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Freedom in the 50 States Pennsylvania Perspective
1. Freedom in the 50 States
Pennsylvania’s Perspective
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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
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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
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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
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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
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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
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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
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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
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9. Is this disconnect between tax policy and tax revenues
unique to Pennsylvania?
9
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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
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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
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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
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13. Pennsylvania’s current budget situation is the result of years
of spending growth outpacing economic growth.
13
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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