie rights -- "Four Actuaries and a Pension Plan"? -- seems unlikely to fetch a high fee.
But the reports did fill an information vacuum that had existed on a pension proposal rumored about for months.
And if you read the reports carefully, they make a solid case that the Tobash plan -- and the Corbett Tobash variant adding in the Governor's proposed cuts in pension contributions over the next four years -- are non-starters.
They would make little progress reducing the state’s pension debt, while forcing draconian benefit cuts on future teachers, cafeteria workers, nurses, and state employees.
Estimates by two of the actuaries found that many employees would see cuts of 40% or more from the already reduced level of Act 120 benefits.
The actuary for SERS, Buck Consulting, also noted that the Tobash Plan could dig a deeper pension hole -- and cost taxpayers more money -- by lowering investment returns on SERS and PSERS assets. Last year, three actuaries estimated that Governor Corbett's plan to provide new employees with 401(k)-type savings accounts would have had a $40 “transition cost” because it lowered investment returns. A Tobash transition cost equal to even a small fraction of $40 billion would more than wipe out any savings.
Summarizing the results of these studies, PERC's consulting actuary concluded, “For new employees the loss of retirement security is greater than the value of the cost savings for the Commonwealth.”
The end of the KRC brief outlines a six-point framework for reform that would build on Act 120, including by incorporating elements of the pension proposals advanced by Representative Glen Grell and Senate Democrats. A starting point could be recapturing to shore up state pensions a portion of the $3 to $4 billion revenue lost annually because of corporate tax cuts since 2003.
Our press release and pension brief provide all the details, also pointing out that the Tobash plan would erode the quality of schools and state services by increasing turnover among talented mid-career professionals.
Here's the Patriot-News story on our new brief.