Third and State
Flying in the face of the often heard rhetoric that tax cuts are the cure for all ills, a new study finds that cuts to business taxes are at best ineffective, and at worst harmful to state economic growth and development. A better strategy for growth is to increase investment in education and infrastructure.
State economic development is related to many factors, but few of these are controllable by state policymakers. One often used lever is to cut taxes – particularly for businesses. Traditional economic theory would have you believe that if a state makes it more profitable for businesses to operate by cutting taxes, that state would have more business activity.
The problem is that this strategy doesn’t work, according to the study. This is because business taxes are not the only factor that influences business behavior. Being close to customers, availability of a well-educated workforce, access to raw materials, and energy costs are much larger factors in a business’s profitability than state taxes. For instance, in Alabama state taxes cost corporations only 1.89% of their revenue. Varying this small factor has a limited effect on the actions of businesses.
Using data from all 50 states spanning the years 1977 to 2005, the study’s authors (Soledad Artiz of Harvard University and Kenneth Meier of Texas A&M) found that state policies seeking to spur business investment had no demonstrative positive effect on state economic development. The authors take a broad perspective on economic development. They measure the changes in gross state product, employment, personal income, net job creation, poverty, and the creation of new establishments.
The biggest factor found to influence the growth of state economies was the health of the national economy. State economies are tightly tied together, making it difficult for individual state actions to make much of a positive difference.
When state lawmakers cut taxes, the net effect may be slower economic growth. This is because the loss of business tax revenue means less funding for government services that often pump money back into a state’s economy.
So, when politicians talk about cutting taxes as a way to grow our state's economy, know that the opposite could occur.
Our just-released report on Pennsylvania higher education points out that student tuition and fees at Pennsylvania's four-year state-owned universities now cover nearly 75% of university costs. Prompted by this, our friend Charlie Bacas sent us today a story on states in Germany making tuition free again. In 2006, Germany began allowing public colleges to charge students up to 1,000 euros per year (currently $1,270). Student protests, petition campaigns, and fear of voter backlash reversed this change. Public universities will once again have free tuition for all students.
Another object lesson for Pennsylvania students and voters?
While there's been a lot of focus recently on K-12 school funding cuts in Pennsylvania, Pennsylvania higher education has experienced even larger state funding cuts in percentage terms. Pennsylvania's starting point for investing in higher education, moreover, was already near the bottom.
The list of poor rankings that reflect Pennsylvania's underinvestment in higher education is somewhat mind blowing.
For example, Pennsylvania is 48th for investment in higher education per capita.
Pennsylvania has seen the fifth largest decrease in higher education funding since 2010-11, including a $90 million cut – 18% -- from funding for the state's cheapest four-year college option, the state-owned Pennsylvania State System of Higher Education (PASSHE) universities.
Pennsylvania has the third-highest tuition and fees at public four-year colleges; we have the seventh-highest tuitiion for our community colleges.
We have the third-highest student debt among graduates from four-year colleges. While that ranking for average debt includes graduates of private and state-related schools (Pitt, Penn State, Temple, and Lincoln), the average debt of graduates from state-owned PASSHE universities is almost as high -- right around $30,000.
Pennsylvania is 41st for the share of adults (25 to 64 years of age) that have more than a high-school education. That's up from 45th or 46th a decade or so ago but we've been stuck around 41st since 2010.
Pennsylvania's rural regions suffer the most from the state's underinvestment in higher education, with 26 counties having little or no access to community college. One positive sign: Senator Joe Scarnati (R-25), the president pro tem of the Senate, has been a leader in addressing this issue, which could open the door to bipartisan progress in the future.
Pennsylvania's low spending is short-sighted because investment in higher education pays off handsomely for states and for individuals.
- According to the Milken Institute, each one year of additional average education beyond high school is associated with a more than 17% increase in both GDP per capita and wages.
- College-educated workers earn hourly wages more than three-quarters higher than workers with only a high-school degree and also have an unemployment rate half or less of the unemployment rate of less-educated groups.
In sum, when we shortchange investment in higher education, we shortchange ourselves.
Interestingly, the top four states for investment in higher education are Wyoming, North Dakota, Alaska, and New Mexico. Four resource-rich states that use some of their mineral wealth to invest in higher education. Perhaps there's a lesson there.
June 26, 1988
To the Editor:
According to the economic theory of compensating differentials, workers in unpleasant or hazardous jobs should be paid more highly to compensate them. A corollary is that a person like Prof. Larry Summers (''The Economists Behind the Candidates,'' June 5), who ''loves'' his work, should be paid less. Of course, then he might not have enough to pay for someone to mow his lawn.
Stephen Herzenberg, Washington, June 5
As we reported on Monday new jobs data for September were not encouraging with payrolls in Pennsylvania falling 9,600 jobs over the month.
According to data for all the states released this morning by the Bureau of Labor Statistics, nonfarm payroll employment increased in 39 states.
Based on this data Pennsylvania’s rank for percent job growth since January 2011 has fallen to last place among states (50th).
Today’s numbers drive home emphatically that you can’t cut your way to prosperity.
We were ranked in the top 10 for job growth in 2010.
Then tens of thousands of layoffs in education, and the state’s postponed investment in infrastructure and delayed acceptance of Medicaid expansion dollars delivered a body blow to Pennsylvania’s recovery, the effects of which are still being felt.
In recession and recovery, Pennsylvania needs a balanced, creative policy and state budget approach that fuels the state’s economic engine, not an unbalanced one that slams on the brakes.
Here are the details on how we ranked the jobs data http://keystoneresearch.org/sites/default/files/KRC_JobRanking_Sept.pdf
Read The State of Working Pennsylvania 2014 (at http://keystoneresearch.org/state-working-pennsylvania-2014) for our complete examination of recent trends in economic data in Pennsylvania.
On Friday the Pennsylvania Department of Labor and Industry reported that the unemployment rate fell from 5.6% to 5.7% while nonfarm payrolls fell by 9,600 jobs in September.
Those disappointing payroll numbers in September plus revisions for August mean Pennsylvania has shed 3,700 jobs a month in the 3rd quarter of this year. Resident employment drawn from a survey of households performed better in September registering a gain of 11,000 jobs. That’s the first gain in resident employment since April of this year. Still on average resident employment in the 3rd quarter fell by 19,700 jobs a month.
Over the last year weak growth in resident employment of just 16,000 meant that most of the improvement in the unemployment rate has been a result a decline in the labor force which has fallen by 93,000 in the last 12 months.
Exploring the change in payrolls by industry over the month the weakest sectors were Construction (down 2.1%), Transportation and Utilities (down 1.4%), Wholesale Trade (down 1.1%), and Information (down 1.2%).
Manufacturing had a good month adding 2,700 jobs but remains down by 2,100 over the last year.
All in all there is nothing to celebrate in the September job numbers for Pennsylvania.