Presentation from Drexel School of Economics / Econsult Solutions, Inc. Joint Conference on Urban Economic Policy April 27, 2016

1. Matthew Knittel, Director
Independent Fiscal Office
Implications of Economic and
Demographic Trends for State and
Municipal Tax Policy
Urban Economic Policy Conference
April 27, 2016

2. Office Began Operations September 2011.
• Similar to the Congressional Budget Office.
• Non-partisan analysis. No governing board.
Our Primary Duties:
• General Fund Revenue Estimate: May 1.
• Five-Year Economic and Budget Outlook: Nov. 15.
• Special studies at request of General Assembly.
Office Makes NO Policy Recommendations.
27.Apr.2016
The Independent Fiscal Office
2

3. 1. Demographics – A Rapidly Aging Population.
• Very large wave of Boomers turn age 65 next decade.
• Affects everything: labor force, spending patterns…
2. Clear Winners and Losers Across Industries.
• Will targeted industries contract in future? What is the cause?
• Will there be sufficient demand over the next decade?
3. Casual and Mobile Workforce.
• Increase in independent contractors and self-employed.
• Smaller, non-corporate entities driving most growth.
4. Don’t Forget Interaction with Other Taxes.
• Specific case: federal income tax.
Relevant Facts & Trends for Tax Policy
27.Apr.2016 3

4. Tax Base
2004-2015
Avg. Ann. Growth
Non-Corporate Business Profits 5.5%
Personal Consumption - Healthcare 4.5%
Personal Consumption - All Services 3.8%
Personal Consumption - All 3.3%
Pennsylvania Economy (Nominal GDP) 3.2%
Wages-Salaries 3.1%
Personal Consumption - All Goods 2.2%
PA Corporate Profits (apportioned) 2.2%
Source: U.S. Bureau of Economic Analysis (consumption, wages, GDP); PA personal income tax return (non-
corporate business profits, includes losses); annual CAFRs (corporate profits, taxable income only).
Major Tax Bases - Pennsylvania
27.Apr.2016 4

5. # Residents (000s) Gain / Loss (000s) Avg. Ann. Growth
Age 2005 2015 2025 2005-15 2015-25 2005-15 2015-25
0-19 3,226 3,062 3,048 -164 -14 -0.5% 0.0%
20-39 3,122 3,238 3,378 116 139 0.4% 0.4%
40-59 3,622 3,545 3,107 -77 -438 -0.2% -1.3%
60-79 1,900 2,338 3,001 439 663 2.1% 2.5%
80+ 580 619 705 39 86 0.6% 1.3%
Total 12,450 12,803 13,239 353 436 0.3% 0.3%
Note: thousands of residents.
Source: Pennsylvania State Data Center projections for Independent Fiscal Office, January 2016.
Pennsylvania: 2005 - 2015 - 2025
27.Apr.2016 5

6. # Residents (000s) Gain / Loss (000s) Avg. Ann. Growth
Age 2004 2014 2024 2004-14 2014-24 2004-14 2014-24
0-19 417.9 393.5 418.7 -24.4 25.2 -0.6% 0.6%
20-39 433.6 511.8 473.9 78.3 -38.0 1.7% -0.8%
40-59 362.8 378.4 417.4 15.6 39.0 0.4% 1.0%
60-79 193.2 222.1 285.4 28.9 63.3 1.4% 2.5%
80+ 62.7 54.4 63.1 -8.3 8.7 -1.4% 1.5%
Total 1,470.2 1,560.3 1,658.5 90.1 98.2 0.6% 0.6%
Note: thousands of residents.
Source: Pennsylvania State Data Center.
Philadelphia: 2004 - 2014 - 2024
27.Apr.2016 6

7. PA Population Distribution - 2015
thousands of residents
0
200
400
600
800
1,000
Gen Y or
Millennials
26.0%
Gen X or
Baby Bust
24.7%
Baby
Boomers
26.4%
Silent
Generation
10.6% 0.9%
Gen Z
11.4%
27.Apr.2016 7
entering
retirement

8. Pennsylvania (000s) Philadelphia (000s)
Sector Number Percent Number Percent
Manufacturing -144.0 -20.2% -12.7 -37.6%
Financial -22.4 -6.6% -10.1 -20.2%
Prof. Services 164.7 27.0% 2.5 3.0%
Healthcare-Social 190.1 24.6% 30.2 25.7%
Leisure-Hospitality 76.0 16.1% 16.6 32.0%
Trade-Transport 16.7 1.5% -3.4 -3.6%
All Government -46.8 -6.2% -14.6 -14.1%
All Other -9.8 -1.5% -5.2 -8.3%
Total 224.5 4.0% 3.3 0.5%
Source: U.S. Bureau of Labor Statistics. Professional Services includes Management and Administrative sectors.
Job Gain / Loss: 2003 to 2015
27.Apr.2016 8

9. Pennsylvania (000s) Philadelphia (000s)
Sector Number Percent Number Percent
Manufacturing -5.9 -1.0% -4.9 -18.7%
Financial -2.3 -0.7% -3.9 -8.9%
Prof. Services 100.4 14.9% 9.3 12.4%
Healthcare-Social 72.5 8.2% 13.8 10.3%
Leisure-Hospitality 52.9 10.7% 11.7 20.7%
Trade-Transport 45.1 4.2% 7.2 8.7%
All Government -63.4 -8.3% -5.8 -6.1%
All Other 21.6 3.6% 1.1 2.0%
Total 220.8 3.9% 28.6 4.6%
Source: U.S. Bureau of Labor Statistics. Professional Services includes Management and Administrative sectors.
Job Gain / Loss: 2009 to 2015
27.Apr.2016 9

10. 27.Apr.2016
Source: U.S. Bureau of Economic Analysis. Self-employed includes individuals who file a federal Schedule C income tax return and general
partners as reported on Form 1065. Self-employed figures and trends are likely overstated due to individuals filing more than one
Schedule C or engaging in minimal business activity. Data from the Current Population Survey suggest that the self-employed comprised
roughly 8%-9% of total PA employment in 2015 (includes self-employed whose businesses are incorporated). For more information, see
“Philadelphia’s Independent Economy: Implications for Office Space,” Knight Foundation (September 2015).
More Mobile Labor Force
0.8
1.0
1.2
1.4
1.6
1.8
1998 2002 2006 2010 2014
US Self-Employed
+61%
Cumulative Growth of Employed
and Self-Employed
1998 = 1.0
10
PA Self-Employed
+47%
US Payroll Jobs
+9.8%
PA Payroll Jobs
+5.6%

11.  Federal Tax Code Subsidizes State and Local Taxes.
• Assume federal marginal tax rate (MTR) = 15%.
• Then a $1,000 deduction = $150 federal tax savings.
 Consider All Pennsylvania State and Local Income Taxes.
• Roughly 2/3 of total income tax claimed as a tax deduction.
• Federal AGI = $25,000; MTR = 15%; 10% itemize (2% offset).
• Federal AGI = $75,000; MTR = 25%; 50% itemize (13% offset).
• Roughly 15-18% of income tax offset via federal savings.
 Consider a Local Property Tax on Corporations.
• All claim the deduction on the federal income tax return.
• For vast majority of income, the MTR is 35%.
• Roughly one-third of tax offset. More if PA CNIT included.
Deductibility Matters!
27.Apr.2016 11

12.  Tax Policy Should Consider Broad Trends.
• Anticipate and work with those trends.
• What will national, state and local economies look like
a decade from now?
 Traditional Taxation Becoming Less Effective.
• Due to demographics and technology / innovation.
• More mobility: workers, purchases and profits.
• Taxation of business entities more difficult.
 Consider Interaction with Other Taxes.
• We care about the effective tax rate, not the statutory rate.
• What is the combined tax rate? What can be deducted?
Wrap Up
27.Apr.2016 12