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Morning Must Reads: A Natural Gas Severance Tax This Year?

April 17, 2014 - 10:01am

Momentum is building to enact a natural gas severance tax in Pennsylvania. But don't take it from us.

The Triadvocate has an analysis of the debate that concludes an extraction tax is "almost a fait accompli."

As April moves forward and we continue to get depressing news from the Department of Revenue about tax collections (the state is now $175 million behind projections for the year), there is some renewed discussion at the very highest levels of the General Assembly about an extraction tax being levied on natural gas drillers in Pennsylvania.

But unlike past discussions that have been taking place since the waning days of the Rendell Administration, this time the possibility of the tax actually being levied is more than just idle talk. It is almost a fait accompli.

The Triadvocate bases its analysis on three factors: lagging General Fund revenue collections, growing support for a severance tax among some members of the House and Senate GOP, and a sense among some (not all) drilling companies that it is best to negotiate a reasonable tax in line with other states now rather than next year when the state may have a new governor.

Meanwhile, The Associated Press reported this week that another GOP lawmaker is joining the chorus calling for a severance tax.

Monroe County Representative Mario Scavello, who is running for a newly created Senate seat, is seeking co-sponsors on a bill to impose a 5% tax on the highest-producing shale gas wells. Tom McGarrigle, a Republican candidate for an open Senate seat in southeastern Pennsylvania, supports a 4% tax, while Representatives Tom Murt and Eugene DiGirolamo, Republicans from the Southeast, favor enacting a 4.9% tax.

Governor Corbett's administration maintains its opposition to a severance tax, as reflected in a National Journal story this week asking "Is Pennsylvania Wasting Its Fracking Wealth?"

That story also notes the state's current drilling impact fee has failed to keep pace with rising gas production.

Between 2012 and 2013, revenue from the fee increased by 11 percent, jumping to a record high of close to $225 million last year. But the leap was significantly smaller than the overall rise in production. Natural-gas output increased by more than 37 percent in the same period, when it rose to 3.1 trillion cubic feet, according to Pennsylvania state estimates.

Skeptics say the math doesn't add up. "We haven't captured the gains we're seeing in production and that means we're essentially giving away money right now that other states are collecting," said Sharon Ward, the executive director of the left-leaning Pennsylvania Budget and Policy Center.

A report released last month by a state data agency has added fuel to the fire. It concluded that Pennsylvania has the lowest effective tax rate on natural-gas production in a survey of 11 of the largest shale-gas-producing states.

A Guide to the Creative Use of Numbers by the Business Lobby

April 16, 2014 - 10:59am

The debate over raising the minimum wage can quickly become a fog of studies and numbers. So in the spirit of keeping people honest, we review some of the arguments against raising the wage made in a Philadelphia Inquirer article by Pennsylvania Chamber of Business and Industry chief Gene Barr.

Young Workers

Barr claims that a majority of minimum-wage workers are young people, under the age of 25, who are not supporting families. By this, he means those earning exactly the current minimum wage of $7.25 per hour or less. This small group is not representative of the much larger group that a minimum-wage increase would actually impact.

If you look at the ages of the larger group of workers impacted by a minimum-wage increase to $10.10 an hour — say, people who earn $8 or $9 an hour — 83.5% of them are age 20 and older. The following figure breaks that age distribution down. And, yes, 38% of the people impacted are over the age of 40!

Workers in Middle-income Household

Barr also claims that many minimum-wage workers are part of middle-income households that do not need special help.

Middle-class wages and incomes are lower today than they were a decade ago, so I’m pretty sure many middle-income households would appreciate the boost that comes with a minimum-wage increase for a household member. That said, out of the more than 1 million people who would get a raise from a minimum wage increase, 62% — just over 660,000 — have family incomes that would place them below the median family income of $65,109 in Pennsylvania in 2012.

On average, the workers who would get a boost from a minimum wage increase to $10.10 per hour earn over four-tenths (42%) of their family's total income.

And with respect to the “special help” remark, remember we are talking about income earned from work. The minimum wage today is 23% lower than it was in 1968. This isn’t about workers needing special help; this is about undoing the damage done to family finances by fierce political opposition to adjusting the purchasing power of the minimum wage to reflect the rising cost of living.

Small Businesses

In the Inquirer article, Barr is quoted as saying: “Half [of minimum-wage earners] work for small businesses [with] less than 100 employees; two-thirds work for businesses that employ less than a thousand people."

Barr is quoting national data on workers earning between $7.25 and $7.30 an hour, drawn from the U.S. Census Bureau's Current Population Survey. But as I noted previously, he is using a small, atypical group of workers (even if a slightly different one than before) to support a claim that is not correct for the group of workers who would benefit from a minimum wage increase to $10.10 per hour.

In the Current Population Survey, when you ask for the size of employers with workers earning $10 (not quite $10.10 but close) or less per hour, the answer you get back is two-thirds of those workers are employed by firms with 100 or more employees.

In sum, an honest and accurate accounting of the impact of a minimum-wage increase concludes that the bulk of the workers who would benefit are adults who contribute substantially to their family finances and are often employed by some of this country’s largest, most successful companies. It’s a shame the business lobby still insists on trying to confuse people by selectively quoting statistics aimed at advancing their cause.

Cut Hours

Finally, Barr claims some employers will cut staff or hours if the minimum wage is increased.

This is where we come to the meat of the disagreement — what happens to employment when the minimum wage is raised. A lot of labor economists, including me, read the research literature as suggesting that modest increases in the minimum wage that have occurred over time have had little or no impact on employment.

You, meanwhile, are left having to choose who to believe. A key part of your decision should include an evaluation of the record of the business lobby in talking about this issue. Can you trust that you are getting an honest assessment of the research literature from advocates who continue to claim that most beneficiaries of a minimum wage increase are affluent teenagers?

I appeared on NBC 10 @ Issue last Sunday with Alex Halper of the Pennsylvania Chamber of Business and Industry to discuss raising the minimum wage. As you watch the program, note how you hear every one of Gene Barr’s points above.

A Look at Shale Drilling’s Mixed Legacy

April 10, 2014 - 4:48pm

Natural gas drilling has transformed two Pennsylvania counties with the greatest development activities, for better and for worse.

That statement in itself is not surprising, but two new studies from the Multi-State Shale Research Collaborative have a wealth of data on just how much these communities have been transformed. And some of the findings may surprise you.

For instance, in one of the two communities studied, Tioga County, the story is one of a boom and bust. The county was largely unprepared for the sudden overwhelming presence of the industry, with few tools to manage or plan for growth and change. And then just as suddenly, the industry packed up and left town, taking many of the jobs with them.

Greene County, by contrast, had a history of coal mining and conventional gas drilling. While employment has increased, the county is now even more dependent on extractive industries, which could put the local economy at risk in the event of a slowdown.

Greene County, in the Southwestern corner of Pennsylvania, and Tioga County, along the Northern Tier bordering New York State, are both small rural communities that witnessed a dramatic growth in shale development in recent years.

For both communities, the impact of shale drilling has been mixed. Communities benefited through higher incomes and new jobs but paid a price in the form of more crime, higher costs for police and emergency services, higher rents and a shortage of affordable housing, and heavy truck traffic and greater road maintenance needs.

Both counties had many similar experiences after drilling expanded, including an influx of out-of-state workers and a climate in which companies operated without much local oversight. There were notable differences too, particularly as the industry shifted its focus from drilling for methane, or dry, gas in Tioga to more lucrative wet gas and shale oil in Greene and parts of Ohio and North Dakota.

The two case studies are part of a package that also includes a close look at shale oil and gas drilling in Carroll County, Ohio, and Wetzel County, West Virginia. You can read more of the key Pennsylvania findings here.

Both the Greene and Tioga case studies recommend that communities with increased drilling create local oil and gas taskforces to coordinate discussions between government agencies, local stakeholders, and companies, and that local landowners establish a landowners group to help each other navigate the growth of the industry.

The studies also recommend the state replace its local impact fee with a severance tax and that more investments be made in fixing and policing the roads and making affordable housing more available in hard-hit communities.

Bottom line: while there are localized benefits from gas development, there are also substantial costs — for low-income residents, in the form of increased crime, and in costs to local governments. Communities potentially facing new gas development would do well to greet the development with as much caution as enthusiasm, and to be prepared as much for the bust as the boom.

Houston, We Have a (Revenue) Problem

April 2, 2014 - 3:25pm

Pennsylvania General Fund revenue collections fell short of estimate, for practical purposes, by more than $100 million in what is usually the largest month of collections for the year. March receipts typically get a boost from a swell in corporate tax payments, but lower-than-expected bank tax collections this March brought corporate tax revenues in well below estimate. Sales tax collections also missed the mark for the fifth straight month.

By the numbers, General Fund collections fell $100.7 million, or 2.4%, short of expectations in March, bringing the fiscal year-to-date shortfall to $176 million, or 0.9%.

On paper, the March shortfall is not as large due to the acceleration in the transfer of $80 million of liquor store profits (normally done in June). The Department of Revenue clearly and fairly indicates that this was done for cash-flow reasons, not to sugarcoat the shortfall. For purposes of our analysis, the $80 million early transfer is not included in the numbers.

While collections so far this fiscal year lag estimate by only 1%, there are a number of reasons to be concerned going forward:

  • March is the fourth straight month that Pennsylvania missed General Fund revenue estimates. A bounce back at this point is looking more and more unlikely.
  • This lackluster showing seems to confirm that the monthly growth projected for 2014 was too high, as revenues have missed targets set for each of the three months so far. If this pattern persists, March may not be the last month of shortfalls.
  • Nearly half of all corporate taxes expected to be collected in the fiscal year come in during March, including almost all bank, insurance, and gross receipts taxes. For the month, corporate taxes fell $82 million, or 3.4%, short of estimate.
  • Early indications are that weak bank tax payments are to blame for the corporate tax shortfall – falling $129 million, or 37%, below the March estimate. As part of the 2013-14 budget agreement, the Legislature adopted changes to the bank tax that broadened its base and lowered the tax rate. This move was thought to be relatively revenue neutral, but if these payments do not bounce back, the change could be an inadvertent tax cut for financial institutions that must be addressed. A report on the impact of this tax change is not due until December 2014.
  • Sales tax collections have fallen short of estimate for the fifth straight month. There was hope after last month that sales tax collections would recover after the weather improved, but that did not happen in March. Sales tax collections are only modestly off track so far ($111 million, or 1.6%), but that may be too much of a shortfall to make up in the final quarter of the fiscal year.
  • Personal income tax collections came in above estimate, preventing March’s shortfall from being even deeper. For the fiscal year, PIT revenues remain $70.6 million, or 0.9%, below estimate.
  • Shortfall amps up pressure on 2014-15 budget. The Governor’s proposed 2014-15 budget assumes 2013-14 revenues come in at estimate. It seems more likely now that revenues will fall short for the fiscal year. Any shortfall in 2013-14 makes it more difficult to craft a budget for 2014-15, particularly with modest spending increases, as Governor Corbett has proposed.
  • 2014-15 revenue projections may be too optimistic. The Governor’s proposal includes tax revenue growth of 3.9% in 2014-15. Tax growth this year is coming in well below what was anticipated, increasing by a mere 0.6% so far. In addition, corporate tax collections are expected to decline next year due in large part to another cut in the capital stock and franchise tax rate and an increase in the net operating loss allowance for corporate net income tax. Overall revenue growth was predicated on stronger personal income and sales tax growth; however, sluggish sales tax collections this year may make lawmakers rethink healthier growth in 2014-15.

While the revenue shortfall remains manageable, troubling signs continue to build as the 2014-15 budget is negotiated. At this point, budget negotiations will likely wait until after collections for April, the second most important month in revenue terms, are tallied. For more details on the revenue numbers, click here.

Morning Must Reads: Don't Settle for 'Chump Change' with Gas Extraction Tax

April 2, 2014 - 10:55am

Two Pennsylvania newspaper editorials are making the case this week for enacting a severance tax on natural gas drilling, like most large energy-producing states have.

The Philadelphia Daily News writes that the state's drilling impact fee is a small fraction of the total value of the gas being extracted and that after the 2014 election "the time will be ripe for Pennsylvania to decide that when it comes to natural gas, we shouldn't settle for chump change." A bit more from that editorial:

The Independent Fiscal Office, a bipartisan agency created by the Legislature, said that the money Pennsylvania gets from its drilling industry is the lowest of 11 natural-gas producing states that were studied.

The IFO said the state's current impact fee equals about one percent of the value of the gas extracted from these Marcellus Shale gas wells.

The revenue is much higher in other states, even in Texas and Oklahoma, which are known to be friendly to oil and gas interests. All of them levy taxes on the volume of gas extracted.

The Patriot-News/ also penned an editorial supporting the adoption of a severance tax in Pennsylvania:

Pennsylvania has room to make gas companies pay more of their fair share for carting off this non-renewable resource, without automatically causing them to flee to other states.

How much room? In today's tight times, with the state struggling to find enough money to invest in schools and higher education, that’s the right question to be asking.

Map: Small Number of PA School Districts Have High Property Taxes

April 1, 2014 - 11:25am

Property taxes have been a subject of much debate in Pennsylvania. Unfortunately, proposals currently before the General Assembly, including bills to eliminate school property taxes and raise state sales and income levies, do not address the primary issue — that too few state dollars are used to support public schools in the commonwealth. All property owners would be helped if Pennsylvania increased the amount of state funding provided to public schools.

Property taxes are high in some places, but as the map below shows, the number of districts in Pennsylvania with high property taxes as a share of district taxable income is small. Property tax relief should be directed to homeowners who pay a large share of their income in property taxes. Expanding and reforming the state’s existing Property Tax/Rent Rebate Program would be the most effective way to target relief to specific taxpayers.

Click here for a larger version of the map below or click here for a table listing the 31 school districts with property taxes of 4% or more of taxable income in each district.

Morning Must Read: PA Senator Proposing 5% Natural Gas Severance Tax

March 27, 2014 - 10:06am

State Senator Vincent Hughes of Philadelphia will unveil a plan today to assess a 5% severance tax on natural gas drilling in Pennsylvania. He told the Philadelphia Daily News that his plan will generate more than $1 billion for education by 2020:

According to Hughes, the tax would generate about $720 million in 2014-15, of which $375 million would go to schools. More than half of that would go toward local school districts, $195 million would be directed to economic development and $150 million would go to environmental uses in the first year. As natural-gas revenues rise, so would the money for education, but the amount for economic development and the environment would remain flat.

As I wrote Monday, Pennsylvania currently assesses a fee on Marcellus Shale gas wells that has the lowest extraction tax rate among 11 states examined recently by the Independent Fiscal Office — despite, as the Daily News notes, the fact that Pennsylvania is the second-largest gas-producing state in the country based on preliminary 2013 data.

And as guest bloggers Parth Vaishnav and Nathaniel Horner wrote Wednesday, replacing the state's drilling impact fee with a 5% severance tax would have little effect on drillers' internal rate of return, making it very unlikely to inhibit new drilling.

Now we just need the state Legislature and Governor to take the right steps to make it happen.

NFIB's Flawed Minimum Wage Study Doesn't Tell Us Much

March 26, 2014 - 11:27am

How do you know that momentum is building in the campaign to raise the minimum wage? Opponents arrive with inflated claims of job losses if we raise the wage.

The latest is from the NFIB Research Foundation in a report claiming that three minimum wage bills before the Pennsylvania Legislature could potentially cost 28,000 to 119,000 jobs as a result of increased labor costs.

To put that wide range in some context, the high watermark of predicted job loss is 11 times higher than the amount of “lost jobs” predicted in a 2005 report from the Employment Policies Institute, a well-known front group for the National Restaurant Association, that was co-released in Pennsylvania with the Commonwealth Foundation.

The 2005 report estimated that the then-proposed 39% increase in the minimum wage (from $5.15 to $7.15 per hour) would reduce employment in Pennsylvania by 10,027 jobs. A prediction like this has never been confirmed in a rigorous examination of actual employment data. 

In fact, after the Pennsylvania Legislature increased the minimum wage in two steps in 2007, job growth remained steady in the sector that relies most heavily on minimum wage workers and would be most impacted by a raise — food service and drinking establishments. It was not until the recession’s impact began to be felt in Pennsylvania in late 2008 that this sector began to lose jobs.

The more recent NFIB study argues that raising Pennsylvania’s minimum wage from $7.15 to $10.10 an hour, also a 39% increase, is projected to cost 11 times as many jobs as the 39% increase proposed in Pennsylvania nearly a decade ago.

The key assumption in all analysis of the potential jobs impact of a minimum wage increase is the percentage change in employment for each percentage point change in the wages of affected workers (technically called an elasticity). Researchers for the past two decades have been using state-level variation in minimum wage laws to observe little or no impact on employment from modest minimum wage increases.

In fact, as John Schmitt at the Center on Economic and Policy Research has argued, the most interesting aspect of the recent report by the Congressional Budget Office (CBO) is that for the first time the CBO acknowledges that the lower range of a potential jobs impact from increasing the minimum wage is zero, a clear sign that careful research has shifted the debate away from assuming large job losses from minimum wage increases.

Table 1 below presents the assumptions in the 2005 report (by David A. Macpherson of Trinity University) and the recent CBO report of the percent change in employment associated with a 10% increase in earnings. You will note that Macpherson assumed that each 10% increase in wages reduced employment by 2.2%. This figure is well above even the high range in the CBO report, meaning that Macpherson was assuming a relatively large employment impact when he predicted the loss of 10,000 jobs in Pennsylvania.

The NFIB study doesn’t disclose the precise relationship that it assumes between wages and employment so we cannot compare its assumptions to the research literature. We do know that job losses are baked into the model NFIB is using in that it assumes no other effects that are known to offset higher hourly wage costs (such as increased productivity or reduced turnover).

So the model the NFIB uses will always give you the same answer: higher wages for those at or near the minimum wage will always lead to job losses, even though there is a large body of research focused on actual state-level minimum wage increases that fails to find employment losses when the wage rises by a few dollars.  

In the end, this study doesn’t include any new information. Its failure to disclose details that would facilitate comparisons with other simulations of a minimum wage increase's employment impact signals pretty strongly that the NFIB would rather you not look too deeply into how the sausage is made. Instead, just repeat after us, hundreds of thousands of jobs lost.

Or as Dr. Peter Venkman might say: ”Human sacrifice! Dogs and cats, living together! Mass hysteria!”

Apocalypse Not: Study Finds Severance Tax Unlikely to Scare Away Drillers from Marcellus Shale

March 26, 2014 - 10:03am

By Parth Vaishnav (left) & Nathaniel Horner (right) of Carnegie Mellon University

A common argument against enacting a severance tax on shale gas in Pennsylvania is that the additional cost will cause the industry to leave the state. As graduate students in the Department of Engineering and Public Policy at Carnegie Mellon University, we decided to test that idea.

We found that replacing the state's current drilling impact fee with a 5% severance tax would be very unlikely to inhibit new drilling. Our study looks at what such a tax would mean on a driller's internal rate of return (IRR) and how that would influence drilling decisions. What we find is that while a severance tax would decrease a well's IRR, as does the impact fee, the decrease is rather small — making wells still quite profitable for drillers.

If people are worried that a severance tax would kill the goose that lays the golden egg, our study shows they shouldn't. Even with the tax, drillers would be able to generate a greater return from drilling and operating a well than it would cost them to borrow the funds needed for the development costs.

Under our base scenario, which assumes the current low gas prices and that gas will remain plentiful in the future, we estimate that a well would have an IRR of 13% with the impact fee versus 12% with a 5% severance tax in place. With a severance tax, the driller would net $1.6 million from its investment — after paying leasing costs, taxes, royalties, and industry typical development costs. 

For the state, the difference between the impact fee and the severance tax revenue is much more pronounced. A 5% severance tax would generate $830,000 from a well in our standard case — more than double the $380,000 that could be expected from the impact fee. Both figures represent the net present value of the payments.

We analyzed other scenarios (in which the well driller paid maximum U.S. tax rates or lease acquisition costs were much lower than current prices), and the results were similar: the imposition of a severance tax had little difference on a well's IRR over the current impact fee, although the overall IRR could vary markedly depending on the assumptions. Even using the most conservative scenario, well development still generated returns comfortably above the typical cost of corporate borrowing.

From a driller's financial perspective, a severance tax would have little more impact on drilling and operating decisions than the state's current impact fee.

Pa.'s Shale Fee Very Low Compared to Other States

March 24, 2014 - 11:21am

Pennsylvania's fee on Marcellus Shale gas wells is the lowest among 11 states examined by the Independent Fiscal Office in a new study out last week.

As PBPC Research Director Michael Wood told The Philadelphia Inquirer, "this report highlights what we've said for a while: The impact fee is low compared to other states."

Read the Inquirer story for more.

Why a minimum-wage increase would help families in Pennsylvania

March 21, 2014 - 11:34am

When you restrict your view to just parents affected by an increase in the minimum wage to $10.10 per hour, the average low-wage parent is responsible for just over half (51%) of her family's income.

Some Major Corporations Pay Little or Nothing in State Income Taxes

March 20, 2014 - 10:54am

What do Pennsylvania-based companies PPL, H.J. Heinz, Airgas, Allegheny Technologies, Hershey, and Comcast have in common? They each pay little or nothing in state income taxes, according to a new report from the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ).

The new study documents how corporate loopholes, tax breaks, and crafty accounting have allowed many Fortune 500 companies to avoid paying state income taxes. In all, researchers looked at 269 Fortune 500 companies, including 16 based in Pennsylvania, that were profitable every year between 2008 and 2012. Of those, 90 companies avoided state income taxes altogether in one or more years.

This is especially troubling for Pennsylvania, where state corporate tax collections have declined as a share of total tax revenue over the past 30 years. The phase out of the capital stock and franchise tax, corporate tax loopholes, and other tax breaks are the primary reasons for the decline.

A law passed last year to close corporate tax loopholes in Pennsylvania failed to get the job done, leaving companies free to continue to avoid paying income taxes. New tax credits and other policy changes mean that corporations are paying a smaller share of taxes overall in Pennsylvania, leaving other taxpayers to contribute more.

This erosion of corporate tax revenue threatens Pennsylvania’s ability to make investments in the future, including funding increases proposed by the governor for public schools, a new college scholarship program, domestic violence prevention, and other human services.

Business tax cuts have also done very little to bring new jobs to Pennsylvania. Job growth in the commonwealth has lagged well behind most other states, ranking 48th out of the 50 states in 2013.

If we are going to get our economy back on track, corporations must pay their share of taxes like the rest of us. Only then will we be able to invest in strong schools and other building blocks of our economy.

The ITEP/CTJ report found:

  • 90 companies paid no state income tax at all in at least one year, and 38 companies avoided taxes in two or more years.
  • 10 companies, including Boeing, Merck, and Rockwell Automation, paid no state income tax at all over the five-year period covered by the study.
  • The average weighted state corporate income tax rate is 6.25 percent, but the 269 companies paid an average rate of just 3.06 percent.
  • In Pennsylvania, PPL and PNC Financial Services Group aid average income tax rates over the five-year period of less than 1 percent; Cigna, Airgas, H.J. Heinz, Allegheny Technologies, and Air Products & Chemicals paid between 1 and 2 percent on average; Wesco International and AmerisourceBergen paid between 2.1 and 3 percent on average; Consol Energy, Hershey, and Comcast paid between 3.1 and 4 percent on average; PPG Industries, Dick’s Sporting Goods, and Universal Health Services paid between 4.1 and 5 percent on average; and UGI paid 6 percent on average.
  • The 269 companies examined collectively avoided paying $73.1 billion in state corporate income tax.

Commentary: A Unified Tax Policy for Marcellus Drilling in Ohio, Pa., and W.Va.

March 19, 2014 - 9:28am

On Tuesday, The Pittsburgh Post-Gazette published an op-ed that i co-wrote with Wendy Patton of Ohio Policy Matters and Ted Boettner of the West Virginia Center on Budget & Policy making the case for a unified approach to taxing shale drilling across our three states. Check it out:

Pennsylvania, Ohio, and West Virginia share a lot in common, including job markets, highways, rolling hills, watersheds and natural resources. In some places, shale wells in close proximity to each other are in different states.

Yet each of our three states has taken a vastly different approach to taxing oil and gas drilling.

Pennsylvania has a small drilling impact fee rather than a severance tax, while Ohio has a low, volume-based tax and West Virginia a conventional severance tax based on value. West Virginia’s rate is in the middle of the pack when it comes to severance taxes in the lower 48 states.

Suppose our three states got on the high road to economic development, taking a unified and coherent approach to tax policy to benefit the entire region and its residents?

That is the vision we have and why we are calling on the governors of our three states to support a severance tax with a rate no lower than that of West Virginia — without tax holidays, exclusions or credits.

All three states have experienced a rapid increase in shale drilling over the past five years, bringing some new jobs but also growing costs associated with spills, increased demand for emergency services, a rapid jump in housing costs and increased road maintenance needs. An adequate severance tax will ensure that industry contributes to these costs and that they aren’t passed on to other taxpayers.

A common tax rate and structure would provide predictability for the industry and bring the region more in line with gas-producing states in the West and the South. Most important, a common approach would take taxes out of the competitive equation.

Legislation has been introduced in Ohio and Pennsylvania to put more adequate severance taxes in place, and the issue is already playing a prominent role in Pennsylvania’s gubernatorial election.

A severance tax in the Keystone State could go a long way to repair the damage from years of budget cuts. Pennsylvania could use severance tax dollars to better protect its environment, invest in public schools and colleges, and support programs that train workers to meet the demands of the changing economy.

The current fragmented approach to drilling taxes in Pennsylvania, Ohio and West Virginia has fueled a climate of interstate competition for the lowest tax rate. It is a race to the bottom that profits drillers at the expense of our states’ residents.

West Virginia’s severance tax rate, at 5 percent of the value of gas plus a small production-based assessment, has not deterred shale drillers. Most gas-producing states in the West and the South have severance tax rates that are higher than West Virginia’s. This is where discussions around a tax rate should start, not end.

In all three states, as well as in western states like Texas and North Dakota, drilling companies pay other business taxes. This should not be a factor in determining an appropriate severance tax. Severance taxes are specifically designed to recompense residents for precious natural resources that can be removed from the land just once, as well as for specific environmental, economic, and social costs associated with that removal.

We hope Governors Corbett, Kasich, and Tomblin will recognize what the elected leaders of most other energy-rich states do: That all residents in our region should benefit from the bounty of drilling.

Our state capitals may be hundreds of miles apart, but when it comes to shale drilling, our states are a lot closer than we think. Let’s acknowledge that and do all we can to maximize the benefits of shale drilling without putting our communities at risk.

More Minimum Wage Momentum in WV and MD. Is PA Next?

March 18, 2014 - 9:58am

An alliance of religious, labor, community, and women’s groups will kick off a campaign this afternoon to raise the minimum wage in Pennsylvania to at least $10.10 per hour. 

Raising the minimum wage has already gained momentum nationally and is likely to be a defining issue in Pennsylvania's gubernatorial election this year. It's also a policy issue where Pennsylvania is lagging well behind our neighboring states.

In January, the minimum wage rose to $8.25 an hour in New Jersey, $8 in New York, and $7.95 in Ohio. Meanwhile, in Delaware, Governor Jack Markell signed a bill raising his state's minimum wage to $7.75 an hour starting this June and then to $8.25 an hour in June 2015.

Not to be outdone, the Maryland House of Delegates voted on March 7 to raise their state minimum wage to $10.10 an hour over the next three years — a key priority of Governor Martin O'Malley. The bill awaits action in the Maryland Senate.

To cap things off, at the close of the West Virginia legislative session on March 9, lawmakers there approved a bill to raise the minimum wage over two years to $8.75 an hour. The bill is awaiting the signature of Governor Earle Ray Tomblin, who voiced support for an earlier version of the bill that raised the minimum wage over three years rather than two.

The lack of action in the Maryland Senate mean it’s not too late for the Pennsylvania House and Senate to avoid being two of the last three legislative chambers in the region to take no action whatsoever to boost the minimum wage.

Did I mention that a minimum wage increase is popular among Demcrats and Republicans in Pennsylvania?

Education Advocates Make a Case for Philly School Funding

March 17, 2014 - 10:37am

A coalition of education advocates joined forces to call on Philadelphia City Council to provide $195 million in sustainable local funding to the city's school district next year.

At an event last Thursday when Council met, several speakers explained how much students have suffered from budget cuts in recent years and how city leaders must step up once again to provide needed funding for city schools.

“Philadelphia students, teachers, and staff cannot go through another year of upheaval and uncertainty,” said Sharon Ward of the Pennsylvania Budget and Policy Center, one of the advocates to participate Thursday.

Ward also said that advocates should continue to fight for fair funding from the state, a point noted in a WHYY Newsworks report:

The $195 million would get the district close to the $200 million it says it needs merely to return services and staff to this year's dismal levels.

In total, the district is seeking $440 million before next school year. That sum would return many staffers and services that were cut this year and begin to implement aspects of Superintendent William Hite's Action Plan 2.0.

So even if the city can come through on the $195 million the district seeks, where will the remaining $245 million come from?

"We should be joining forces and going to Harrisburg, working together for more state funding for Philadelphia schools," said Sharon Ward, executive director of the Pennsylvania Budget and Policy Center.

Read other media reports from last Thursday's call for adequate funding of Philadelphia schools in:

Makers of the U.S. Unite: The UAW Vote at VW One More Time

March 13, 2014 - 10:31am

There are three central challenges facing U.S. manufacturing today: wages are too low, employers invest too little in their workers, and the sector lacks meaningful credentials or job-matching institutions allowing dislocated workers to find new manufacturing jobs that capitalize on their skills.

As I wrote yesterday on the United Auto Workers' vote at the Chattanooga Volkswagen plant, the union began to develop a nontraditional argument during that campaign for why unions make sense in U.S. manufacturing. The UAW emphasized the cooperative union-management relationship that would result from "works councils," which may only be legal in the United States if there is a union.

Today I want to further develop another nontraditional argument for why unions in U.S. manufacturing would benefit workers, employers, and the the nation as a whole.

Before discussing the union vote at VW further, I want to first focus on those three challenges facing U.S. manufacturing to explain why unions could strengthen the sector more broadly in the future:

1. First, wages. Long gone are the days when manufacturing paid high school-educated workers far above the wages and benefits enjoyed by workers in other parts of the economy. Yes, manufacturing still pays better — but only about 7.4% better controlling for worker education, experience, and other characteristics, according to recent estimates by Keystone Research Center labor economist Mark Price for the Brookings Institution.

As Steven Rattner pointed out in a recent New York Times commentary, manufacturing wages have fallen more than other wages in the current economic recovery. Even in the higher wage U.S. auto industry, according to Rattner, wages are now well below those in Germany. Keeping wages low is not the solution for U.S. manufacturing and, in fact, it is part of the problem.

2. Second, investment in skills. Too many U.S. manufacturing employers invest little in their workers. Apprenticeship programs, common in the 1960s in manufacturing, have almost disappeared. (There are anecdotal reports of some new ones.) Manufacturing now accounts for nearly two out of five jobs in the temporary help industry (p. 4), another symptom of the Walmart-ization of manufacturing work.

3. Third, credentials and job-matching institutions. For all practical purposes, U.S. manufacturing has none. To be sure, the National Association for Manufacturers has pursued a widely publicized effort to promote skills standards. But there's not much evidence yet that employers have embraced these standards or are willing to pay more for people with credentials.

There is, on the other hand, lots of evidence that manufacturing workers with skills-in-demand do not easily find new positions that capitalize on their skills. Even in industrial maintenance and precision machining occupations, for example, unemployment rates were well above the national average during and shortly after the Great Recession. Only about one in five dislocated manufacturing workers in these occupations regains employment in manufacturing in the same occupational cluster by the time of the next displaced worker survey, up to three years later. (For more on this, see Critical Shortages of Precision Machining and Industrial Maintenance Occupations in Pennsylvania's Manufacturing Sector by Keystone Research for the Pennsylvania Department of Labor and Industry.)

Declining wages and benefits ... little investment in skills and reliance on "disposable" workers ... no effective institutions that enable skilled manufacturing workers to find new jobs.

These three structural factors underlie the widespread reports of skills shortages in U.S. manufacturing. These structural factors also threaten the economic performance and innovative capacity of U.S. manufacturing employers going forward.

In light of these factors, unions, rather than being "the problem," could be the solution for U.S. manufacturing. To be seen as the solution, it may help manufacturing unions to borrow more from their union friends in the building trades.

Why building trades unions, you ask? To understand why, let's play Jeopardy briefly.

Ignoring right-wing and liberal elitist stereotypes for a moment, what might the question be if the answer is "building trades union"? How about: "What is a union that lifts regional wages and benefits, promotes employer investment in skills, and supports industrywide credentials and job-matching institutions?" Exactly the features needed by U.S. manufacturers to eliminate skills shortages, support more widespread adoption of good job strategies, and promote innovation.

In sum, I'm suggesting a union model that borrows heavily from building trade traditions might be viable in U.S. manufacturing going forward. Based on this, maybe the feature of the VW campaign that might be emphasized in another union vote is not "works council" — which is very unfamiliar in the United States — but a new apprenticeship program that VW has already implemented.

A UAW-VW partnership might be more effective than the company could be on its own to spread apprenticeship within the United States, first down the VW supply chain and to nearby lower-wage manufacturers struggling to find qualified workers. In addition, a union appeal based on investing in the skills of the next generation of manufacturing workers, and supporting employers in taking the good jobs "high road," might resonate more with workers than the more alien concept of "works councils."

Indeed, there is already an organic U.S. movement — the "maker movement" — that might help glue together, and provide grassroots leaders for, an upsurge of skill-based manufacturing unions.

"Makers" of the U.S. unite: You have nothing to lose but your low wages.

Understanding the Union Vote at VW in Tennessee

March 12, 2014 - 10:44am

As you probably know, the United Auto Workers (UAW) lost a union election at a Chattanooga Volkswagen plant last month by a vote of 712 to 646 (53% to 47%). My heart goes out to the workers and UAW leaders who put heart and soul into achieving a different result.

I was taken aback by the vote, I have to admit. So it has taken me a couple of weeks to process it.

The most obvious explanations for the election outcome start with the political and cultural hostility to unions in Tennessee. VW may have stayed neutral on the election, but the right-wing anti-union political establishment in (and beyond) Tennessee did not. The political interference in the election is the basis of a UAW appeal for a revote.

Beyond these much-discussed variables, a deeper issue raised by the UAW election is what model of unionism could fit the U.S. auto industry and U.S. manufacturing going forward? My contention will be that the UAW was groping towards a new model that would benefit employers and the community as well as workers — and to encourage it to keep going.

The union model with which the UAW has traditionally been associated is "industrial unionism." Industrial unions seek to represent all workers in the industry and take wages and benefits out of competition. U.S. industrial unions also provide shop-floor protections through work rules and a grievance procedure. As a result of U.S. employer opposition and American labor law, however, U.S. industrial unions have always been fragmented. Bargaining took place one company or one plant at a time and then spread to other companies through so-called pattern bargaining. (In other countries, the law supports genuine industrywide bargaining to set wages and benefits in master agreements that apply to all employers.)

In the U.S. auto industry, the pattern contract was always at one of the "Big Three" automakers — GM, Ford, or Chrysler. Once terms were established at the lead company selected each bargaining round, the union would seek to achieve the same terms at the other two of the Big Three and at auto suppliers.

Since the union had to organize and bargain one company (and sometimes one plant) at a time, maintaining industrywide union presence and wage and benefit standards was an exhausting and challenging process for the UAW from the beginning. As early as the late 1950s, individual suppliers sought below-pattern wages and benefits and later to avoid the union in new (more rural and/or southern) plants. Rising vehicle imports and globalization of the supply chain to low-wage Mexico and Asia further dented the union's ability to take wages and benefits out of competition.

In the last two decades, the union has been forced to retreat into the "Big Three" automakers (GM, Ford, and Chrysler), with most suppliers non-union. Even within the domestic assemblers, the growth of non-union foreign transplants (VW, Toyota, Honda, Nissan, etc.) has created a non-union presence. That is why the UAW hoped to win an election at VW and then build on that success at other transplants.

But unlike the 1930s to 1970s, victory at one plant doesn't plausibly maintain the union's industrywide presence. Nor does it fit with the simple New Deal narrative in which union wage increases for all manufacturing workers drove the overall economy. (Unions now represent 11% of private-sector manufacturing workers, or about 15% to 16% of production and non-supervisory workers.)

These broader trends create challenges for the UAW as it seeks to persuade workers that joining the union serves their interest. Since it's not clear that workers at competitors will also rise, the broader trends leave workers more susceptible to arguments that a union at their plant could threaten future investment and job security. These broader trends require the union to make a new argument about how it fits into the auto industry and why this new union model will not only raise wages and benefits but also enhance job security.

In fact, the UAW did begin to make this type of argument, centering on the fact that unionization would permit VW to establish "works councils" and a cooperative workplace relationship that helps ensure competitiveness.

In another blog post, I will develop the idea that U.S. manufacturing is in trouble unless unions grow that encourage U.S. employers to invest more in workers and pursue "good jobs strategies."

Taking a Common Approach to Shale Taxation in OH, PA, WV

March 10, 2014 - 3:17pm

Although their state capitals are separated by hundreds of miles, Pennsylvania, Ohio, and West Virginia are home to Marcellus Shale gas fields that in some cases are separated by only a few miles.

From that vantage point, advocates from the three states said it would make sense for Pennsylvania, Ohio, and West Virginia to take a common approach to taxing shale gas and oil drilling.

West Virginia has a severance tax whose rate is in the middle range of gas-producing states, but Ohio and Pennsylvania have lagged far behind. Ohio has a very low production-based severance tax, while Pennsylvania had no extraction tax until 2012 when it adopted a small statewide drilling impact fee. Legislation has been introduced in both Ohio and Pennsylvania to put more adequate severance taxes in place.

The leaders of the Pennsylvania Budget and Policy Center, Policy Matters Ohio, and the West Virginia Center on Budget & Policy sent a letter to the governors of their three states today, urging them to enact a severance tax with a rate no lower than that of West Virginia. 

A comparable tax rate will allow the three states to invest in a stronger economic future, ensure that their communities are benefiting, and allow them to address the impacts of drilling. As our three groups wrote in the letter, it would also “provide important long-term predictability for the industry,” and “take taxes out of the competitive equation."

The three organizations recommend that West Virginia’s severance tax rate be considered a floor, not a ceiling, for the three states. Doing so will bring the region more in line with gas-producing states in the West and the South, which mostly have higher severance tax rates than West Virginia.

All three states have experienced a rapid increase in shale drilling over the past five years – bringing some new jobs and economic opportunities but also growing costs to address environmental risks, increased demand for emergency services and public safety, a rapid jump in housing costs, and greater road maintenance needs.

Leaders from the three states said there is an opportunity now to take a more coherent approach to tax policy that will benefit the entire region and its residents.

You can read the letter to the Governors and a press release on it. You can also listen to today's media conference call on the topic,

PA Payrolls Essentially Unchanged in January But Jobless Rate Falls to 6.4%

March 7, 2014 - 3:11pm

Today was an unusual first Friday of the month as we got both a national release of job numbers for February and a Pennsylvania jobs release for January.

Both reports were a mixed bag:

  • National payrolls grew a bit faster than expectations, but the unemployment rate climbed to 6.7% in February.
  • Pennsylvania payrolls grew by a disappointing 500 jobs in January, but the unemployment rate declined four-tenths of one percentage point to 6.4%.

Those of you hoping to see how other states fared in January relative to Pennsylvania will have to wait until March 17 when the U.S. Bureau of Labor Statistics releases January jobs data for all 50 states. In the meantime, check out the Keystone Research Center's recent policy brief finding that in 2013 Pennsylvania ranked 48th out of the 50 states in job growth, creating about a quarter of the number of jobs last year as it did in 2010.

As is standard operating procedure, the release of state jobs data for January corresponds with the release of newly revised and updated unemployment and nonfarm payroll data for previous months. These revisions typically don’t change employment and unemployment trends radically. Unfortunately, some technical glitches on the Pennsylvania Department of Labor and Industry's website are preventing a full review of the new benchmarked data, so I will let you know next week if there are any changes of note.

For more on the national jobs report, here are two quick takes from D.C.'s leading labor economists, Dean Baker of the Center on Economic and Policy Research and Heidi Shierholz of the Economic Policy Institute:

The establishment survey showed the economy added 175,000 jobs in February, in spite of the unusually harsh weather on much of the country. With modest upward revisions to the prior two months' data, this brings the 3-month average to 129,000. While this is considerably weaker than the fall months, weather has undoubtedly played a role in slowing job creation. (In contrast to the prior two months, February’s weather was unusually harsh.)

But the main point of the table [see below] is that the unemployment rate is between 1.4 and 1.7 times as high now as it was six years ago for all age, education, occupation, gender, and racial and ethnic groups. Today’s sustained high unemployment relative to 2007, across all major groups, underscores the fact that the jobs crisis stems from a broad-based lack of demand. In particular, unemployment is not high because workers lack adequate education or skills; rather, a lack of demand for goods and services makes it unnecessary for employers to significantly ramp up hiring. [My emphasis]


PA Job Growth Slows Once Again in 2013

March 5, 2014 - 11:57am

By several measures, Pennsylvania’s economic recovery is still limping along. That is the essential finding of a new policy brief from the Keystone Research Center examining Pennsylvania job growth since the recession ended.

Job growth in the state has slowed steadily over each of the past three years with only about a quarter of the number of jobs created in 2013 as in 2010, the first full year of the economic recovery.

in 2013, Pennsylvania ranked 48th out of the 50 states in job growth, compared to seventh in 2010. The state’s unemployment rate, meanwhile, has hovered at or above the national jobless rate since mid-2012.

If job creation is the test for effective policies, Harrisburg needs to re-evaluate its approach.

To be clear, new jobs have been created, and unemployment declined to a five-year low in 2013 — signs of progress. Still, job growth in 2013 was less than a quarter of the 83,600 jobs created in 2010. The number of new jobs created has declined every year since 2010 — coming in at 45,900 in 2011, 34,600 in 2012, and 19,000 in 2013. (See Figure 1.)

Private-sector job growth followed a similar trajectory – coming in at 88,600 in 2010, 71,700 in 2011, 42,900 in 2012, and 28,200 in 2013. (See Figure 2.)

A few years ago, Pennsylvania's economy was riding high above the waves coming out of the recession. Since 2011, however, the economy has been taking on water. Now would be the time for the Legislature and the Governor to re-evaluate policies such as cutting education funding and refusing federal Medicaid expansion dollars that could give Pennsylvania’s state and regional economies a much-needed shot in the arm.