Third and State
As the saying goes, “It’s better to keep your mouth shut and appear stupid than open it and remove all doubt.”
The last time I recall talking to Dennis Roddy was when he was still a member of the Corbett communications team and phoned the Keystone Research Center (KRC) office. At the time KRC was engaging on the opposite side of a debate over public sector pensions with the Corbett administration. Mr. Roddy let on that he knew our eight-person non-profit provides its employees with a 401(k)-style pension plan. When I stopped laughing, it occurred to me that this was an attempt to intimidate us.
Call me old-fashioned but I hang onto the idea that we’re better off when policy and political debates are based more on logic, evidence, and transparency, and less on playing fast and loose with the facts, attempts at intimidation, or personal attacks.
In Mr. Roddy’s latest column on shale jobs – which we recommend you read and then read again – he wants you to believe that the Wolf Administration has politicized the counting of shale jobs and that the Corbett Administration was as pure as the driven snow when it came to letting the numbers people in the Pennsylvania Department of Labor and Industry (PDL&I) just provide “the facts.” Even if you don't know what happened, Roddy’s story has the ring of fantasy about it.
But I do know what happened.
At the end of the Rendell Administration and into the Corbett Administration, there was a great hunger for information on the shale boom. In response to this customer demand, the entrepreneurial civil servants leading the data shop within PDL&I, the Center for Workforce Information and Analysis (CWIA), put together a new report called Marcellus Shale Fast Facts.
This booklet included numbers on employment in oil and gas extraction and pipeline construction, six detailed industries that CWIA labelled the “Marcellus Core.” Everyone – CWIA under Rendell, Corbett and Wolf, KRC, academic experts, even Dennis Roddy, accepts employment in these six “core” industries as a good estimate of direct jobs in shale extraction itself plus in pipeline construction.
To estimate Marcellus Core employment requires two steps. First, add up total jobs in the six industries; second, subtract jobs in those industries as of 2005 or 2006 before fracking began in earnest, since those jobs were in conventional gas extraction. (Since separate industry categories do not exist for conventional and unconventional gas extraction, everyone has to assume that all employment change in these six codes since about 2005 is due to fracking not conventional oil and gas extraction.)
As well as “Marcellus Core” employment, however, Marcellus Shale Fast Facts also included lots of other numbers – in fact, pretty much the kitchen sink of numbers related to shale. While heavy on numbers, the booklet was light on interpretation, leaving reporters, industry and others to try to make sense of the numbers largely on their own.
The first episode in misinterpreting Marcellus Shale Fast Facts numbers, ignoring the difference between “new hires” and “new jobs,” is what drew KRC into the shale jobs debate. We published this June 2011 brief correcting the error -- which earned us this personal attack from the Marcellus Shale Coalition and another one from the state Republican Party, both of which we responded to here. Who knew that correcting the factual record was a contact sport? (For more on this particular episode, read this op ed, which is a companion piece to this blog.)
The more significant misinterpretation of Marcellus Shale Fast Facts, which Roddy goes to tortured lengths to defend, is an estimate of employment in Marcellus shale “ancillary industries.” As defined by CWIA, the 29 Marcellus Shale ancillary industries are all industries in which shale extraction creates some supply chain jobs – industries such “engineering services,” “trucking,” and “highway, street and bridge construction.” While shale does create some jobs in these and other ancillary industries, most jobs in these industries have nothing to with shale – e.g., UPS drivers are part of trucking but not part of the shale jobs footprint.
Piling absurdity on top of absurdity, to get numbers over 200,000 you also have to count all jobs in these industries, not just the increase since fracking began around 2005. So apparently fracking created about 170,000 ancillary and core jobs even before unconventional drilling began.
Using this method to estimate shale’s jobs footprint isn’t an exaggeration it’s just making stuff up. Yet as recently as January 22, this employment number was used to support a Marcellus Shale Coalition claim that the shale industry supported 243,000 jobs in 2014.
In stopping the routine reporting of jobs in Marcellus Shale ancillary industries, the Wolf Administration has simply stopped publishing numbers that don’t mean anything and have proved susceptible to misinterpretation. This positive, common-sense step also means that CWIA will no longer unwittingly echo invented and exaggerated shale jobs claims.
Dennis “Through the Looking Glass” Roddy, sees the story differently.
First, he misrepresents Marcellus Shale Fast Facts as a “scientific” document produced by “statistical wizards." He then goes into a long “how I learned the secrets of the temple” explanation of the standard economists’ method of estimating total jobs impact.
While it may be mysterious to Dennis, it is well known among economists that the total jobs impact includes three components: direct jobs, supply chain or “indirect” jobs, and the “induced” jobs created in consumer industries when workers, owners, and royalty recipients in the shale industry and its suppliers spend their additional income. Roddy ends his discussion of this standard economic method with the sentence “that was the context of those numbers” and then quotes Patrick Henderson, Corbett’s energy executive at the time and now with the Marcellus Shale Coalition, "We have about 240,000 Pennsylvanians working in industries that are supported directly, or made more secure, by the growth of oil and gas activity in Pennsylvania." Roddy seems to be trying to suggest that the 240,000 figure comes out of using the economists’ standard methodology for measuring total jobs impact. But that is not true.
In addition, Roddy doesn’t appear to realize – or at least acknowledge – that the Wolf Administration has actually just done what his opinion piece suggests should be done. The new Wolf methodology DOES explicitly estimate indirect and induced jobs and then add those to direct shale jobs to get the total jobs footprint. The current estimate for direct jobs is 22,058 jobs (down a bit from a year earlier), with an additional 15,706 jobs at suppliers and 19,912 “induced” or consumption-based jobs. That’s a total of 57,676 jobs. In sum, the Wolf Administration is not underestimating the total jobs impact of shale. It has just set aside a ridiculous approach that led to estimates more than four times a legitimate estimate.
Even if Dennis Roddy is living in his own fantasy world, other sources have recognized that the change in methods makes sense. For example, the Times-Tribune calls the new approach a “more honest reporting method.” Several economists have also noted that the new figures create a “much more accurate” employment picture of the shale industry.
At the end of the day, going “inside (the mind of) Dennis Roddy” doesn’t matter. What does matter is the combination of factual distortion and attempts at intimidation that are aimed at blocking lawmakers from enacting state natural gas policies that benefit Pennsylvanians rather than simply cater to the industry. We are still a good ways from achieving the right outcome on that front.
Special blizzard edition ... yeah we’re snowed in, but we know you’re just watching your email for our weekly news so here it is, delivered despite the weather.
Shoveling through a blizzard of extremism and misinformation … At KRC and PBPC we’re committed to providing you the facts and information that we all need to sort out which competing public policy proposals will fairly and adequately fund our schools, create good-paying jobs, and put our economy on a sustainable, solid footing. So, we speak up when we spot misinformation and policy positions based on extreme ideologies rather than facts. So we needed to respond to some egregious examples that recently appeared in the media.
In this letter to the editor KRC’s Steve Herzenberg called out Senator Wagner for repeating the flat-out wrong assertion that the budget that passed is balanced and responsible and for stirring up resentment towards the people of Philadelphia.
PBPC’s Marc Stier took to the opinion pages to object to Rep. Seth Grove’s personal attack on Governor Wolf.
And KRC’s Mark Price, who by the way has a Ph.D. in economics, took on the voluble Senator Wagner’s prediction that an economic recession is on the way in our Third and State blog.
We deeply appreciate this special recognition of our work ... KRC was honored to receive a Martin Luther King Social Responsibility Award from the Interdenominational Ministers Conference (IMC) of Greater Harrisburg for its “state-of-the-art research on economic issues facing Pennsylvania residents.” Dr. Steve Herzenberg accepted the award on behalf of KRC.
New Hampshire clearly needs us ... Steve Herzenberg journeyed north – bad call – to New Hampshire to testify before the Labor Committee of the state legislature aboutKRC’s new study on the impact of a proposed state law requiring that workers on state-funded construction projects be paid “prevailing” wage and benefit levels specific to each county and craft. As reported in the New Hampshire business press, KRC found that a prevailing wage law would help in-state contractors recapture market share from low-wage out-of-state contractors, creating several thousand more New Hampshire jobs. Pennsylvania is one of the half of states that already has an effective state prevailing wage law setting a floor on wages and benefits that benefits responsible Pennsylvania contractors.Don't wait til it's too late ... two weeks ago we began accepting registrations for our annual Budget Summit which is taking place on Thursday, March 3rd, at the Harrisburg Hilton, and we're nearly halfway to reaching our maximum capacity for this free event. Reserve your place now.
It's snowing in January, but June will come and bring us ... The 20th Anniversary Keystone Research Conference on June 8-9 at the Crowne Plaza in Harrisburg. We’re lining up great sessions and exciting speakers. Watch your email and social media for more details.
If you were getting bored by the never ending budget process, a flurry of colorful metaphors by “Fightin” Sen. Scott Wagner of York County added a more circus like element to the standoff. I just wanted to highlight an interesting argument in the Senator’s letter to Capitolwire about the current state of the economy. According to the Senator:
“I have been a private sector business owner for over 35 years and I can smell that a recession is beginning to develop”
Interesting, I always assumed that a dulled sense of smell was a key ingredient to a successful career in waste management, but then again I also never thought to smell a recession.
Predicting recessions or unending prosperity is a perilous business mostly because the predictions almost always turn out to be wrong. So mark your calendar - the Senator says a recession is developing. Let’s come back in six months and see how that turns out.
Now what might be bothering the Senator?
One of the few people to see the housing bubble, Dean Baker explains:
“For those who closely follow financial markets the first two weeks of 2016 have been the most fun since the financial crisis triggered by the collapse of the housing bubble. The market has lost more than 10 percent of its value since its late December peak, destroying more than $2 trillion of stock wealth…The fundamentals are not strong, but the economy is also not about to fall into another recession. The basic story is the one we were seeing before all the fun on Wall Street, we are looking at an economy that is growing slowly and still has not come close to recovering from the last recession. The rollercoaster ride on Wall Street has little effect on this picture.”
The Pennsylvania economy, like the national economy, is growing slowly. Job growth through November of 2015 is slower than in 2014 thanks to a bad year for durable goods. Specifically mining, construction and manufacturing all shed jobs through November. Is this a recession? Unlikely, but like I said, we will come back in six months and know much better. So stay tuned.
Now the Senator's prediction does provide a new interpretation of the state budget policies he favors -- more spending cuts which would drag Pennsylvania back to the bottom of the job growth rankings. So even if Wagner's prediction of recession turns out wrong for the nation, another state budget with deep cuts in spending like Gov. Tom Corbett’s first budget would most certainly deal a body blow to the Pennsylvania economy.
Goodbye and good riddance 2015… A bruising and historic budget fight ended in an unsatisfactory stalemate with the governor’s signing and blue-lining of an inadequate budget passed by the General Assembly after the House and Senate walked away from a negotiated compromise. Education funding remains far from resolved, but school districts did receive enough funding to keep the doors open in the new year. The temporary funding for schools will last until March when some school districts will again run out of money. The temporary budget does restore a portion of the human services funding that was cut under Governor Corbett. You can see comparisons between the compromise budget that the General Assembly walked away from and the budget that the members passed.
You made all the difference… The progress that was made – getting a budget with more money for education to overwhelmingly pass in the Senate, and come within a whisker of final passage in the House – would not have been possible without your help and participation in broad ad hoc budget coalition that our outreach and engagement director, Jeff Garis, so ably led. This coalition is 80 organizations strong - labor unions, environmental and education advocates and about 30 social service providers. Their staffs, members and clients wrote about 20 op-eds, 40-50 letters to the editor, mobilized hundreds of people to participate in rallies and press conferences, made thousands of phone calls and visits to legislators and sent them countless emails. We are not done yet, but last year’s extraordinary work has set the stage for all that we will do this year.
What our crystal ball shows for 2016… We still don't have a final budget. Even though there was some increase in human service funding, we still hope for a full budget that will restore $94 million in funding for human services this year. But many analysts believe that campaign politics will prevent a budget resolution any time soon.
Is it finally time for a severance tax and an increase in our paltry minimum wage?…While the gas drillers once again toasted their success at preventing the General Assembly from enacting a severance tax, Governor Wolf remained determined to try to secure it in 2016. And will Pennsylvania join the 14 counties, cities and states that passed a $15 minimum wage in 2016 that helped more than one million low-wage workers and their families. The severance tax and raising the minimum wage are at the top of the governor’s to-do list this year.
Our big plans for 2016…Start with our annual Budget Summit which will be held on March 3rd at the Harrisburg Hilton. This free event will feature an in-depth look at the Governor's 2016-17 budget proposal, including what it means for education, health and human services, and local communities. The Summit will focus on the leading issues facing the commonwealth in 2016, with workshops, lunch, and a legislative panel discussion. Reserve your place here.
And then mark your calendars for a major event – The 20th Anniversary Keystone Research Conference which will be held June 8-9 at the Crowne Plaza in Harrisburg. We’re lining up great sessions and exciting speakers. Watch your email and social media for more details.
On New Year’s Eve, Miss Smith walked out through the automatic sliding doors of the grocery store where she worked as a cashier and pulled her scarf to her nose as the December wind hit her face. Glad to be done with the last shift of 2015, she walked briskly toward her parents’ house where she had lived for the last three years.
Before she lost her job as an art teacher for the local school, she had her own apartment. But her salary at the grocery store was not enough to allow her to afford her own place after she made her student loan and car payments.
As she made her way down the dark street, she noticed a golden glow emanating from a beautiful bay window. “Unconventional Drillers Club - Private” was inscribed on a plaque on the door. She slowed and looked in to a festive scene – a steady-flame gas fireplace against the opposite wall, a table spread with cheese, oysters, caviar, a chocolate fountain and more, men dressed in Armani suits and ostrich skin cowboy boots.
A butler dressed in a starched white shirt, black bow-tie was serving flutes of Dom Perignon to the well-heeled partygoers. Wait a minute, she recognized him – it was the Speaker of the Pennsylvania House of Representatives!
One guest, wearing a cap with the logo of the energy company EQT and wanting some entertainment, handed the speaker some sheet music and asked him to sing. He obliged and did a respectable twist on the 12 Days of Christmas that included 10 reps a leaping, 9 senators dancing, 7 years not taxing, 5 golden PACS, and a speaker in your giving tree.
As he finished, the guests heartily applauded and raised their flutes in a toast to another year without having to pay a severance tax in Pennsylvania. Then they solemnly made a circle and stacked their right hands into the center and vowed to continue to fight a severance tax in 2016, no matter the cost.
Miss Smith turned from the window. She hoped for a better 2016 – one in which more funding for the local school would allow her to return to the work she loved – teaching art. And she also made a vow – to work with others to make sure the New Year would not be another year without the severance tax that makes sense to everybody who wasn’t invited to the drillers’ New Year.
It turns out we're not the only ones waiting for a responsible Pennsylvania state budget that actually raises the revenue the state needs to pay its debts -- and also to adequately fund education, infrastructure and human services.
The rating agency, Standard and Poor's (S&P), is also waiting for a fiscally responsible budget.
Rating agencies are responsible for evaluating whether entities that want to borrow (e.g., corporations or government entities) are "credit worthy" -- will they be able to pay back their debt? When examining states, rating agencies look at whether projected state tax revenues are in line with projected state expenditures. If they are, states can be expected to make good on their payments and buying state debt is a good risk for investors. If the state’s fiscal house is in order, states get a good bond rating.
In recent years, however, Pennsylvania's bond rating has been downgraded repeatedly because the state has had a series of fiscally irresponsible budgets. State lawmakers and Gov. Corbett used one-time revenue sources and other accounting gimmicks (e.g., shifting payments into the next fiscal year, raiding every possible trust fund) to limp through the last several state fiscal years. Such fiscal irresponsibility leaves Pennsylvania today with a growing gap between projected revenues and expenditures -- what public finance economists call a "structural deficit." It also makes rating agencies nervous about the state's ability to pay its bills.
How does S&P feel about the state budget sent to Gov. Wolf in December, which he blue-lined (i.e., vetoed parts of) yesterday in part because it was fiscally irresponsible? Nervous.
Here are S&P's own words.
"Despite six months of deliberations, Pennsylvania's budget deliberations continue, leaving it uncertain whether legislators will act to close the state's budget gap or address its long-term pension liabilities."
"The $30.3 billion budget passed by both the house and senate is, in our view, structurally unbalanced...As proposed, the budget had a $500 million budget gap for fiscal 2016 and left a $2 billion budget gap for fiscal 2017."
"As the state's longest running budget impasse persists, the question of lawmakers' political willingness to address fiscal challenges remains."
"While we have not changed our rating based on the state's political gridlock, continued structural imbalance or lack of progress in funding its pensions could result in a rating action."
Translation: if the legislature doesn't finish a budget that brings in enough revenue to cover expenses, Pennsylvania's debt will be downgraded further.
Standard & Poor's was generous to give the state an "incomplete" on its unfinished budget. At the start of the New Year, legislative leaders need to get back on track to finally pass the bipartisan budget framework that has already passed the Senate overwhelmingly (43-7) and gained a majority of members’ support on a preliminary vote in the House -- and to couple that with a revenue bill. It's past time to reassure bond rating agencies that the faith and credit of the commonwealth of Pennsylvania is good -- and to reassure Pennsylvanians that lawmakers still believe in educational opportunity.
Actuarial studies released yesterday confirmed what Keystone Research Center said a month ago about the Pennsylvania hybrid pension plan that passed the Senate and is now being considered in the Pennsylvania House. The hybrid pension plan won’t save any money. It will actually increase taxpayer costs if courts rule unconstitutional savings from cutting current members’ benefits. But the plan will cut benefits deeply.
Pennsylvania taxpayers as well as teachers, nurses and other public servants are better off staying with the current pension plan as modified by the Act 120 of 2010, which already cut benefits over 20 percent and established a schedule for ramping up employer contributions to the required level.
Here are the key findings of the actuarial studies about the hybrid plan:
- The hybrid plan increases the cost of benefits for new employees by nearly $5 billion on a cash flow basis and over $1 billion on a “present value” basis (dollars in hand today). The savings from cutting future workers’ guaranteed pension in half are more than offset by the costs of employer contributions to those workers individual savings accounts. (The costs and savings from the hybrid pension are summarized in Exhibit I of the report by Public Employee Retirement Commission (PERC) actuary, Milliman, in the "PERC Note" released yesterday.)
- The pension savings under the hybrid plan come from cutting the benefits of current workers. (Benefits are cut by lowering the final salary of state employees for purposes of pension calculations and by making less generous the terms under which retirees can "cash out" their own contributions to their retirement.) If the courts reject these savings, you are left only with the increases in pension costs for new employees: that is, the hybrid plan increases pension costs.
- The hybrid pension would cut benefits by an estimated 27 percent to 29 percent according to the PSERS actuary, Xerox (see Table 3 of Xerox report to PSERS). These benefit cuts result from the fact that the additional taxpayer contributions made to the retirement of new employees don’t deliver much in terms of retirement benefits. That’s because they go into inefficient 401(k)-type defined contribution savings accounts with higher costs and lower investment returns than traditional pooled pensions. More money for Wall Street financial firms; less money in Main Street pension checks.
The hybrid pension is still being sold on the grounds that it reduces “taxpayer risk” of unfunded pension liabilities. But many other public pensions have found good ways to mitigate taxpayer risk while retaining the advantages for taxpayers as well as retirees of efficient defined benefit pensions.
By deeply cutting benefits, including for college-educated teachers and state employees who make far less in average salary than comparable private workers, the hybrid pension will make future salary increases necessary to attract and retain good employees. This plus the fact that the plan puts more than half of pension contributions for new employees into inefficient retirement savings plans meant that the hybrid pension plan virtually guarantees higher taxpayer costs down the road.
While we are saying "we told you so" about the impact of the hybrid pension plan on pension costs and retirement benefits, our hope is that we won’t have to say “I told you so” again five or 10 years from now. That can be avoided by the Pennsylvania legislature decided that maybe the Hippocratic oath makes sense with respect to public sector retirement plans as well as medical care: first, do no harm – let the hybrid pension die.
Five and a half weeks ago, Governor Wolf and the Democratic and Republican leaders of the Pennsylvania House and Senate announced a bi-partisan “budget framework” designed to end the long impasse over the budget. The framework agreement, like most compromises between parties that are far apart, pleased no one. But it provided enough to satisfy everyone.
Or so we thought. In the last two weeks, the House Republicans have backed away from the bi-partisan agreement. In the last two days, Speaker Turzai has been demanding that someone else — the Governor or the House Democrats—come up with the votes to enact the tax revenues that are a necessary part of the budget framework. As I write, efforts are continuing to find those votes, most of which in the House are going to come from Democrats.
Speaker Turzai, it appears, won’t lead in support of the budget framework, won’t follow it, and, won’t get out of the way. This is no way to run a government. Or as Capitolwire’s Chris Comisac observed, we need “more grown-ups in the state Capitol.”
Despite our own misgivings about the framework agreement, we have been urging our supporters and coalition members to call Representatives and Senators to support it and be prepared to vote for the new revenues it requires.
But since the Speaker and the House Republicans have walked away from the framework, there is also one last opportunity to improve it: All (or most) of the new revenues should come from the personal income tax (PIT) not the sales tax. As we have pointed out, the PIT is a much more equitable way of raising revenue. And, because the PIT in Pennsylvania is only a flat tax it is a way raise revenues that conservatives can embrace as well.
PA lawmakers: While you’re scouring for revenue, look here, under this rock – it’s a minimum wage increase!
To get Pennsylvania’s budget over the finish line, Pennsylvania lawmakers are now turning over every stone to find sources of revenue that are acceptable to all four of the legislative caucuses and the Wolf Administration.
We think the lowest-hanging fruit should be…a minimum wage increase to $10.10 per hour phased in starting January 1, 2016. Once this increase is fully phased in, we estimate conservatively that it would provide $300 million more to the state budget. If 10 percent of that benefit is realized within the first six months of 2016, that’s still $30 million – with the chance by moving quickly to get close to the full $300 million by the 2016-17 budget.
Why is a minimum-wage increase low-hanging fruit in budget end-game negotiations about revenue sources? Because poll after poll shows that a higher minimum wage is supported by an overwhelming majority of Pennsylvanians including a majority of Republicans. For example, a March Franklin & Marshall poll (p. 16) found that two-thirds of Pennsylvania registered voters support increasing the minimum wage to $10.10 per hour. A January 2015 poll found that a majority of Republicans support raising the minimum to $12.50 per hour by 2020 (this would be roughly 15% more in inflation-adjusted terms than $10.10 in July 2016).
So now the harder question: why would a $10.10 per hour minimum wage provide roughly $300 million in state revenue plus cost savings? Most important, increasing the minimum wage pushes more families from the range in which the state pays nearly half the cost of Medicaid (48% in 2015) into the the range in which -- under the Medicaid expansion program -- the federal government pays most or all of the cost. More specifically, a minimum wage increase to $10.10 per hour would shift an estimated $231.5 million in Medicaid payments from the state to the federal government – that shift represents savings for the Pennsylvania General Fund budget. (This $231.5 million estimate comes from an October 2014 report by the Center for American Progress and Institute for Research on Labor and the Economy at U.C.-Berkeley. Today, $231.5 million is still a reasonable -- and likely conservative -- estimate.)
The state would also benefit financially from a $10.10 minimum wage increase because the resulting increase in wages and incomes would generate an estimated $65 million more in state income and sales tax revenue. (This estimate is based on Economic Policy Institute figures that show how the $1.9 billion in total wage increases from a $10.10 minimum wage would be spread across the family income distribution and on Institute for Taxation and Economic Policy estimates of the state income and sales tax rate on each part of the family income distribution.) Adding $65 million in additional state tax revenue to the $231.5 million in state Medicaid cost savings gets you about $300 million total.
You only get about 10% of this $300 million in the first six months. First, the year is half over (so now we're down to 50%), Second, minimum-wage bills in the Pennsylvania legislature would increase the state minimum wage to $10.10 in two steps. If the first step increase, to $8.70 per hour, happens January 1, 2016 that only increases wages and incomes by about a fifth as much as the increase to $10.10 (as indicated by Table 2 here). If a fifth as big a wage and family income increase translates into a fifth of the state Medicaid savings and a fifth of the increase in state tax revenues, then the first half of 2016 revenue gain from first-step minimum wage increase to $8.70 adds 10% of the $300 million generated over a full year by the full increase to $10.10 (i.e., a fifth of 50% is 10%)
While $30 million may not sound like a lot, $300 million does sound like a lot. If we want to enjoy the full state revenue benefits of a minimum wage increase to $10.10 per hour in the state's next budget year, we need to implement the first step of that increase January 1, 2016 and then the second step July 1, 2016.
Rumors of a sudden interest on the part of Republicans in raising the personal Income tax (PIT) instead of the sales tax to meet the revenue requirements of the budget framework have floated across 3rd Street to our offices at the Pennsylvania Budget and Policy Center. So I’m going to do something unusual for us—and frankly a bit uncomfortable—and give some conservative arguments for preferring the PIT over the sales tax.
First, a PIT increase is for three reasons likely to place a smaller burden on businesses than a sale tax increase. For those goods and services on which the sales tax is imposed, the tax is paid on every purchase. It thus dissuades some people from making purchases. It especially dissuades those who live near a border with a state that has a lower sales tax from buying goods in Pennsylvania. The PIT in Pennsylvania also has less impact on overall consumption because it has little (and sometimes no) impact on those with low incomes, who spend all their income, but a bit more impact on those with high incomes, who save a portion of their income.
Second, the PIT can raise a great deal of money with only a small increase in the tax rate. Conservatives always tell us that the higher the tax rate, the more taxes distort and reduce economic activity. A 0.1% increase in the PIT raises roughly $400 million.
Third, the Pennsylvania PIT is flat. It takes the same percentage of income from poor and rich. Flat taxes have long been a favorite of many conservatives.
Fourth, the PIT may be more acceptable to much of the public. People are reminded of the sales tax with every purchase they make. The PIT takes a small amount from paychecks every week or two, and after the first paycheck, a small increase is barely noticeable. (Contemporary right wingers, who thrive on generating antipathy to government may think this is a bug not a feature. But traditional conservatives, who value comity over contention, would surely agree.)
As progressives, we at PBPC aren’t entirely comfortable with some of these arguments, although there are good progressive reasons to be concerned about public support for taxation and the impact of taxes on businesses. For example, we don’t agree that either tax would have a negative impact on economic activity—quite the opposite if it is used restore state funding on education, human services and other needs. We would also love to figure out a way to make the Pennsylvania PIT fairer moving from a flat tax to one with a higher tax rate on those with more income.
But these four arguments are typically made by conservatives and if you accept them, then the Pennsylvania Personal Income Tax is the best—or perhaps it should be “least bad” way—to raise the revenue we need on the table today.
And we do need the revenue because, don’t forget, balancing budgets without gimmicks is also a conservative principle!
The Patriot-News yesterday highlighted a new report by the Pew Trust which finds that the middle class is shrinking. That’s interesting, especially given that, another part of Pew has been advocating for several years with former Enron billionaire John Arnold for policies that would further undermine the middle class. (Check on this link for one perspective on Arnold and Pew.)
Here’s what I mean: in widely publicized and influential work on public sector pensions Pew has been whittling away at middle-class retirement security where it still exists – in the public sector in the form of guaranteed defined benefit (DB) pensions. It has done this by promoting a shift to 401(k)s and other defined contribution (DC) savings accounts (here is a Pennsylvania perspective on Pew and Arnold).
Across the country, the shift Pew advocates away from DB pensions to individual DC accounts has increased the inequality of retirement income dramatically. Retirement benefits in traditional DB plans are distributed equally (as illustrated in this figure). The overwhelming majority of benefits from DB pensions goes to people with pensions of $15,000 to $75,000. By contrast over two thirds of savings in defined contribution accounts are in the accounts of the top income fifth (as shown on p. 28 of the Retirement Inequality Chartbook). In other words, the inequality of retirement savings in 401(k)-type plans mirrors the overall inequality of income documented for every state by our labor economist Mark Price. The equity of retirement savings in DB accounts is a throwback to the glory days of America’s middle class, in the 1960s and 1970s.
In Pennsylvania, Pew was the main champion for the hybrid pension (part DB, part DC) that may be adopted in conjunction with the state’s overdue budget. Pew highlighted the federal employee retirement system as a model hybrid. This helped win over a bipartisan group of Senators – including reluctant Democrats – to live with a hybrid pension for future teachers, nurses, and other public servants. As the Pennsylvania pension discussion has moved forward, Pew has been quoted by reporters – who rarely point out Pew's connection to the Arnold Foundation – calling Pennsylvania’s hybrid “a national model for reform.”
Pew has failed to enlighten Pennsylvania's press (or legislators) that the Pennsylvania Senate’s hybrid pension is dramatically inferior to the one for federal employees -- which makes it, well, less of a model. The chart below shows that the guaranteed pension that is part of Pennsylvania’s hybrid pension would only provide a benefit 54% of the federal hybrid by the end of a long retirement.
The federal hybrid is also superior to the inadequate Pennsylvania hybrid in other ways, as we pointed out earlier this week. (For example, the federal hybrid plan provides as much as twice the employer contribution to DC retirement savings (5% vs. 2.5%).)
So here’s our plea to the part of Pew that put out the report on America’s shrinking middle class – let’s call it the left hand. Could you talk to your colleagues partnering with John Arnold and let them know that, the last thing America’s middle class needs right now, as a highly credible liberal think tank piling on the already powerful forces weakening middle class retirement security in America?
The Pennsylvania Senate today passed the Fiscal Code, a must-pass piece of legislation that is part of the budget process. It contains provisions that would subvert Pennsylvania’s climate plan and gas drilling regulations and raid $12 million from the Alternative Energy Investment Act to create a new “Natural Gas Infrastructure Development Fund” providing more taxpayer help to an industry that still doesn’t pay a severance tax in Pennsylvania.
Environmental and conservation organizations are furious. In a joint press release issued earlier today, Larry Schweiger, PennFuture’s CEO said, “With a new sense of urgency for passing a budget to fulfill the basic functions of government to its citizens who have been held hostage for over five months, lawmakers are shoving this Fiscal Code through so they can run off to New York and attend the Pennsylvania Society dinner and related fundraisers with funders who are likely to benefit from this bad deal — big oil and gas companies.”
Both the climate plan, which will require power plants to cut their emissions of carbon dioxide, and the new gas drilling regulations have undergone extensive public scrutiny with more public involvement coming for the climate plan. Having failed to stop them through the proper public processes, legislative leaders resorted to the tried and true secret backroom deal.
Since the Fiscal Code is supposed to deal with appropriations and not environmental standards, the deal may also be illegal. Joanne Kilgour of the Pennsylvania Sierra Club said, "Using the Fiscal Code in this way lacks transparency, violates the public's trust, and runs counter the Pennsylvania Constitution."
Pennsylvania taxpayers and anyone who cares about good government should also be furious. The House should strip out these provisions and send it back to the Senate.
Pennsylvania should enact a severance tax on natural gas production. The need to enact a severance tax will not change regardless of the outcome of current, protracted budget debate between the Republican-controlled General Assembly and the Wolf administration.
Pennsylvania remains the only major gas-producing state without a severance tax. A severance tax is a common and appropriate way to ensure that gas drillers compensate taxpayers for the depletion of one of the Commonwealth’s valuable natural resources, pay for the damage drilling does to local infrastructure and higher costs for the increased demand for local government services, and contribute their fair share to improving the quality of life for all Pennsylvanians.
The current impact fee is inadequate, and this year, it will bring in less revenue than it has since 2012. The Independent Fiscal Office projected (IFO) that, despite soaring natural gas production, the impact fee will generate only $189.6 million this year, compared to $223.5 million last year. And because of generous federal and state tax breaks, gas drillers paid less in state corporate taxes than they did at the beginning of the shale boom in 2008.
Governor Wolf originally proposed enacting a 5 percent severance tax on the price of gas at the wellhead plus $0.047 per thousand cubic feet (Mcf) of production. His original proposal would have replaced the impact fee with the severance tax, but would have guaranteed that local governments would continue to receive impact fee revenue set at its highest level. The IFO estimated that a severance tax at Wolf’s original proposed level would yield just shy of a billion dollars based on a full year of production. Those revenue estimates assumed a minimum price of $2.97 per Mcf. Natural gas prices so far (through October) will average 2.83 per Mcf. So current prices even at historic lows are only slightly below the minimum price that was assumed in the IFO estimates.
The governor subsequently offered a compromise proposal that lowered the tax rate to 3.5 percent, retained the $0.047 production tax and retained the impact fee as is. In October the Democratic House Appropriations Committee calculated that Wolf’s compromise proposal would raise $389 million in 2016-17. That amount by itself well over one-and-half times current IFO projections for the impact fee.
The impact fee appropriately returns substantial revenue to the communities that bear the burdens of gas drilling, but the impacts of drilling are felt statewide in increased pollution and health costs and additional duties imposed on state agencies. Pennsylvania needs both – a severance tax that raises revenue that can be used to benefit all citizens and an impact fee to directly assist gas patch communities.
Bet that title got your attention!
This is of course a policy blog so wealth stripping refers to financial services offered to working families which, thanks to high fees and extended use, leave families poorer for having used them. The classic example is the neon lite storefront of a payday lender usually with a catchy title like Ca$h Now or Quick Ca$h (for our hip readers to the best of our knowledge there is no relationship between payday lenders and the artist formerly known as ke$ha)!
These firms offer small dollar loans to consumers with a cash flow problem but they carry high fees and more often than not working families end up taking out multiple loans. With each additional loan the lenders business model becomes more profitable while families sink themselves further and further into debt. We don’t have payday lending storefronts all over Pennsylvania because the Commonwealth has strong consumer protections which limit the fees that payday lenders can charge.
For years now the financial companies that operate these stores in other states have been lobbying to weaken consumer protections in Pennsylvania so they can operate profitably in the Commonwealth. Pennsylvania state Senator John Yudichak (D-Luzerne/Carbon) is circulating draft legislation to bring the payday lenders’ fee-laden, high-cost installment loans into our state.
Unlike a traditional payday loan which is paid back in 14 days an installment loan is as the name implies paid back in installments over a longer period of time. But that doesn’t make them any safer. What Senator Yudichak is proposing has no maximum cap on fees. Based on what payday lenders charge in other states, we know the fees could push the annual interest rate on these loans to 200-300%. The financial disclosure listed below is for an installment loan offered in California by the payday lender Check ‘n Go (read more about Check ‘n Go), the leader of continuing efforts to bring predatory lending to Pennsylvania. Note the high annual percentage rate over 200% and finance charges that exceed the amount borrowed. Looking at the terms below you have to ask yourself in what financial universe other than the fictional world of the Sopranos is it good for working families to pay fees of $4,654 for the privledge of borrowing 3,000 for a year?
The reason for the our alarm is the General Assembly is in the middle of budget negotiations the perfect time for industry lobbyists to attempt to sneak through this kind of change. Veteran budget watchers (a hardy group given this year’s never ending saga) will remember the payday lending lobbyists nearly derailed a budget agreement in July 2013 when the House inserted language favored by the payday lenders into the fiscal code in the hopes nobody would notice. An additional concern this year, the Majority Leader of the Senate Jake Corman (R-Centre) was the leader of a failed attempt in 2014 to advance legislation favorable to the interests of the payday lenders.
As ever we will keep you posted about further developments regarding this worrying proposal. The Pennsylvania legislature should be working to boost earnings for working families by raising the minimum wage rather than opening the door to financial products that promise to trap people in debt with high fees.
Majority Leader of the Senate Jake Corman suggested Monday that his caucus walked away from a deal to increase the sales tax to pay for property tax relief because Gov. Wolf and Democratic legislators were insisting on allocating the money in a way that was (1) unfair to Republican districts and (2) too generous to Philadelphia ("I could never have gone to my caucus and said: 'Vote for this increase in sales tax and a disproportionate share of the money will go to Philadelphia.' I couldn't have done it, and we could not have gotten the votes.")
While this sentiment fits with a familar Pennsylvania political narrative, it doesn't fit with what we know about how Gov. Wolf wanted to allocate property tax relief -- based on his original property tax relief proposal.
(1) As we documented in July, the original Wolf proposal was fair to Republican school districts, in most cases fairer than the May House Republican plan for property tax relief. In fact, homeowners in all but a small handful of the very richest school districts would have received a larger share of property tax relief under the Wolf proposal than the House Republican proposal. In more than half of rural Republican districts, typical homeowners would have received more dollars of relief under the Wolf proposal than the House proposal, even though the former gave out less total property tax relief.
(2) The original Wolf proposal gave out very little money in property tax relief to Philadelphia homeowners ($357), less, in fact, than the House Republican proposal ($474). To be sure, the Wolf proposal would also have given out $450 million in wage and cigarette tax relief to Philadelphia -- 12 percent of the total $3.8 billion in tax relief for a city with 12 percent of the state's population. Keep in mind, further, that suburban commuters would have received a portion of the wage relief for the city. Is this a disproportionate share of relief for Philadelphia? We don't think so.
Even this far along into this year's property tax debate, most Pennsylvanians and many lawmakers of both parties -- possibly including Sen. Corman -- still may not have processed how much tax relief middle-class and rural districts would receive under the allocation approach favored by Gov. Wolf, or how much relief would go to rich districts and businesses in the House proposal (the only public proposal put forward by Republicans). Allocating as much property tax relief as the House Republican proposal did to a small number of wealthy areas in which constitutents are neither clamoring for nor need property tax relief doesn't make sense on policy or political grounds -- for either major political party.
Better understanding of alternative property tax relief formulas might yet make possible a bipartisan compromise that benefits communities of modest means throughout the commonwealth.
Unintended Consequences? Property Tax Elimination Increases Taxes on the Middle Class to Reduce Taxes for high income families
The budget end game has focused a lot on property tax cuts. The budget framework agreement includes property tax relief, the allocation of which has not yet been worked out. And now the Pennsylvania Senate will consider SB 76, a bill to eliminate school property taxes early next week. Property tax elimination would be paid for by raising the sales tax rate to 7 percent and expanding it to cover more services, and by raising the personal income tax rate to 4.34 percent.
This blog will compare property tax elimination with two more targeted approaches that would reduce, but not eliminate, property taxes: the Republican proposal that passed the Pennsylvania House in May (HB 504) and Gov. Wolf’s original proposal.
The bottom line: property tax elimination would raise taxes on the middle class to give wealthy homeowners and businesses in wealthy communities a tax break. Both targeted property tax reduction approaches would be better for the middle class, but the Wolf proposal would be the best for moderate-income homeowners and also would cut non-residential property taxes the most in lower-income communities, a potential boost to community revitalization.
We think that if Pennsylvanians and lawmakers of both parties fully understood these differences, they would oppose property tax elimination and favor using a scaled-down version of the Wolf formula to allocate the amount of property tax relief funded by the budget framework. So please, help us spread the word.
Let’s start with the impact of property tax elimination on different groups of taxpayers. While we have not examined the tax incidence of the current SB 76 bill, the Institute on Taxation and Economic Policy (ITEP) did estimate for us the tax incidence of a similar proposal several years ago. That proposal, like the current SB 76, promised to eliminate school property taxes through an increase in the sales tax rate to 7 percent while applying it to more services, and an increase in the personal income tax rate (to 4.1 percent under the old SB 76 and to 4.34 percent under the new SB 76). One reason SB 76 now has a larger PIT increase is that the earlier proposal didn’t raise enough revenue: even the “new and improved” SB 76 does not raise enough revenue to eliminate property taxes permanently and to adequately and equitably fund schools going forward.
Who are the winners and losers of eliminating property taxes by raising sales and income taxes? As we explained in our release last Wednesday, the sales tax falls more heavily on middle-class and low-income families. The property tax also falls more heavily on middle-class and low-income families, but it is not as regressive as the sales tax – in part, because the wealthy choose to spend substantially more on housing than the middle-class and also to impose high property taxes on themselves to provide more funding for their local schools.
Given these realities, there is a danger that raising the sales tax to eliminate school property taxes will increase taxes on lower-income families to provide tax benefits to higher-income families. Underscoring this danger, ITEP’s analysis of the earlier property tax elimination proposal did, indeed, find that it increased average taxes on middle-income families, while lowering taxes, on average, on the top 20 percent of families. (This proposal also provided a small cut in average taxes for the bottom 20 percent of families). Property tax elimination amounted to a middle-class tax hike to pay for tax cuts for affluent households.
If property tax cuts are going to be a priority, a smarter approach for the middle class is to provide more targeted relief as a majority of the House proposed to do with the passage of HB 504 in early May, and as Gov. Wolf proposed in his initial budget address in March. Although we won’t explain the details of the differences in the allocation formulas of the House and Wolf proposals here, it turns out the Wolf proposal is more targeted to moderate-income homeowners and communities. (For more on the House and Wolf proposals and their allocation formulas, check out our late July trio of briefs).
To see the wisdom of the targeted approach and that property tax elimination benefits high-income families consider two school districts, the relatively low-income Reading School District in Berks County and the relatively affluent Wissahickon School District in Montgomery County (Table 1). If you want to make your own comparisons download our technical appendix, which has data on every school district. (If you want help with this, contact the Pennsylvania Budget and Policy Center at 717-255-7158 or email@example.com).
Table 1 reveals that SB 76, by eliminating all school property taxes, would cut taxes for the typical homeowner (i.e., “median value homestead”) in the Wissahickon School District by $3,630. It takes a lot of extra revenue, raised in part from middle-income families via higher sales and income taxes, to eliminate such substantial property taxes in affluent places. HB 504’s targeted approach would only have given affluent Wissahickon homeowners a property tax cut about half as big ($1,800). Gov. Wolf's more targeted plan would have trimmed the Wissahickon property tax cut further – to $1,000.
By contrast, Reading would receive almost the same property tax cut under all three plans – roughly $700.
Another key difference among these three proposals concerns the amount of non-residential property tax relief they provide – i.e., primarily to business owners of commercial property. SB 76 would eliminate all property taxes on non-residential property owners and pay for this by raising taxes on middle-income families.
The Wolf plan provided small or no property tax cuts for non-residential property owners in affluent school districts (e.g., 0 percent in Wissahickon) but large property tax cuts for non-residential property owners in less affluent school districts (e.g., 97 percentin Reading), potentially enough, along with more school funding, to spur community revitalization (Table 2). By contrast, HB 504 would provide a 20 percent cut in non-residential property taxes in Wissahickon -- to what purpose? – but only a 45 percent cut in Reading.
Summing up: property tax elimination amounts to tax relief for the wealthy and for businesses paid for by the middle class. The original Republican proposal for more targeted property tax relief would be less generous – but still generous – to wealthy homeowners and to businesses in wealthier communities. The original Wolf proposal for property tax relief would be much more generous to middle-class homeowners, renters (an issue not addressed here) and to businesses in lower-income communities.
We think a majority of voters and lawmakers – if they understood these differences -- would oppose property tax elimination: they don’t want to make the Pennsylvania tax system even more unfair, and they don’t want to threaten the adequacy of school funding.
In the context of Pennsylvania’s budget framework agreement, which includes scaled-down property tax relief (half as much relief or less than the original Wolf and HB 504 proposals), we also think that a majority of voters and lawmakers would favor a variation on the Wolf distribution approach for targeted tax relief. This would benefit the middle class more and lower property taxes in struggling communities, while giving less of a windfall to mall owners in affluent communities.
This morning the Bureau of Labor Statistics reported that the unemployment rate in Pennsylvania was down slightly to 5.1 percent, and nonfarm payrolls were up by 13,700 jobs last month, each from their respective September levels.
After two months of declines in nonfarm payrolls, the return to growth in October was a welcome change.
Although the month-to-month numbers have been up and down recently, the overall pattern in both the surveys that track employment is positive, with resident employment as measured in the household survey up 60,000 jobs, or 1 percent, over the last 12 months, and total nonfarm payrolls as measured in the establishment survey up by 48,600 jobs, an increase of 0.8 percent, over the same period.
Of note, the household survey has registered a sustained increase in the labor force in the last 12 months (up 62,000), another sign that stronger job growth is probably pulling people into the labor force.
Changes of Note by Industry:
Over the past year, employment in mining and logging is down by 2,900 jobs, or 7.7 percent. Though it is interesting to note, the Pittsburgh metro area has bucked this trend, adding 1,100 jobs, an increase of 9 percent, in mining and logging over the same period.
The primary driver of employment change in mining and logging in the past several years has been natural gas extraction. The number of gas drilling rigs operating in Pennsylvania so far this November stands at 28. That’s down from an average of 56 rigs in 2014, and down from the peak of rig activity in 2011, when there were 110 rigs operating in the state. Drilling activity is the primary driver of employment change in this industry, so it is no surprise that as rig counts have fallen employment in mining and logging also has fallen. Although drilling activity and employment are falling, natural gas production from June to August of this year was still up 9 percent over the same period last year (see the figure below).
As we have argued, the employment contribution of natural gas extraction is small relative to the overall economy. It is true that new well development has slowed, but that process began in 2012 in response to falling natural gas prices. Production, however, is still growing strong, signaling that the commonwealth continues to miss out on vital revenues that could fund our schools by not having its own severance tax on natural gas extraction. When natural gas prices rise in the future, new drilling activity will pick up, and it will be important for the commonwealth to have a severance tax in place to fully capture the tax revenues that other states already collect from this activity.
Another sector operating as a drag on employment is the public sector, which shed 4,800 jobs in the past year. An examination of the more detailed, but not seasonally adjusted, data indicate that in the past 12 months all of the weakness in public employment has been concentrated in public schools, which are still retrenching as their classroom funding has yet to be fully restored. Assuming the budget framework currently being negotiated in Harrisburg becomes law, schools are set to receive an infusion of $350 million, which should reduce somewhat the need for further layoffs in that sector.
Who Pays For An Increase in the Sales Tax: Analysis of the Tax Incidence of an Increase in the Sales Tax from 6% to 7.25%
Today we released new analysis of the tax incidence of a proposal to raise the state sales tax rate from 6% to 7.25%. Gov. Wolf and legislative leaders are currently negotiating over the terms of a plan to cut property taxes which would be financed by this sales tax increase.
As the figure below illustrates we find that the average taxpayer in the bottom 80% of taxpayers would pay higher taxes under the proposed sales tax rate increase than under an increase in the personal income tax rate to 3.57% which Gov. Wolf proposed in October. In stark contrast we find that average taxpayer in the top 20% of taxpayers would pay substantially less in new taxes with a higher sales tax rate than a higher personal income tax rate. By far, the biggest beneficiaries of relying on the sales tax to fund cuts in property taxes are the top 1% of taxpayers, who would see an average tax increase of $1,200 under the sales tax plan, less than a quarter of the average increase of $5,300 under the governor’s proposed higher income tax rate.
From a tax fairness perspective, these findings show, even an increase in the state’s flat personal income tax is far superior to a sales tax rate increase. If the General Assembly and Gov. Wolf must finance property tax cuts we urge them to do it with a higher personal income tax rate rather than with a higher sales tax rate. (They could also finance property tax relief with a severance tax which, according to the conservative Tax Foundation, would be paid mostly by people from out of state.)
If a sales tax rate increase remains the vehicle for reducing property taxes, it is imperative that the property tax relief in the final budget not further amplify the regressive nature of the tax increase by distributing a high share of property tax cuts to affluent property taxpayers. To this end, the final plan to cut property taxes should:
- include a rebate for renters;
- target property tax cuts to low- and middle-income homesteads; and
- increase the minimum wage to $10.10 per hour to boost the wages of low-income taxpayers who already bear the greatest relative burden of sales taxes.
In addition, lawmakers should take up Gov. Wolf’s proposal (made first in March and again in October) to expand personal income tax forgiveness to more low-income households.
What's It to Be on Property Tax Relief, PA Lawmakers? Reverse Robin Hood or Relief for Renters and Middle-Class Homeowners
This is an appeal to legislators in rural parts of Pennsylvania and in high-property tax areas such as the Poconos: we think that the evidence shows clearly that your constituents would benefit more from distributing the property tax relief promised by the tentative budget framework in a fair way, including a rebate for renters. There is a danger, however, that this relief will be distributed in an unfair way, without a renter rebate and with much tax relief going to businesses and high-income homeowners.
So unless you enjoy playing reverse Robin Hood -- taking from the poor to give to the rich -- more than representing your constituents, you need to raise your voice with legislative leaders. It is especially critical that Republican lawmakers raise their voice: if they do, a bipartisan consensus for fair distributions of property tax relief should be an easy win.
Here's the background to our appeal. Yesterday, in an analysis of the tentative state budget framework, the Pennsylvania Budget and Policy Center (PBPC) highlighted that this budget proposal would collect revenues for property tax relief from Pennsylvania's most regressive tax -- the sales tax. As a result, it is critical that distribution of tax relief be done in a fair way that offsets the impact of the sales tax.
Specifically, we called for a renter rebate as well as for property tax relief that targets moderate- and low-income homeowners, not businesses and affluent homeowners. Without a renter rebate, we explained, low-income renters could end up paying several hundred dollars in additional sales tax while getting nothing back in relief. If we combine revenue from an unfair tax with unfair distribution of tax relief, the net impact would be -- ta da -- unfair. That's that reverse Robin Hood thing.
We also noted yesterday that many Republican legislative districts, including most of rural Pennsylvania, would benefit from fair distribution of property tax relief, including a renter rebate -- more like the distribution proposed by Gov. Wolf's original plan than like the Republican property tax relief plan that passed the House. We documented in a late July trio of briefs how a fair distribution of tax relief benefits rural areas and many high-property tax areas -- in fact, most parts of the state except affluent suburbs (that, after all, aren't clamoring for and don't need tax relief).
After we laid out our arguments, we read today an Associated Press story quoting Gov. Wolf acknowledging the burden of the sales tax on lower-income people, including renters, and also highlighting, accurately, that the governor would have preferred that some of the revenue for property tax relief come from an income tax increase (which falls less heavily on lower-income Pennsylvanians). The better news in that story was a statement that "Wolf and Republican lawmakers are still battling over how that money would be distributed, a major point of contention in the ongoing negotiations."
From our perspective, the governor and Republican lawmakers shouldn't be battling because a fair distribution of relief, including a renter rebate, benefits the constituents of most legislative districts. So all we need is a bipartisan group from rural and high-property tax areas to step forward and say: "hey, that reverse Robin Hood thing is not working for me. I'd rather give hard-working families, my constituents, some relief."
Will Charlie Brown end up on his back again as Lucy whisks the football from the tee?
This budget season it looked like a severance tax on natural gas drilling was finally teed up to be successfully kicked through the uprights. Candidate Tom Wolf made it the centerpiece of his campaign for governor, vowing to use the revenue to replace the disastrous funding cuts to education made under former Gov. Tom Corbett. Voters rewarded Wolf with the governor’s office, and all subsequent polls show voters continue to strongly support a tax on gas drilling. All the public policy arguments are on the side of a drilling tax as well.
But recent news reports indicate a severance tax has been whisked from the budget negotiating table.
Gov. Wolf initially proposed a 5 percent tax on the value of the gas extracted from under our land and a 4.9-cents-per-MCF production tax – almost identical to the levy in place in neighboring West Virginia. His proposal would have directed the lion’s share of the revenue to education funding with smaller amounts earmarked for economic development, clean energy and oversight of the gas drilling industry. Again, polls showed that voters approved of his overall budget proposal and especially liked the tax on gas drilling.
The governor proposed compromises which Republican leaders simply rejected. By July, news reports indicated that the governor had dropped the proposed severance tax rate to 3.2 percent that would have been in addition to the existing impact fee, which goes to municipalities where drilling occurs.
In response, Republican leaders only stiffened their opposition to a severance tax, even though as production has soared, impact fee revenue has declined. Meanwhile, state corporate taxes paid by drillers have dropped below the amount they paid in 2008 at the start of the shale boom.
The shale industry claims it cannot afford a severance tax because its over-production has created a supply glut and lowered gas prices. Instead of cutting back on production, gas companies are looking to tap even more abundant gas resources in the Utica formation which lies underneath the Marcellus. The perverse economics of the industry promise to keep the prices low for many years to come.
From the perspective of the voters, now is the time to finally enact a severance tax in Pennsylvania as every other major gas-producing state has already done. From the perspective of the drillers, that time should never come, and they’ve spent $55 million (and counting) in campaign contributions and lobbying to ensure it never does.
If the gas drillers successfully pull the severance tax from the budget, Pennsylvania taxpayers are the ones who will land flat on their backs.