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Freedom in the 50 States
Pennsylvania’s Perspective
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$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
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
Stat
e an
d Lo
cal T
ax R
even
ues
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 Foundation2
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0%
2%
4%
6%
8%
10%
12%
14%
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
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 Foundation3
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0%
2%
4%
6%
8%
10%
12%
14%
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
…despite large fluctuations in unemployment...
4Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0%
2%
4%
6%
8%
10%
12%
14%
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
…despite fluctuations in income tax rates...
5Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
0%
2%
4%
6%
8%
10%
12%
14%
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Real
GSP
(m
illio
ns 2
000$
)
…and despite real economic growth.
6Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation
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Tax Revenue = (State’s Share of GSP) (Gross State Product)
This suggests that tax policies aimed at raising revenues will fail because the state has no (or little) control over its share of GSP.
Fixed at 9.6% of GSPFluctuations in tax revenues are driven by fluctuations in this.
7
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Tax Policy Tax Revenue
How does tax policy affect tax revenue?
Economic Activity Tax Revenue
Tax Policy Economic Activity Tax Revenue
F A I LOld School
New and Cool
8
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Is this disconnect between tax policy and tax revenues unique to Pennsylvania?
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
0% 2% 4% 6% 8% 10% 12%
Stat
e an
d Lo
cal T
ax R
even
ue p
er ca
pita
Top Marginal Income Tax Rate
Effect of Top Marginal Income Tax Rates on Tax Revenues (2006)
Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation10
Across states, there is no apparent relationship between state income tax rates and tax revenues.
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
0% 1% 2% 3% 4% 5% 6% 7% 8%
Stat
e an
d Lo
cal T
ax R
even
ue p
er ca
pita
State Sales Tax
Effect of Sales Tax Rates on Tax Revenues Across States (2006)
Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation11
Across states, there is no apparent relationship between state sales tax rates and tax revenues.
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000
Stat
e an
d Lo
cal T
ax R
even
ue p
er ca
pita
GSP per capita
Effect of GSP on State and Local Tax Revenues Across States (2006)
Source: Bureau of Labor Statistics, U.S. Bureau of the Census, Tax Foundation12
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.
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Pennsylvania’s current budget situation is the result of years of spending growth outpacing economic growth.
13
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0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2004 2005 2006 2007 2008 2009
Growth in GF Appropriations Growth in GSP
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 Budget14
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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, orb. Grow the state economy.
Review
1.The state cannot affect tax revenue directly – revenue is always around 10% of GSP.
15
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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
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
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
Ann
ual C
ost
of E
mpl
oyee
Age
Cost of Public School Teachers versus Nurses in Pittsburgh
Nurse
The total cost of a nurse is $5.0 million.
Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract 17
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
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
Ann
ual C
ost
of E
mpl
oyee
Age
Cost of Public School Teachers versus Nurses in Pittsburgh
Public School Teacher Nurse
The total cost of a nurse is $5.0 million.The total cost of a public school teacher is $9.6 million.
Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract
In present value terms, each teacher costs the same as 2.6 nurses.
18
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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
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0%
5%
10%
15%
20%
25%
30%
35%
NABCA Full Control Moderate Control
Light Control License
Alch
ohol
Use
Am
ong 1
2-2
0 Yea
r Old
s
Source: Government-Run Liquor Stores: The Social Impact of Privatization, Commonwealth Foundation Policy Brief. 20
Alco
hol U
se A
mon
g 12
-20
Year
Old
sState control has no effect on the incidence of underage drinking.
PA is a “full control” state
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-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
NABCA Full Moderate Light License
Drive
rs in
Fata
l Cra
shes
per
100
DUI
Arr
ests
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
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Grow the State Economy
Cut Pennsylvania’s sales tax to 4%.
22
Sales tax 2% Tax revenue $3 b.F A I L OMG! We can’t afford that!
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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.
23
Sales tax 2% GSP $10 b. to $30 b. Tax revenue $1 b. to $3 b.
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Freedom in the 50 States
Pennsylvania’s Perspective
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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.
How do you grow the economy?
25
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$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Salary Health Benefit Retirement Benefit
Present Value of Lifetime Employee Costs
Public School Teacher Nurse
Source: The Higher Cost of Education, Matthew Marlin, Duquesne University; Pittsburgh Federation of Teachers Contract 26