Freedom in the 50 States

Pennsylvania’s Perspective




         www.antolin-davies.com
$60,000



                                  $50,000
   State and Local Tax Revenues




                                 ...
14%



 12%



 10%



   8%



   6%
                  But, state and local tax revenue has remained
                  co...
14%



 12%



 10%



   8%



   6%



   4%

                  …despite large fluctuations in unemployment...
   2%



...
14%                                                                                                             3.5%



 1...
14%                                                                                          $500,000


                  ...
This suggests that tax policies aimed at raising revenues will fail
 because the state has no (or little) control over its...
How does tax policy affect tax revenue?


Old School

  Tax Policy        Tax Revenue

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




                       ...
Effect of Top Marginal Income Tax Rates on Tax Revenues (2006)
                                             $7,000


     ...
Effect of Sales Tax Rates on Tax Revenues Across States (2006)
                                             $7,000


     ...
Effect of GSP on State and Local Tax Revenues Across States (2006)
                                             $7,000
   ...
Pennsylvania’s current budget situation is the result of years
of spending growth outpacing economic growth.




         ...
10%
                                Over the past six years, PA’s general fund expenditures
    9%
                       ...
Review

1. The state cannot affect tax revenue directly – revenue is always
   around 10% of GSP.

2. The current budget s...
Cut Spending

Put Public School Teachers on Defined Contribution Retirement

 Public school teachers currently have defin...
Cost of Public School Teachers versus Nurses in Pittsburgh
                            $350,000

                         ...
Cost of Public School Teachers versus Nurses in Pittsburgh
                            $350,000
                          ...
Cut Spending

Privatize Pennsylvania State Stores

 Segal and Underwood (Reason Foundation) estimate that
  Pennsylvania ...
35%
                                                State control has no effect on the incidence of underage
             ...
2.0
    Drivers in Fatal Crashes per 100 DUI Arrests            State control does not reduce DUI fatality rates.
        ...
Grow the State Economy

Cut Pennsylvania’s sales tax to 4%.


 OMG! We can’t afford that!


       Sales tax 2%          ...
Grow the State Economy

   Cut Pennsylvania’s sales tax to 4%.

    Evidence from across the states suggests that a 1-per...
How do you grow the economy?


Centralized approach
 Increase federal/state spending
 Problem: Shifts economic activity ...
Present Value of Lifetime Employee Costs
 $1,600,000


 $1,400,000


 $1,200,000


 $1,000,000


   $800,000


   $600,000...
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Freedom in the 50 States Pennsylvania Perspective

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Freedom in the 50 States Pennsylvania Perspective

  1. 1. Freedom in the 50 States Pennsylvania’s Perspective www.antolin-davies.com
  2. 2. $60,000 $50,000 State and Local Tax Revenues $40,000 $30,000 $20,000 $10,000 Pennsylvania’s state and local tax revenues have grown 5.7% annually (on average). $0 1977 1979 1980 1982 1984 1985 1987 1990 1992 1993 1995 1997 1998 2000 2002 2003 2005 2008 1978 1981 1983 1986 1988 1989 1991 1994 1996 1999 2001 2004 2006 2007 Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 2 www.antolin-davies.com
  3. 3. 14% 12% 10% 8% 6% But, state and local tax revenue has remained constant at 9.6% (+/- 0.6%) of GSP… 4% 2% 0% 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 3 www.antolin-davies.com
  4. 4. 14% 12% 10% 8% 6% 4% …despite large fluctuations in unemployment... 2% 0% 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 4 www.antolin-davies.com
  5. 5. 14% 3.5% 12% 3.0% 10% 2.5% 8% 2.0% 6% 1.5% 4% 1.0% 2% 0.5% …despite fluctuations in income tax rates... 0% 0.0% 1978 1979 1981 1983 1984 1986 1988 1989 1991 1993 1994 1996 1998 1999 2001 2003 2004 2006 2008 1977 1980 1982 1985 1987 1990 1992 1995 1997 2000 2002 2005 2007 Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 5 www.antolin-davies.com
  6. 6. 14% $500,000 $450,000 12% $400,000 10% $350,000 Real GSP (millions 2000$) $300,000 8% $250,000 6% $200,000 4% $150,000 …and despite real economic growth. $100,000 2% $50,000 0% $0 1977 1978 1980 1981 1983 1984 1987 1990 1991 1993 1994 1996 1997 1999 2000 2003 2006 2007 1979 1982 1985 1986 1988 1989 1992 1995 1998 2001 2002 2004 2005 2008 Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 6 www.antolin-davies.com
  7. 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 www.antolin-davies.com
  8. 8. How does tax policy affect tax revenue? Old School Tax Policy Tax Revenue Economic Activity Tax Revenue New and Cool Tax Policy Economic Activity Tax Revenue 8 www.antolin-davies.com
  9. 9. Is this disconnect between tax policy and tax revenues unique to Pennsylvania? 9 www.antolin-davies.com
  10. 10. Effect of Top Marginal Income Tax Rates on Tax Revenues (2006) $7,000 $6,000 State and Local Tax Revenue per capita $5,000 $4,000 $3,000 $2,000 $1,000 Across states, there is no apparent relationship between state income tax rates and tax revenues. $0 0% 2% 4% 6% 8% 10% 12% Top Marginal Income Tax Rate Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 10 www.antolin-davies.com
  11. 11. Effect of Sales Tax Rates on Tax Revenues Across States (2006) $7,000 $6,000 State and Local Tax Revenue per capita $5,000 $4,000 $3,000 $2,000 $1,000 Across states, there is no apparent relationship between state sales tax rates and tax revenues. $0 0% 1% 2% 3% 4% 5% 6% 7% 8% State Sales Tax Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 11 www.antolin-davies.com
  12. 12. Effect of GSP on State and Local Tax Revenues Across States (2006) $7,000 State and Local Tax Revenue per capita $6,000 $5,000 $4,000 $3,000 $2,000 Across states, there is a relationship between GSP and tax revenues. $1,000 On average, each additional $1 in GSP per-capita generates $0.08 in state and local tax revenue per-capita. $0 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 GSP per capita Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation 12 www.antolin-davies.com
  13. 13. Pennsylvania’s current budget situation is the result of years of spending growth outpacing economic growth. 13 www.antolin-davies.com
  14. 14. 10% Over the past six years, PA’s general fund expenditures 9% have grown at 1.4 times the rate of the state’s economy. 8% 7% 6% 5% 4% 3% 2% 1% 0% 2004 2005 2006 2007 2008 2009 Growth in GF Appropriations Growth in GSP Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Pennsylvania Office of the Budget 14 www.antolin-davies.com
  15. 15. Review 1. 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: a. Cut spending, or b. Grow the state economy. 15 www.antolin-davies.com
  16. 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 www.antolin-davies.com
  17. 17. Cost of Public School Teachers versus Nurses in Pittsburgh $350,000 The total cost of a nurse is $5.0 million. $300,000 $250,000 Annual Cost of Employee $200,000 $150,000 $100,000 $50,000 $0 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 Age Nurse Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract 17 www.antolin-davies.com
  18. 18. Cost of Public School Teachers versus Nurses in Pittsburgh $350,000 The total cost of a nurse is $5.0 million. The total cost of a public school teacher is $9.6 million. $300,000 In present value terms, each teacher costs the same as 2.6 nurses. $250,000 Annual Cost of Employee $200,000 $150,000 $100,000 $50,000 $0 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 Age Public School Teacher Nurse Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract 18 www.antolin-davies.com
  19. 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 www.antolin-davies.com
  20. 20. 35% State control has no effect on the incidence of underage drinking. Among 12-20 Year Olds 30% Alchohol Use Among 12-20 Year Olds 25% 20% 15% 10% Alcohol 5% 0% NABCA Full Control Moderate Light Control License Control PA is a “full control” state Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief. 20 www.antolin-davies.com
  21. 21. 2.0 Drivers in Fatal Crashes per 100 DUI Arrests State control does not reduce DUI fatality rates. 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 - NABCA Full Moderate Light License PA is a “full control” state Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief. 21 www.antolin-davies.com
  22. 22. Grow the State Economy Cut Pennsylvania’s sales tax to 4%.  OMG! We can’t afford that! Sales tax 2% Tax revenue $3 b. 22 www.antolin-davies.com
  23. 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 www.antolin-davies.com
  24. 24. 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. 24 www.antolin-davies.com
  25. 25. Present Value of Lifetime Employee Costs $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Salary Health Benefit Retirement Benefit Public School Teacher Nurse Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract 25 www.antolin-davies.com
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