PA Standing at the Ready: Creating Proactive Strategies for Potential Changes in Defense Spending

PA-Defense-ManufacturingDefense Department budgets are in flux. Factors such as the Budget Control Act, reductions or shifts in spending related to the drawdowns in Iraq and Afghanistan and responses to future threats could all create significant economic disruptions for Pennsylvania’s defense industry sectors and the regions they call home.  The state’s defense industry leaders and the communities that support them cannot afford to risk being caught unprepared by waiting for news of budget changes and then reacting to them.  Instead, it is imperative that the sector understands potential risks and prepares for them proactively.   Continue reading “PA Standing at the Ready: Creating Proactive Strategies for Potential Changes in Defense Spending”

Debating the Mortgage Interest Deduction

Mortgage-RateMitt Romney lost the election but some of his fiscal ideas may survive.  Mitt Romney’s comments on an Iowa radio station re-ignited the debate about the mortgage interest deduction (MID) that has been simmering since at least 1984.  Romney’s plan calls for a $17,000 deduction budget that effectively caps and may even kill the MID:

 As an option you could say everybody’s going to get up to a $17,000 deduction. And you could use your charitable deduction, your home mortgage deduction, or others — your health care deduction, and you can fill that bucket, if you will, that $17,000 bucket that way. And higher income people might have a lower number.

The MID inspires deep passions.  It is also not likely to be received by the public with any objectivity.  The National Association of Home Builders (NAHB)  released a poll showing that the MID was supported by 77 percent of Republicans, 71 percent of Independents and 71 percent of Democrats.  Real estate lobbyists have been arguing for some time that eliminating the MID while the housing market is weak would further destabilize housing.   However home prices and interest rates are so low right now that the benefit that the deduction provides to buyers has been significantly minimized.  As a result, there are new calls that now is exactly the right time to restructure the deduction. Continue reading “Debating the Mortgage Interest Deduction”

Sacred Cows – The Political Economy of Tax Loopholes

If Social Security is the third rail in American politics, then tax loopholes are the sacred cows and we have a growing herd of tax dodge heifers. Whether you call them loopholes, expenditures, exclusions or deductions often characterize how you feel about them. Nobody likes loopholes, expenditures should be scrutinized, exclusions can be okay, but everyone loves deductions. We tend to think of loopholes as things that other people get and deductions are things we deserve. The Joint Committee on Taxation (JCT) has been publishing reports on tax expenditures since the 1970s, so that is what we’ll call them here. The debate on tax expenditures has been simmering for decades but it has attracted renewed attention with the ascendance of Paul Ryan as the Republican Vice Presidential nominee and his call for closing tax loopholes. A lot of attention is focused on “…loopholes that let politically-connected companies avoid paying taxes…” What is also less known is that most tax expenditures go to individuals (Figure 1). From 2001 to 2011, individuals get more than $800 billion in tax breaks compared to just $98 billion for corporations. Continue reading “Sacred Cows – The Political Economy of Tax Loopholes”

PA Governor’s Proposed Budget Cuts Millions from Economic Development Programs

Today in Harrisburg, Governor Corbett revealed his proposal for the 2012-2013 budget. We wanted to provide a quick summary and high-level observations to members of the economic development community. The bottom line is that there is little to be excited about if you work in the economic development or related communities in Pennsylvania.

First, this budget continues and in some cases adds to the cuts that have been faced by almost all of the Department of Community and Economic Development programs. The chart below illustrates the impact over the past 12 budget cycles on the economic development initiatives in the Commonwealth.

 

Commonwealth of PA Economic Development Funding

Source: Fourth Economy Consulting

 

This year’s budget further reduces economic development spending by $3.6 million from 2012-2013 figures.

This is a total of $60.9 million from the end of the previous administration with several programs consolidated or eliminated in the past two years. The chart provided also breaks out Commonwealth Financing Debt service as this funding is going to pay off previous commitments rather than being available for new investments.

The larger cuts are in the areas of Pennsylvania First (decreased by $2.5 million) and the Marketing to Attract Tourists (decreased by $1 million).

Programs such as the Ben Franklin Technology Development Authority which supports the Ben Franklin Technology Partners ($14.5 million), the Life Science Greenhouses ($3 million), and the newer Discovered and Developed in PA program ($9.9 million) are level funded in the Governor’s proposal. It remains to be seen if the Corbett administration will continue to support the Keystone Innovation Zone program. Previously those funds were provided as part of the BFTDA funding but in the past year the appropriation went to support the regional Ben Franklin Technology Partners.

One major blow to the state’s colleges and research universities that are performing health research is a redirection of all funding for the Health Research Priorities otherwise known as the Commonwealth Universal Research Enhancement program (CURE). Last year the CURE program supported $55.8 million in research funding and if the Governor’s proposal passes they will received no funding.

The budget negotiation process begins today and the Governor has made his recommendations. We will keep you posted about the conversations. If you have any questions or information to share please feel free to ask and comment.

 

 

 

Numbers Behind the News: The Noise on Jobs and Buffet Taxes

 

The analogy of job-killing taxes is dramatic but it is not supported by evidence.  Michael Chase writing for The Rational Middle not only dissects the argument but also provides a how-to guide for readers to check the data themselves.  Yet we can expect to hear a lot more about job-killing taxes, especially now with Obama’s proposed Buffet Tax. In all of this noise we never hear how the taxes will kill jobs, or why we’ve lost jobs when we’ve cut taxes.  We must simply equate taxes with the “death” of jobs.

Businesses hire and fire based on their need to produce more, or less, to meet the demands of their customers.  Taxes might shift the marginal threshold of those decisions, but taxes are generally insufficient to “kill” jobs.  Taxes do take money out of people’s pockets so taxes do reduce consumer demand, but taxes do not take money out of the economy.  The money circulates back into the economy, sometimes more efficiently than our individual spending.  An individual might spend their tax cut largesse on dining out or going to a sporting event, whereas government makes investments in infrastructure and education that are much more productive.  Not all government spending is more productive, there is certainly money that is wasted, or where the marginal gain is wiped out by the transaction costs of transferring that money.  It also depends on whether the money is being used for consumption or investment.

 


Figure 1

Note:  All data indexed to 1998 values.


 

Enough rhetoric, it is time to turn to the data.  For more historical perspective, you can turn to Michael Chase again or go directly to the National Income and Product Account.  Because employment and taxes are on vastly different scales, the numbers here have been indexed to 1998 values.  During this period, employment has been stable while we have had two major spikes in tax revenue (Figure 1).  You might argue that taxes have acted like a prophylactic – preventing the creation of jobs that might otherwise have been created.  That is possible but we need to explore someother data.

 


Figure 2

Note:  All data indexed to 1998 values.


 

If taxes are killing jobs – then they do so by siphoning off profits that might otherwise be converted into jobs.  Yet when we look at taxes versus profits the linkage goes the other way – rising profits produce more tax revenue (Figure 2).  There is no connection between higher taxes reducing profits.  Beginning in 2003, profits began to increase much more rapidly than taxes.

 


Figure 3

Note:  All data indexed to 1998 values.


 

Investment income, or capitals gains, are taxed at a lower rate than labor income because we desire that income to be re-invested. The problem with this logic is that there is nothing magical about a lower tax rate that encourages that re-investment, and the data show that very little of those gains are being reinvested in ways that generate jobs.

The linkage between profits and employment has been broken for some time.  Private industry is generating profit but it is not translating that profit into jobs (Figure 3).  Businesses have been able to wring greater productivity and profit out of an increasingly stressed labor force.  There is significant variation around the country with some regions doing better in aligning growth in profits and output with job growth, but in many regions and many industries that is simply not happening.

Neither additional stimulus spending nor steeper spending and tax cuts are going to kickstart job creation until we fix the gap between wealth, growth and employment.  Right now the outlook is grim for any real progress on employment.

 

Poll Results: State Economic Development Budgets

Last month, we asked the question, “what do you think of your state’s economic development budget?” Responses returned represented eight different states with a varied mix from those states. However, as shown above, most individuals indicated that they were scared of what will happen with their state’s budget.

The responses were not surprising to our team. Are they surprising to you?

The Fourth Economy Team will be launching a national Fourth Economy Index in the coming months. The Fourth Economy Index will be a first of its kind, designed to measure a variety of indicators important to the modern economic development landscape. So, this month’s poll is a precursor to this index where we are gauging confidence levels in several economic categories.

Be sure to take this month’s poll: Rate your confidence level in several economic categories…

Ignorance Is Bliss, and It Gets the Job Done for Now…

Would you cut your personal budget today by $1,000 if you knew, as a result, you would lose $3,500 five years from now?

Pennsylvania and many other states are contemplating significant reductions in their funding of programs that support economic diversity. While I recognize that government has not done well to reign in spending, the rationale for reductions must be thought through much more than what is currently being proposed. I am increasingly fearful that the actions being taken, not just in Pennsylvania but also in many other capitols across the country, are going to have mid- to long-term ramifications for U.S. competitiveness and future economic recovery.

Pennsylvania’s Acting DCED Secretary recently summed my concerns up best:

“Just as a farmer doesn’t eat the seed corn during a drought, you don’t cut economic development programs during a recession,” Walker said. “This is actually when we need new tools in our arsenal to survive and grow.”

As many in the field of economic development have begun to focus on ‘economic gardening,’ providing assistance to local firms to support growth, his statements are right on the mark.

The issue before us is that the easy path to balanced budgets is to eliminate anything that is not understood. The example formula above is being played out in Pennsylvania as the state cuts millions from its budget. The ratio of $1 in state investment equaling $3.5 in tax returns is taken from the actual impact measures shown from the Ben Franklin Technology Partners. Over the past few years over $10 million in annual investment has been taken from this program. Two years of these reductions represents over $70 million in lost future tax revenue.

Pennsylvania’s state government has been a pioneer and decades-long leader in supporting technology-based economic development. In 1983, then Governor Thornburg responded to the serious economic threats caused by the demise of the steel industry employment base by calling for the creation of the Ben Franklin Technology Partnership. In similar fashion the Governor of Ohio announced the creation of the Edison Center Network. These two efforts have led the way and today are still being replicated in state’s that are seeking to diversify their economies and create an environment that supports high growth, high wage companies. The visionary leadership has benefited us well for almost three decades.

Today we all must make hard choices but I hope that we can start doing so with informed and deliberative decision-making rather than the sound bite-filled rhetoric that has guided the current proposed cuts. The science of program evaluation is often difficult to understand, but so is the reality that we have eaten our seed corn and have nothing left for the future.

Ideas Wanted

The other day I attended a Team Pennsylvania Foundation regional forum that focused on Pennsylvania’s new economic development budget.

Even if you are not a resident of Pennsylvania my guess is that your state is also looking at doing things differently with respect to their economic development programs. The economy and financial concern in most state capitals require a hard look at economic development delivery system and investment priorities.

What struck me by the presentation by staff from the Department of Community and Economic Development and conversation that followed was that more people need to be involved in the process. Governor Corbett in his 2011-2012 budget is calling for significant changes to the DCED budget. Foremost is the reduction of programs managed by the agency from 127 to 56. This reduction will come from program elimination and consolidation.

Of course such action is not without its critics who would prefer the status quo over the unknown. In the end though the action is necessary, as the agency has had to deal with the creation and implementation of new programs with each subsequent Governor and new Legislature for decades. The maze of funding opportunities, guideline and legal requirements has created a nightmare of doors to go through for any community or business seeking government funding support.

The Governor began the process by making his recommendations. It is now critical that we as tax payers and stakeholders in the economic development infrastructure of this state weigh in on those recommendations and offer our own suggestions.

The Team PA Foundation has developed a feedback tool for you to share you ideas and comment on others. I strongly encourage you to take advantage of this opportunity and if you can attend a future regional session do that as well.

New initiatives that have been recommended include:

  • The Liberty Loan Fund
  • PA First Fund
  • Discovered in PA, Developed in PA
  • PA Regional Economic Partnership

Each program significantly changes the current way the state conducts business and it’s relationship with partners throughout the state. As a result there is significant room for recommendations and adjustment while the budget is debated. The time is now for you to add your voice to the discussion.