Third and State
As Pennsylvania legislators scramble to identify ways to balance the budget (no small task with a $1.5 billion deficit) one substantial source of revenue is once again up for discussion – a severance tax on natural gas production. A new report released by the Pennsylvania Budget and Policy Center found that natural gas company impact fee payments in Pennsylvania result in one of the lowest production tax rates in the country, just 1.9%. In 2013 they paid $223 million in impact fees while the market value of natural gas production topped $11.8 billion.
Despite booming production, corporate tax payments from these companies have dropped significantly, with total receipts dropping from a high of $443 million in 2011 to $265 million in 2013. Most natural gas drilling companies were able to minimize or avoid altogether paying Pennsylvania’s corporate net income tax (CNIT) by organizing themselves as pass-through entities. Gas drilling companies paid only 0.5% of the total CNIT collected, and the drilling companies paid only 9% of the total remitted by the oil and gas industry. The balance came from pipeline, distribution and other support companies that work with the gas drillers.
The gas drilling industry argues that, because of other taxes levied by Pennsylvania, they cannot afford the added burden of a severance tax. These companies enjoy numerous tax credits and incentives at both the state and federal level. Because of their low operating costs and prime location near premium markets, researchers from Carnegie Mellon noted, “The goose that lays the golden egg is going nowhere.” A business exodus spurred by the enactment of a severance tax is very unlikely.
The absence of a fair severance tax is a bad deal for Pennsylvanians. A 5% severance tax in addition to the impact fee on natural gas companies can raise an additional $400 million for Pennsylvania. A $1.5 billion budget deficit and weak revenue collections is forcing legislators to make difficult choices. Rather than make devastating cuts to education, healthcare, and key investments for future economic growth, our lawmakers should consider a balanced approach that includes raising new revenues. Adopting a modest severance tax is not punitive or unfair. It is sound policy in a time of tight budgets.
According to recently-released data, CEOs and executives in the United States have been recovering well since the end of the recession, while most workers are being left even further behind. The Economic Policy Institute released a study today documenting compensation in 2013 for CEOs at the top 350 firms in the United States. Their data is especially valuable because it provides a consistent historical series of CEO pay trends back to 1965.
In 2013, compensation for the average CEO (using a measure that includes the value of stock options that were realized during the year) was $15.2 million, an increase of 2.8 percent over the year and more than 20 percent since 2010.
Over the long term, pay for these top executives has soared and is now 937 percent higher than in 1978. This pay escalation was much faster than both the growth of the stock market and income of other high-wage earners, signaling that the extreme increases in CEO pay are not due to improving CEO productivity but because significant rents are embedded in executive compensation.
Meanwhile, the compensation of a typical worker has only grown by 10.2 percent since 1978. While CEO pay increased more than 20 percent since 2010, inflation-adjusted typical worker compensation has actually fallen slightly. To put this in perspective, we look to the CEO-to-worker compensation ratio, which measures the gap between CEO pay at the top 350 U.S. companies and the compensation of the workers in the industry of each respective CEO.
In 2013, the CEO-to-worker compensation ratio was 295.9-to-1, meaning that top executives made nearly 300 times the amount their average workers earned. The 2013 ratio is far above the ratio in 1965 (20-to-1), 1995 (122.6-to-1), and last year (278.2-to-1).
While data availability and sample size issues do not allow us to compute this measure at the state level, local sources have started to look at CEO pay for some companies that are headquartered in Pennsylvania. For example, the Pittsburgh Post-Gazette has begun compiling the “Fortunate 50” – a list of compensation for highly-paid executives at firms headquartered in the Pittsburgh area.
While the Post-Gazette’s measure of compensation is computed using slightly different methodology than the EPI study (most notably, the value of stock options realized during the year is not included), compensation for area executives averaged $5.7 million, down about 15 percent over the year.
However, if the options-realized value was included, it is likely that these executives would have seen a jump in pay comparable to the national increase detailed in the EPI study. In fact, according to this table from the Post-Gazette, Pittsburgh executives took advantage of the rebounding stock market and exercised millions of dollars in stock options in 2013, some cashing in more than $15 million.
Average worker pay (not compensation) grew 2.4 percent over the year in the Pittsburgh metro area. Again, accounting for the stock options that executives in the area realized this year would likely show that executive pay growth in Pittsburgh, as in the nation, is far outpacing average worker wages. Skyrocketing CEO compensation is one of the largest contributors to runaway income inequality in both the state and the nation.
 Facebook was excluded from the sample for being a high outlier. Including the company would increase average CEO pay in 2013 to $24.8 million.
 Average weekly earnings from Current Employment Statistics data.
The Bureau of Labor Statistics (BLS) reported last Friday that total nonfarm employment increased by 217,000 in May, following a 282,000 increase in April. So far this year, 214,000 jobs have been created on average each month, compared to a 204,000 average monthly gain during the same time period in the previous year. The nation’s official unemployment rate remained unchanged from last month at 6.3%. The Labor Force Participation Rate and the Employment-to-Population ratio remained unchanged in May.
Here is a synopsis of what D.C.’s top labor economists had to say about the Employment Situation Summary for May.
- Heidi Shierholz, Economic Policy Institute (EPI) — Economy Is Healing but Far from Healed:
This morning’s jobs report show payroll employment increased by 217,000, passing the pre-recession peak. This might sound like good news, but it is important to remember that return to the pre-recession level of employment does not mean we are back to health in the labor market.
The economy is healing, but far from healed. Almost six-and-a-half years have passed since the start of the recession, and in that time the working-age population grew by 14.5 million. That means we needed to have added millions more jobs than we have. More precisely, we now need 7 million jobs to get back to health in the labor market given growth in the potential labor force since the start of the recession. At the current pace of job growth, it will take nearly four more years to fill in that gap.
- Dean Baker, Center for Economic and Policy Research (CEPR) — Economy Adds 217,000 Jobs in May; Unemployment Stable at 6.3 Percent:
The May employment report showed another healthy month of job gains, with the economy adding 217,000 jobs. This brings the three month average to 234,000. If this rate is sustained, it will lead to a substantial decline in unemployment in the months ahead. However, this is difficult to reconcile with the weak growth the economy has seen in recent quarters, hence the fall in reported productivity in the first quarter. The job gains were concentrated in health care (33,600), restaurants (31,700), social assistance (21,300) and employment services (20,200).
To the surprise of many, the unemployment rate was unchanged in May. This is due to the fact that the 0.4 percentage point plunge in labor force participation reported for April was not reversed. The labor force participation rate remained at 62.8 percent.
- Chad Stone, Center on Budget and Policy Priorities (CBPP) — Statement on the May Employment Report:
More than six years after the Great Recession and the worst jobs slump since the 1930s began, today’s jobs report shows that payroll employment has finally topped its level at the start of the recession (see chart). Still, with essentially no net job growth since December 2007 but a growing working-age population, many more people today want to work but don’t have a job.
The job losses incurred in the Great Recession have been erased. There are now 620,000 more jobs on private payrolls and 113,000 more jobs on total payrolls than there were at the start of the recession in December 2007. Because the working-age population has grown over the past six and a half years, however, the number of jobs remains far short of the number of jobs needed to restore full employment. The pace of job creation so far this year (214,000 jobs a month) is the highest five-month average in over a year, and, if maintained, would gradually restore normal labor market conditions. Faster job growth would clearly be better, though.
Even though the state estimates for May will be released until June 20th, the Federal Reserve Bank of Philadelphia developed unemployment estimates for Pennsylvania, New Jersey, and Delaware in order to alleviate uncertainty.
The Federal Reserve Bank of Philadelphia – State Unemployment Rate Nowcasts: May 2014:
Using an analytical method created by Bank researchers, we expect unemployment rates for May to decrease from 5.7 percent to 5.6 percent in Pennsylvania and from 6.9 percent to 6.7 percent in New Jersey and remain unchanged in Delaware at 5.8 percent.
The employment report for Pennsylvania in May will be released by the BLS next Friday June 20, 2014. The Pennsylvania Department of Labor and Industry typically (but not always) releases the job numbers the day prior to the official BLS release.
The House Commerce Committee is set to vote on June 17th on SB 622 the Debt Settlement Services Act. This legislation covers the licensing and regulation of debt settlement companies in Pennsylvania.
Debt settlement services run television commercials in which companies with comforting names that include words like free, freedom, and relief offer consumers a chance to cut their debt by up to 50%!
Does that sounds too good to be true?
The Consumer Financial Protection Bureau puts it bluntly, “Some debt settlement companies promise more than they can deliver.” These firms often fail to settle enough debts to allow consumers to be financially better off than before they engaged the service. Bottom line - this type of “service” is really predatory finance.
Remarkably SB 622 contains no provisions to regulate the fees charged and requires no assessment of whether the consumer will in fact be better off before defaulting on all their loans.
Wait what? Default on all their loans?
Yes! Step one in a debt settlement is a risky gambit where consumers are told by the debt settlement company to default on all their debts. The company then attempts to negotiate with the creditors who in the meantime have assessed charges for defaulting on the debt. The industry’s own data suggests two-thirds of the consumers who use this service fail to settle all of their debts and face substantial fees, an average of 22.5% on their outstanding balances. And of course if the debt settlement company fails to settle all of a customer’s debts the remaining creditors are likely to take legal action because, based on the advice of a debt settlement company, the consumer defaulted on all of his or her loans.
This is a pretty complicated scheme targeted at a consumer who took on too much debt. That brings us back to predatory finance. There is a lot of money to be made in taking advantage of people under financial stress.
Exposing vulnerable consumers to complicated financial services absent common sense rules is a recipe for disaster. When consumers in financial trouble get deeper into financial trouble because of unscrupulous business practices, the likelihood that financial damage will spread to the local community and economy through more unpaid bills rises.
Please reach out to your representative in the House and urge them to oppose the bill. In particular members of the House Commerce Committee need to hear from you.
WESA in Pittsburgh has a radio feature airing today on union organizing among contingent faculty in higher education. It includes some excerpts from an interview with me. You can listen to it and access a transcript here.
Reporter Josh Raulerson places contingent faculty organizing in the context of innovative union efforts throughout the "non-mobile services" -- services which can't easily relocate because they have to locate near the customer. These non-mobile services -- health care, education, retail including supermarkets, janitorial services, child and elder care, hospitality, eating and drinking including fast food -- account for most jobs and for an even higher proprtion of low-wage jobs. Metro area-wide unions and collective bargaining that establish new wage and benefit norms in these non-mobile sectors could take a giant step towards reversing the growth of inequality.
As we've said before -- and we'll say again (we're not too proud to take a page from the right's "repeat yourself" machine) -- what is exciting about the multiplying examples of area-wide organizing in services (in Pittsburgh, in fast food nationally, among contingent faculty in Philadelphia, etc.) is that they are beginning to chip away at the idea that growing inequality is irreversible.
The theory of change here is to get to a critical mass of successful living examples of area-wide service sector organizing -- enough sectors in enough metro areas that working people see generally that revitalizing the middle class requires only that LOTS of people get on board this new model of unionism. As well as lifting wages and benefits, this model of unionism can and should play a central role in training, job-matching, and careers (similar to building trades unions). As a result, this model of unionism can not only fix inequality but can also help employers compete based on skill, service, and productivity -- along the "high road" or using what we now call the "good jobs strategy."
Anyway, listen to the WESA story here and let us know what you think.
As you may have heard by now, Seattle has adopted a city minimum wage of $15 an hour. As with all minimum wage increases, this one will be phased in over three to seven years depending on the size of the business.
Arindrajit Dube, a rising star in labor economics has an excellent editorial on the proposal that I would encourage you all to read.
One of the great challenges of public policy work as a labor economist is squaring off in the media with business lobbyists and/or public relations professionals for industry associations who consider “nuance” to be a dirty word. Being honest about what we do and don’t know about a policy or labor market trends is right and honorable, but often a loser in policy debates when our opponents have no ethical qualms about being misleading. Still, at the end of the day, the best and most effective policy work is tethered to research and open to changing course when the policy doesn’t lead to good outcomes.
In this regard Dube, who more than most commentators can take credit for advancing our understanding of the impacts of the minimum wage, stands out for his measured honesty and pragmatism:
Finally, we should acknowledge the limits of our knowledge about how local economies respond to a minimum wage. In my opinion, the best evidence suggests that state and federal minimum wage increases have had a very small impact on employment, while moderately reducing turnover, poverty and inequality. The limited evidence from other cities corroborates this. However, we cannot reliably apply those estimates to predict the effects of an increase the size of Seattle’s. The good news is that the somewhat long ramp-up period in Seattle will provide us with an occasion to learn from this experiment and offer opportunities for course corrections.
Dube is a great model for aspiring economists and public policy researchers not to mention policy makers.
While Seattle begins its bold effort to reduce inequality the campaign for a more modest increase in the minimum wage to at least $10.10 an hour here in Pennsylvania continues. Remember to reach out to your representatives in the House and Senate and share this petition with your friends.
Tax revenues continue to nosedive in May. Now $174 million less than last year due to corporate tax cuts. 2014-15 shortfall continues to grow.
For the sixth straight month, General Fund revenues fell short of estimate in May, missing the target by $108 million, or 5.5% for the month. The year-to-date revenue deficit grows to $613 million, or 2.3% below estimate (excluding the early transfer of liquor store profits in March). The deficit is now larger than the $581 million the Independent Fiscal Office had forecasted for the fiscal year just one month ago, as tax collections in nearly every category fell short of estimate in May.
Unfortunately, things did not have to be this way.
Looking at revenue growth from the prior fiscal year, it is apparent that this funding crisis is largely self-inflicted. Tax revenue has dropped $173 million from this point in 2012-13. While sales tax shows modest growth and personal income taxes are flat (due in large part to wealthy taxpayers recognizing capital gains on their 2012 returns to avoid a federal tax hike), corporate taxes have fallen $322 million, or 6.9% from last year. Some of the largest portions of this loss of revenue come from the capital stock and franchise tax (down $255 million) and bank taxes (still down $35 million after some late payments in May), both of which had tax rate cuts as part of the 2013-14 budget.
The anemic revenue collections in May push the funding shortfall for the 2014-15 budget to over $1.5 billion. Without new and sustainable revenue, the cuts that would be required to balance the budget could be catastrophic – at a time when the overall economy continues to grow. All gains proposed by Governor Corbett for early childhood programs, education, and other human services would likely be reversed and many non-mandated services could be slashed.
At a time when other states are starting to see healthier revenue gains, Pennsylvania is falling behind – making it more difficult to restore previous cuts to education, health care, and critical human services. With less than a month left to enact a new spending plan for 2014-15, it is clear that Pennsylvania must take a balanced approach and consider new revenues to bridge the $1.5 billion funding gap.
 Pennsylvania’s tax revenue growth ranked 30th highest out of 46 states reporting revenues in the 1st quarter of 2014 according to data compiled by the Rockefeller Institute, http://www.rockinst.org/pdf/government_finance/state_revenue_report/2014-05-06_Data_Alert.pdf.
1314 Revenue Tracker by Month May 2014
May 2014 Revenues to Estimate
May 2014 Revenues to Prior Year
CMS Is Not Asking for Its Money Back
A report issued by the Office of Inspector General (OIG) at the U.S. Department of Health and Human Services on Pennsylvania’s tax on Medicaid managed care services has a relatively sensational title. But the reality is the federal government is not going to force Pennsylvania to eliminate its Gross Receipts Tax (GRT), or even modify it, anytime soon.
The report comes at a critical juncture for Medicaid expansion. Lawmakers are reportedly revisiting the idea, which would generate immediate substantial savings that could help to close a $1.5 billion-and-growing budget gap (not to mention giving health coverage to half a million working people). It would also give Pennsylvania’s economy a desperately needed boost.
A bill that would allow Pennsylvania to expand Medicaid sponsored by State Rep. Gene DiGirolamo was reported by the House Human Services Committee on Wednesday, June 4.The OIG report is no reason to slow the Medicaid expansion train down.
Buried in a lengthy Capitolwire article is the good news:
“[The federal government], if it determines the tax is inappropriate, does not intend to force Pennsylvania to “offset,” meaning repay, the revenues the GRT generated and which were used to pay for Medicaid managed care services since the creation of the GRT. Nor will the state be forced to repay - as was suggested by the OIG report - the federal matching funds received by the state due to those GRT-funded state managed care expenditures after Fiscal Year 2011-12.”
It is important to tamp down the hysteria and look at the facts. The feds are bending over backward to work with Pennsylvania in their negotiations over a potential Medicaid expansion.
The federal Centers for Medicare & Medicaid Services (CMS), which oversees Pennsylvania’s Medicaid program, has not found Pennsylvania’s GRT to be “impermissible.” The OIG report confirms that states may be permitted to use revenue from health care-related taxes to help finance the states’ share of Medicaid. The decision about whether a GRT is impermissible rests with CMS, and CMS has not made that determination in Pennsylvania.
Pennsylvania changed its managed care assessment in 2009 to comply with federal law. Medicaid managed care companies are subject to Pennsylvania’s 5.9% GRT, the same tax that is paid by telecommunications and electric companies and transportation entities.
The events that triggered the OIG investigation were anomalies. Certain federal requirements do not apply to states with GRTs under 6.0%, but during the recession, Congress lowered the threshold rate to 5.5%. After September 30, 2011, that threshold (called a “safe harbor”) reverted back to 6.0%.
A second trigger occurred when Pennsylvania GRT taxpayers were assessed a 0.16% surcharge in 2011, which put Pennsylvania above the 6.0% threshold for a second time. Once Pennsylvania was over the GRT safe harbor threshold, certain prohibitions (on sharing revenue with the managed care payers) that are not applicable to a state GRT under 6.0% kicked in.
CMS has issued no guidance on what a permissible GRT looks like. CMS has not issued guidance to help states determine if their GRTs are permissible. Last year, CMS told Pennsylvania Medicaid officials that it had no plans to issue the guidance, and that it did not plan to scrutinize Pennsylvania’s GRT. And CMS has authority to waive existing GRT requirements, including requirements that the GRTs be broad-based and uniform.
According to an article in Bloomberg news, the Department of Health and Human Services will “work with Pennsylvania to develop an approvable tax structure.”
The article also notes that 49 states have some form of assessment on managed care nursing homes or other health services that help to draw down additional federal Medicaid dollars.
The OIG report will have no impact of the 2014-15 budget. The OIG report focuses only on the unique circumstances surrounding the GRT in 2011 and 2012. It has no impact the upcoming budget.
There are some unknowns ahead. What is known is that Pennsylvania has a budget shortfall and can not afford to walk away from billions of dollars in new federal funds that could jumpstart the terribly sagging economy, and can not afford to ignore the savings that would come immediately from the Medicaid expansion.