Freedom in the 50 States Pennsylvania’s Perspective

1. Freedom in the 50 States Pennsylvania’s Perspective

2. Pennsylvania’s state and local tax revenues have grown 5.7% annually (on average). Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 2

3. But, state and local tax revenue has remained constant at 9.6% (+/- 0.6%) of GSP… Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 3

4. …despite large fluctuations in unemployment... Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 4

5. …despite fluctuations in income tax rates... Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 5

6. …and despite real economic growth. Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 6

7. This suggests that tax policies aimed at raising revenues will fail because the state has no (or little) control over its share of GSP. Tax Revenue = (State’s Share of GSP) (Gross State Product) Fixed at 9.6% of GSP Fluctuations in tax revenues are driven by fluctuations in this. 7

8. How does tax policy affect tax revenue? Old School Tax Policy Tax Revenue F A I L Tax Revenue Economic Activity New and Cool Tax Revenue Tax Policy Economic Activity 8

9. Is this disconnect between tax policy and tax revenues unique to Pennsylvania? 9

10. Across states, there is no apparent relationship between state income tax rates and tax revenues. Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 10

11. Across states, there is no apparent relationship between state sales tax rates and tax revenues. Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 11

12. Across states, there is a relationship between GSP and tax revenues. On average, each additional $1 in GSP per-capita generates $0.08 in state and local tax revenue per-capita. Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 12

13. Pennsylvania’s current budget situation is the result of years of spending growth outpacing economic growth. 13

14. Over the past six years, PA’s general fund expenditures have grown at 1.4 times the rate of the state’s economy. Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Pennsylvania Office of the Budget 14

15. Review • The state cannot affect tax revenue directly – revenue is always around 10% of GSP. • 2. The current budget situation stems from state spending growing faster than GSP. • 3. The only way to grow tax revenue is to grow GSP. • 4. Therefore, the only way to balance the state budget is either to: • Cut spending, or • Grow the state economy. 15

16. Cut Spending • Put Public School Teachers on Defined Contribution Retirement • Public school teachers currently have defined benefit retirement plans. • Cost is 3.6 times the cost of a comparable private sector retirement plan. • Estimated savings: $400 million annually. 16

17. The total cost of a nurse is $5.0 million. 17 Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract

18. The total cost of a nurse is $5.0 million. The total cost of a public school teacher is $9.6 million. In present value terms, each teacher costs the same as 2.6 nurses. 18 Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract

19. Cut Spending • Privatize Pennsylvania State Stores • Segal and Underwood (Reason Foundation) estimate that Pennsylvania could raise $1.7 billion from the sale of its liquor stores. • Pulito and Davies (Commonwealth Foundation) estimate that privatization will have no deleterious social effects. 19

20. State control has no effect on the incidence of underage drinking. Alcohol Use Among 12-20 Year Olds PA is a “full control” state 20 Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief.

21. State control does not reduce DUI fatality rates. PA is a “full control” state 21 Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief.

22. Grow the State Economy Cut Pennsylvania’s sales tax to 4%. • OMG! We can’t afford that! F A I L Sales tax 2% Tax revenue $3 b. 22

23. Grow the State Economy • Cut Pennsylvania’s sales tax to 4%. • Evidence from across the states suggests that a 1-percentage point reduction in the state sales tax is associated with a $400 to $1,200 increase in per-capita GSP. Sales tax 2% GSP $10 b. to $30 b. Tax revenue $1 b. to $3 b. 23

24. Freedom in the 50 States Pennsylvania’s Perspective

25. How do you grow the economy? • Centralized approach • Increase federal/state spending • Problem: Shifts economic activity from the future to the present. • Problem: Resources allocated according to political value. • Decentralized approach • Reduce burdens on consumers and producers • Solution: Creates activity rather than merely shifting activity. • Solution: Resources allocated according to economic value. 25

26. 26 Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract