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Best of Times, Worst of Times


“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness . . . ”  So begins Charles Dickens’s novel A Tale of Two Cities.  It is set in in the years prior to the French revolution, but actually applies to the recent performance of Republicans in the Pennsylvania legislature.

As official Harrisburg prepares for what is shaping up to be another epic budget battle, the big question is: which GOP will show up in 2017?  Will it be the Republican-controlled legislature that last year stood its ground and fought Governor Tom Wolf’s historic tax and spending proposals, or will it be the GOP that this year folded like a cheap suit and approved $1.4 billion in new spending?

The $1.4 billion spending hike might not qualify as the worst of times, but coming on the heels of a successful struggle against the Wolf Administration’s spending demands it did leave a lot of folks puzzled.  After winning the longest budget fight in state history, why turn around and cave in months later? This leaves most observers – and quite a few participants – at a loss when it comes to predicting how the 2017 budget war will unfold.

We are certain of a few things.

The toxic stew of tax increases and new taxes cooked up to pay for this year’s massive spending increase has failed to live up to expectations.  To date, revenue collections for the 2017-2018 fiscal year are running $261.8 million below estimates.  This, coupled with a “structural budget deficit” pegged at over a billion dollars means the new budget will begin with a significant gap between spending and revenue.

We also can be sure that Governor Wolf will again demand massive spending increases and the taxes to pay for that spending.  He used his budget address this year to lecture the General Assembly for its refusal to accede to his spending demands.  Since most of his priorities have not been funded chances are they will be dusted off and included in his new budget proposal.

But should Republicans sit back and wait for the governor to set the agenda?  Leo Knepper of the Citizens Alliance of Pennsylvania, a pro-growth PAC, suggests a different course of action.  “If Republicans in the General Assembly were smart, they would upend a long-standing budget tradition and go on offense,” Knepper wrote in a recent policy brief.  “(They) should ignore tradition and pre-empt the Governor’s budget address with a plan of their own.”  Knepper observed this would “force the governor to play defense rather than the usual offensive position granted to governors.”

The question remains, however, whether or not legislative Republicans – or at least the leaders who actually sit at the negotiating table – want to go on offense.  Will the resolute leaders who fought and won the first budget battle show up to play, or the ones who forfeited this year’s game?

The final certainty is that all this will play out against the backdrop of the rapidly approaching 2018 election for Governor.  For his part, Governor Wolf will want to deliver the goods of higher spending to his largely urban constituency.

It won’t be so simple for Republicans.

With a number of legislators, including leaders who will negotiate the new budget, eyeing a race for the Republican gubernatorial nomination, the upcoming budget battle is fraught with peril.  There are pressures for leaders to “be responsible” and give into spending demands.  But with a veto proof Senate majority and a historically large majority in the House, voters are not likely to be either understanding or forgiving if the GOP doesn’t stand firm.

Will it be the “best of times” with legislative Republicans going on offense and standing up to a tax and spend governor, or will it be the “worst of times” with the taxpayers of Penn’s Woods getting stuck with yet another round of tax hikes?  As the budget process begins a new cycle it is impossible to tell which of the GOP’s split personalities will emerge dominant in 2017, but both the pocketbooks of taxpayers and the political fortunes of many politicians will be affected by the outcome.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

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PA’s Economic Climate Challenges Nonprofits


‘Tis the season when many Americans donate to their favorite charity.  While leaders in the nonprofit sector remain firm in their conviction that they are best suited to deal with Pennsylvania’s social and economic challenges they are concerned that public trust in charities is not as high as it should be.  Those are among the findings of the 2016 Pennsylvania Charitable Organizations Survey conducted during the month of November by the Lincoln Institute of Public Opinion Research, Inc. in cooperation with the Pennsylvania Association of Nonprofit Organizations (PANO).

Among the participating nonprofits just ten percent said that public trust in charities is “high,” while 77% rated public trust as “medium.”  Nine percent felt public trust in charities currently is “low.”  Twenty-two percent of the nonprofit executives said the level of public trust in charities has gotten better over the past few years, but 31% said it has gotten worse.

Having said that, the nonprofit leaders feel their sector is best positioned to address Pennsylvania’s social and economic challenges.  Forty-five percent identified their own sector as best suited to address those needs; 22% think state government is most effective; while 6% cite the for-profit sector.  Just three percent said the federal or municipal governments can best handle those challenges.

“Public trust,” said Anne Gingerich, Executive Director of PANO, “is critical to the sustainability of any business – nonprofit, for-profit or government.  When one nonprofit fails to live up to the highest standards it can damage the reputation of all.”  She continued: “Unfortunately these stories overshadow the hundreds of nonprofits who give selflessly to ensure that lives are changed, not just during the holidays, but all year long.”

Like their counterparts in the for-profit world, leaders in Pennsylvania’s nonprofit sector say business conditions in the state have gotten worse over the past year rather than better.  Concerns over potential new federal regulations and the growing likelihood of another extended state budget stalemate feed concerns that the commonwealth’s business climate will continue to deteriorate during the year ahead.

The survey found 15% of the nonprofit executives view business conditions in Penn’s Woods over the past year as having improved, 22% say business conditions have gotten worse.  The majority – 63% – say the state’s economy has remained about the same.  But “about the same” is not good as business confidence, whether for-profit or nonprofit, has been low for the past two years.

By comparison, a September 2016 survey of owners/chief executive officers of for-profit businesses found only five percent saying the state’s economy has improved in recent months while 50% said it had gotten worse.

Looking ahead, a third of the nonprofit leaders expect the state’s business climate to get worse while 22% predict it will get better. Forty-four percent say the Pennsylvania business climate will remain about the same during 2017.

Despite their overall pessimism about the direction of the commonwealth’s economy, employment was up at a quarter of the nonprofits, and down at 16%.  That could be explained in part by some nonprofits stepping up hiring after having cut back staff during the budget stalemate of two years ago.  However, looking ahead 22% say they expect to add employees while 14% predict staffing cuts.

Federal Regulation

Hanging over all sectors of the economy including nonprofits are U.S. Department of Labor (DOL) regulations that would increase the minimum salary requirements for “white collar” workers from $23,600 to $47,476 per year.  The effect would be a significant increase in overtime costs.  This is perhaps more significant for the nonprofit sector in that employees at many smaller nonprofits view their jobs as being community service as much as employment and often put in hours well in excess of those for which there are paid.

The 2016 Pennsylvania Charitable Organizations Survey found that the new regulations would increase payroll costs at 43% of the responding organizations as well as increase the amount of time spent tracking employee hours.  The regulations are now on hold due to a federal court ruling, but should they go into effect 30% of the nonprofits surveyed said they would have to cut staff to pay for the increased costs of complying with the regulations; 11% would have to cut services and another 16% would respond by seeking additional volunteer help.

State Issues

Pennsylvania’s nonprofit organizations were among those most significantly impacted by the lengthy state budget stalemate of two years ago.  In light of that experience, 68% would support putting into place legislation that would incentivize lawmakers to adopt a state budget in a timely manner. Sixty-eight percent (some with board approval) said they would support legislation that would progressively penalize state lawmakers for missing the state budget deadline, with penalties increasing for each day past the June 30th deadline.

PANO’s Gingerich said nonprofit support of legislation penalizing lawmakers for budget stalemates is not surprising.  “Not only clients suffer as a result of the impasse, but nonprofits themselves had to lay off staff and borrow money to continue operations.  As partners with state government in providing mandated services, nonprofits should ask to be at the budget negotiation table.”

Unlike executives in the for-profit sector, nonprofit leaders are open to supporting a wide range of tax hikes.  Thirty-seven percent said they would support an increase in the state’s Personal Income Tax (PIT), while 22% said they would not.  Another 41% offer no opinion on the question.  Likewise 43% would support imposing a new natural gas drilling tax of up to 6.5% specifically to support human services.  Thirteen percent would oppose such a tax, and 43% offered no opinion.  Similar support levels were voiced for the imposition of a new public health tax (ie: sugar tax, soda tax) of 1.5 cents per ounce dedicated to human services.  The highest level of support – 50%  – is for dedicating a portion of taxes generated by Pennsylvania’s gaming industry to support human services.

Organizational Issues

Despite their overall negative assessment of the direction of Pennsylvania’s business climate, more of the nonprofits participating in the 2016 Pennsylvania Charitable Organizations Survey said funding for this calendar year has increased than have seen decreases.  A third of the nonprofits said funding is up, a quarter reporting funding has dropped and 43% said their funding levels have remained about the same.  Looking ahead to 2017 about half of the nonprofits predict funding levels at their organization will remain static; 30% say they expect funding to increase; 20% are braced for funding to decrease.

By a two-to-one margin nonprofits have seen state funding levels decrease over the past five years.  Twenty-one percent said funding from the state had dropped during that period of time while ten percent saw an increase in state funding.  The other half of the organizations said funding from state government has remained about the same.  Likewise there has been a slight drop in federal funding.  Sixteen percent said their organization’s funding from the federal government has dropped over the past five years, 12% said federal funds have increased.  Federal funding remained about the same at the remaining 45% of organizations surveyed.

Property tax exemption challenges remain a concern at some nonprofit organizations.  Seven percent report having had their property tax exemption challenged over the past two years and 13% are concerned their municipal or county government may challenge their exemption next year.

Nonprofit organizations are not participating in lobbying activities in a major way.  Just six percent say they have someone from their organization registered as a lobbyist under the Pennsylvania Lobbying Disclosure Act. Twenty-two percent have lobbied on a public policy issue at some level of government over the past year.  Twenty-seven percent expect to lobby government at some level during the coming year.  Gingerich urged nonprofits to engage in more lobbying activities.  “Nonprofits must understand that not only can they lobby, but they are not doing their jobs if they do not.  Together, the collective voice of the nonprofit sector has powerful, yet untapped power.”

Methodology

The 2016 Pennsylvania Charitable Organizations Survey was electronically conducted during the month of November 2016.  A total of 177 nonprofit organizations responded to the survey invitation.  Complete numeric results are available at http://www.lincolninstitute.org.

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Your Pain Is His Gain


The epic budget battle that began two years ago with the inauguration of Governor Tom Wolf resulted in school children and nonprofits being held hostage for over nine months as legislators battled the massive tax and spending increases advocated by the new chief executive.  State employees, however, were spared economic pain.

As the budgeting process for the new fiscal year gets underway the first shots in what is shaping up to be an even more intense struggle between the Democratic governor and a legislature heavily dominated by Republicans clearly will not let state employees off the hook.  In fact, some 520 workers in the Pennsylvania Department of Labor & Industry are among the first casualties.

Just as the battles at Lexington and Concord heralded the start of America’s Revolutionary war, the skirmish over funding for Labor & Industry represents the start of what may turn into Pennsylvania’s longest fiscal fracas.  Court rulings require state employees to be paid even if there is no budget in place by the constitutionally mandated June 30th deadline.  That is one reason why little pressure was applied to the governor and lawmakers during the lengthy budget battle two years ago.

But this is different.  At issue is continuing a dedicated funding stream that finances the operations of seven unemployment compensation service centers around the state.  As the last hours of the 2015-2016 session of the General Assembly ticked away the House passed a bill reauthorizing the spending.  Senate Republicans, however, wanted more information which was not forthcoming from the Wolf Administration in a timely manner and the clock ran out.

Sensing a political opportunity Wolf immediately announced lay-offs and sent a labor union ally out to blame Senator Scott Wagner who plans to challenge the governor’s re-election.  This despite the fact senate leaders indicated their willingness to renew the funding when the new session of the General Assembly reconvenes in January.

Senators argue the lay-offs are unnecessary because the administration could merely move funding among budget categories to cover costs until after the New Year.  Wolf claims he can’t do that, but during the long budget battle of two years ago he made hundreds of such transfers.  It isn’t a matter of can’t – it is a matter of won’t.

So once again Governor Wolf is signaling his willingness to inflict great pain upon innocent parties in his efforts to achieve his spending goals.  As 570 families enter the holiday season with paychecks about to end, they are the first of millions who will suffer economic harm in the coming months.  Charities and schools are soon to follow.

A representative survey of just 176 nonprofit organizations found that during the last budget battle 68% were adversely affected by the disruption in state reimbursements.  Had that fight gone on much longer numerous school districts across the state would have been forced to close.  Many kept their doors open only by borrowing.  Likewise many counties were forced to cut services and/or borrow money.  All of this came at significant cost to taxpayers.

The early signal by Governor Wolf that he plans to continue using fiscal hostage taking as a tactic is ominous.  The recent General Election produced a veto-proof Republican majority in the state Senate.  And while not holding veto-proof numbers in the state House, Republicans did add to their already substantial majority.  Thus the stage is set for a lengthy fight.

Overlay all these factors with the unofficial start of the 2018 gubernatorial election cycle and it becomes quite possible Penn’s Woods may see something it has never seen before: a fiscal year with no official budget.  It happens in Washington all the time where so-called continuing resolutions keep the money flowing because congress and the president can’t agree on a spending plan.

But even a state version of a continuing resolution is not possible unless all parties agree that money must continue to flow.  At this point it is unlikely Governor Wolf will bow to political reality any time soon. Rather he is doubling down on his policy of your pain is his gain.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

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Winners and Losers


One of the many quirks of our political system is that each year there are winners and losers among politicians whose names are not actually on the ballot.  This year is no exception.  Neither Governor Tom Wolf nor State Senator Scott Wagner was up for election this year, but results of the balloting sent their career paths in opposite directions.

Governor Wolf has had a tough first two years in office dealing with a Republican-controlled legislature. His efforts to dramatically expand government spending, and to implement the historic tax hikes needed to pay for that agenda resulted in the longest budget stalemate in state history.  Legislative Republicans won.

Tuesday voters rewarded the GOP with even larger legislative majorities. Democrats in the state senate are now on life support.  Two Democratic incumbents were defeated by challengers; a third Democrat seat went Republican after the incumbent gave up several months ago and resigned from the ballot.  Combined, the three seats give Republicans a 34-16 edge and something rarely if ever seen in state government: a veto proof majority.

Meanwhile, across the rotunda in the House of Representatives Republicans saw their already historically high majority expand by three seats as four incumbent Democrats and one incumbent Republican lost.  The Republican pick-ups came in southwestern Pennsylvania which has been trending toward the GOP for several election cycles.  In fact, the most endangered species in Penn’s Woods might well be the non-urban legislative Democrat, with only a handful of Democratic lawmakers representing districts outside of the state’s urban cores.

All of this matters because next year’s state budget battle is shaping up to be even tougher than the first.  Republicans caved into Governor Wolf’s spending demands this year, but failed to fully fund the budget.  That coupled with revenue sources that either never materialized or have failed to meet projections presages a major fiscal fight next year.

Not only have Republicans added to their numbers, but this year’s legislative elections moved both chambers further to the Right.  Moderate state senators like Cumberland County’s Pat Vance and Lancaster’s Lloyd Smucker have been replaced by far more conservative legislators.  The continued drift of the House GOP caucus from moderate southeastern dominance to conservative central and western Pennsylvania influence means tougher sailing for those wanting to raise either taxes or spending.

Governor Wolf also saw his agenda rejected in another race; that the battle for Pennsylvania’s U.S. Senate seat.  The Democratic nominee, Katie McGinty, was Governor Wolf’s first chief of staff and architect of the tax and spend plan that triggered the epic budget battle.  Incumbent U.S. Senator Pat Toomey made hay of that effectively painting McGinty as out of touch with the financial needs of average Pennsylvanians. He won, she lost.

How then do the fortunes of one state senator rise on all of this? Senator Scott Wagner was an establishment pariah when he ran for an open seat in York County in 2014.  Shunned by his own party Wagner accomplished an historic first in Pennsylvania: He won a special election on a write-in defeating both party nominees.

The upstart senator has quickly gained clout and was tapped by his colleagues to lead the Senate Republican Campaign Committee.  The SRCC as it is known is tasked with recruiting, funding and electing Republicans to the state senate.  After playing a major role in helping to win several seats two years ago, Wagner effectively recruited candidates like Senator-elect John DiSanto of Dauphin County who upended Democratic incumbents last week.  Much of the credit for the senate’s now veto-proof majority goes to Wagner.

This is important because Scott Wagner has made no secret of his desire to run for governor in 2018 and is widely expected to announce his candidacy within weeks.  Having built a strong senate majority gives him a leg up both on the Republican nomination and on a grassroots organization for the battle against Tom Wolf who is expected to seek re-election.

Thus the 2016 election has set the stage for the beginning of the next big electoral battle in Pennsylvania. Political fortunes have risen and fallen. And the never ending cycle of campaigns has already begun anew offering no respite for weary voters.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

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Grow Private Sector, Not Government


 

Tax policy received scant attention in the presidential debates, but when it did both candidates displayed a serious lack of understanding regarding at least one critical component of the tax code: carried interest. Although arcane in nature and unheard of by most, carried interest is a tax rule that fosters capital formation, encourages investment and ultimately leads to job creation.

Simply put, carried interest is a type of capital gain.  Homeowners are familiar with the term ‘capital gain’ which in that circumstance refers to the increase in value of your home over time as you make improvements or rising market prices increase its sale price.  If you sell your principle residence and make more than $500,000 in profit as a married couple, you must pay a capital gains tax.  You pay the capital gains tax rate, not the ordinary income tax rate, on the transaction because you have already paid taxes on the income used to purchase the house.

Likewise carried interest is a long-term capital gain that is earned by an investment partnership.  In this case the asset is not a house, but an investment portfolio that the partnership established and grew over time. When sold, the portfolio manager pays a lower capital gains tax rate on the fund’s profit, not the higher ordinary income tax rate.

The presidential candidates have, unfortunately, decided to portray carried interest capital gains as a loophole granted to special interests.  Both candidates want to raise this capital gains rate claiming it gives investment fund managers an unfair tax break.  Fairness, however, is not what such an increase would achieve. Rather it would amount to double taxation.

The negative effects would be much worse than over-taxing a sub-set of taxpayers.  The partnerships that are formed when an investor joins with a fund manager results in a structure that fosters informed investments that grow over time.  This growth generates profits.  When the profits are re-invested that is called capital.  Such capital is invested in businesses so that they can grow, expand and create jobs.

Carried interest capital gain rules play a critical role in allowing capital to form.  If you raise the carried interest capital gain tax rate, the government will take more in taxes–dramatically decreasing the amount of capital available for investment in the economy.

A significant portion of that capital available for investment is invested right here in Pennsylvania.  According to the American Investment Council, private equity firms invested an estimated $24.49 billion in Pennsylvania-based companies in 2015.  There are 143 private equity firms headquartered in Pennsylvania.  These companies support more than 185,103 workers at facilities both in Pennsylvania and in other states.

In other words, carried interest capital gains is not a tax device aimed at making Wall Street fund managers richer. Rather, it is appropriate taxation that makes more capital available for investment in the companies that are creating much needed new jobs for Pennsylvanians and elsewhere.

It is common in an election year for candidates to propose new government spending programs in an effort to win votes.  They then go looking for ways to pay for that higher spending. “Reforming” the nation’s complex tax structure is often an effective target.

But, changes can have unintended consequences.  Raising the current 23.8% carried interest rate to 33% as proposed by Donald Trump or almost 50% as suggested by Hillary Clinton would result in only a modest increase in tax revenue flowing into the federal treasury.  And we all know that any move to raise this rate would likely be coupled with other tax hikes on working families and small businesses.

Even if you set aside the unfairness of double taxing investors, raising the carried interest tax rate or eliminating that category of capital gain entirely would have the detrimental effect of reducing capital formation.  That means dramatically fewer dollars available for companies to grow and create new jobs.  Carried interest is not a tax break for the wealthy; rather it is a way for investors to put their earnings to work creating the new jobs needed as the nation struggles to recover from the Great Recession.

Lowman S. Henry is Chairman and CEO of the Lincoln Institute of Public Opinion Research, Inc. and host of the weekly Lincoln Radio Journal. His e-mail address is lhenry@lincolninstitute.org

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Leave Us Alone


It was a simple, yet revealing summary of the problems plaguing Pennsylvania’s businesses.  “Please stop trying to ‘fix’ it,” the business owner begged. “Leave us alone.”  That plaintive plea came as three new studies show our state’s economy is sagging under the weight of new regulations, higher taxes, and unsustainable government spending.

Recovery from the Great Recession of 2008-2009 has been one of the slowest in history.  But, some states have bounced back faster and farther than others.  Pennsylvania is not one of those states.  The Fall 2016 Keystone Business Climate Survey conducted by the Lincoln Institute of Public Opinion Research found half of the business owners/chief executive officers surveyed saying the state’s business climate has gotten worse over the past six months, and only five percent reporting improving business conditions.

Like other states the people who actually run businesses reported a dramatic deterioration in economic conditions in Pennsylvania during the Great Recession. Optimism returned briefly during the Corbett Administration, but tanked less than three months into Governor Tom Wolf’s tenure.

Governor Wolf began his administration pushing for historic increases in both state spending and in taxes.  The Republican-controlled legislature successfully derailed that effort last year, but then caved into $1.4 billion in higher spending this year – earning the disapproval of 86% of the owners/CEOs.  All of this creates a climate of uncertainty leaving one owner to comment: “We expect another shoe to drop making it difficult to operate in Pennsylvania.”

The biggest shoe that hasn’t dropped is who will pay to bail out Pennsylvania’s massively underfunded public pension system.  Business owners fear a significant portion of that burden will fall upon them.  And the problem is, to use a currently popular word, huge.

The American Legislative Exchange Council (ALEC) recently released a study of state pension systems entitled Unaccountable and Unaffordable.  It pegged Pennsylvania’s unfunded pension liability at nearly $212 billion dollars.  The commonwealth has amassed the 44th largest unfunded pension liability among the fifty states.

Compounding the problem is Pennsylvania has little room in which to maneuver in finding new revenue streams (taxes) to fund the public pension system.  The Tax Foundation’s State Business and Tax Climate Index found we have the 24th highest state tax burden in the nation.  We already have the most damaging taxes on the books: the Personal Net Income tax, Corporate Net Income tax, and a broad-based state sales tax.  Already suffering from a poor tax climate, any move to expand, increase or create new taxes would further erode our competitiveness.

These factors weigh heavily on the minds of business owners/CEO as they consider locating or expanding in Pennsylvania.  Forty percent said Governor Wolf’s proposed tax hikes have caused them to not expand their businesses.  That factor was second only to the explosion of new federal regulations in impeding business growth.

Why should non-business owners care about all of this?  Business relocation into Pennsylvania and the expansion of existing businesses will result in the creation of new jobs.  Penn’s Woods has lagged the national average in job creation in large measure due to state taxes and regulations.  The 2016 Keystone Business Climate Survey found 21% of the responding businesses reduced their employee compliment over the past six months while only 11% added employees.

Thus Pennsylvania continues on a downward spiral.  And there is little optimism among those on the front lines of business activity in the state for improvement at any point in the near future.  Uncertainty is Kryptonite to business development.  At the state level uncertainty abounds.  Governor Wolf continues to press for increased spending and higher taxes at a time when the commonwealth already faces a structural budget deficit.  The recent record of legislative Republicans has shaken confidence in their ability to either deal with cost drivers like the pension crisis or to successfully oppose future tax hikes.

The bottom line is Pennsylvania’s business climate will not improve, and significant job creation resume, until and unless state government gets spending under control, addresses the looming pension crisis, cuts onerous regulations and provides some measure of tax relief to businesses ready to expand but which are being held back by the heavy hand of government.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

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Stagnation: PA business climate remains sluggish


Pennsylvania’s business climate remains sluggish as the commonwealth continues to struggle in the aftermath of the Great Recession.  Business conditions, employment levels and sales have all backslid over the past six months with owners blaming high taxes, government regulation and a lack of skilled workers for the malaise.

The Fall 2016 Keystone Business Climate Survey conducted by the Lincoln Institute of Public Opinion Research found half of the business owners and chief executive officers survey saying the state’s economy has gotten worse over the past six months, only five percent felt Pennsylvania’s business climate had improved during that time frame.

Comparatively, one year ago 42% felt the business climate had gotten worse, while six percent at that time said it had improved.  There is little optimism that business conditions will improve soon. Forty-four percent say they expect the state’s economy to continue getting worse over the upcoming six months, five percent expect to see an improvement in the business climate.

Along with that pessimistic overall prognosis twice as many businesses report having reduced their workforce as say they have added jobs.  The majority of businesses – 66% – reported that employment levels remained about the same over the past six months.  But, 21% said they have reduced their employee compliment while 11% added employees.  The picture improves slightly as the owners/CEOs look ahead to the coming six months.  Sixteen percent say they plan to add employees, 12% expect to reduce their workforce.

Sales have also taken a hit over the past six months.  Thirty-nine percent said their sales remained about the same from March thru September.  But, 39% reported decreased sales and were off-set by only 21% having reported sales increases.  Looking forward, 51% expect sales to remain stable.  Twenty-Four percent forecast an increase in sales, 23% are braced for a sales decrease.

Factors Impacting Business Growth

Among the factors cited by businesses for why they considered expanding their businesses over the past two years, but decided against expansion taxes and regulation topped the list of barriers.  Onerous federal regulations were cited by 41% of the businesses that considered, but rejected, expansion plans.  Coming in a close second was Governor Tom Wolf’s proposed tax increases cited by 40% as a reason why they did not expand. Pennsylvania’s tax structure was listed by 29% as having frustrated expansion plans.

Thirty-six percent cited onerous state regulations as a barrier to expansion, while another 35% cited the lack of a skilled work force.  Nearly half of the businesses surveyed said they currently have open positions for which they have been unable to find qualified applicants. Forty-two percent say they have been unable to fill one to five jobs; 2% have six to ten open positions; one percent has more than ten jobs unfilled due to lack of qualified applicants.

State Issues

Pennsylvania fiscal condition continues to be of concern to the business owners and CEOs participating in the Fall 2016 Keystone Business Climate Survey.  Eighty-five percent disagreed – 70% strongly so – with Republicans in the General Assembly having agreed to a $1.4 billion spending increase and then raising taxes to enact the current year’s state budget.

Looking ahead to what will likely be another epic budget battle next summer, 92% say the General Assembly must address cost drivers such as pension reform before considering an increase in taxes.  In fact, 34% said the state’s massive unfunded pension liability has caused them to not consider expanding in Pennsylvania.

Among pension reforms being considered is moving state employees from the current defined benefit pension system to a defined contribution plan. Thirty-nine percent of the businesses surveyed said they offer employees a company administered defined contribution plan to which the company contributes.  Only 3% of the private businesses surveyed continue to offer a defined pension plan.  Another 40% offer employees no retirement plans at all.

Earlier this year the General Assembly did pass, and Governor Tom Wolf signed into law, some modest changes to the state’s century-old liquor laws. Business owners/CEOs said those reforms did not go far enough.  Fifty-two percent would like for the state to completely privatize both retail sales and wholesale distribution of alcoholic products.  Another 26% would like to see just retail sales privatized.  Twelve percent said the recent changes were sufficient.

Pennsylvania has an abundant supply of natural gas, but additional pipelines are needed to get that gas to market.  Eight-nine percent agree – 60% strongly agree – that this resource should be developed and more pipelines built.  Nine percent disagree.  Twenty-five percent said easier access to natural gas would be a benefit to their business with an additional 14% saying it would be a major benefit.  Thirty percent said they do not utilize natural gas in their business.

Over the past nine years since the passage of Act 44 the Pennsylvania Turnpike Commission has diverted $5.2 billion to PennDOT to help pay for state highways and public transit.  This has resulted in annual fare increases for turnpike travelers.  Sixty-three percent of those participating in the Fall 2016 Keystone Business Climate Survey said this should end and fare revenue be used only to maintain and improve the turnpike.  Twenty-nine percent felt the sharing of revenue should continue.

Job Approval Ratings

President Barack Obama and Governor Tom Wolf continue to suffer from significantly low job approval ratings among the business community.  Eighty-four percent have a negative view of the President’s job performance; 86% disapprove of the job being done by Governor Wolf.

U.S. Senator Pat Toomey, who faces re-election in November, received a 50% job approval rating against 23% with a negative view of his job performance.  The job being done by U.S. Senator Robert P. Casey, Jr. is viewed negatively by 56% of the business owners/CEOs, 18% give him positive marks.  Likewise, 54% say Federal Reserve Chair Janet Yellen is doing a poor job, 15% approve.

Pennsylvania has three statewide constitutional or “row” offices. Two are serving by appointment, their elected predecessors having resigned after being convicted of crimes.  Auditor General Eugene DePasquale is the surviving official elected in 2012 still in office.  Seventy-three percent have no opinion of his job performance, with 14% saying he is doing a good job and 14% having a negative opinion of his job performance.  Likewise about two-thirds offered no opinions on state Treasurer Tim Reese or Attorney General Bruce Beemer.  Of those who did, 18% give Beemer a negative rating, 6% a positive one while 15% hold a negative view of Reese, 5% a positive view.

As has been the case throughout the Keystone Business Climate Survey’s 22-year history the owners and chief executive officers hold the federal congress and the state legislature in very low regard.  Just 8% approve of the job being done by the United States Senate, 11% approve of the job being done by the U.S. House of Representatives.  Seventeen percent approve of the job performance of the Pennsylvania Senate; 19% approve of the job being done by the Pennsylvania House of Representatives.

Finally, the Lincoln Institute asked participants in the survey who they support for President of the United States and United State Senator from Pennsylvania in the upcoming November General Election.  Seventy-three percent said they will vote for the Republican nominee Donald Trump, 12% support the Democratic nominee Hillary Clinton and 6% say they will vote for Libertarian Gary Johnson.   Republican incumbent U.S. Senator Pat Toomey has the support of 81% of the owners/CEOs, Democratic challenger Katie McGinty has 12% support.

Methodology

The Fall 2016 Keystone Business Climate Survey was conducted electronically by the Lincoln Institute of Public Opinion Research, Inc. from September 13 through October 5, 2016.  A total of 370 businesses responded to the survey invitation.  Of those 81% are the owner of the business, 14% are the CEO/COO/CFO and one percent a business manager.

Twenty-five percent of the responses came from the Philadelphia/southeastern part of the state; 18% from Pittsburgh/southwestern Pennsylvania; 16% from south/central Pennsylvania; 13% from northwestern Pennsylvania; 11% from northeastern Pennsylvania; 10% from north-central Pennsylvania; 4% from the Lehigh Valley and 3% from the Altoona/Johnstown area.

Complete numeric results are posted on-line at http://www.lincolninstitute.org

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What’s My Line?


There is an old television game show entitled “What’s My Line?” The game featured celebrity panelists questioning contestants to determine their occupations.  Let’s play a Pennsylvania version of the show: Who are Otto Voit, Joe Torsella, John Brown, John Rafferty and Josh Shapiro?  The answer is they are all currently running for statewide office in Pennsylvania.

Next question: Can you correctly identify the office for which they are running?  The answers are Voit and Torsella are running for state treasurer; Rafferty and Shapiro for attorney general; and John Brown, along with incumbent Eugene DePasquale are running for auditor general.

When it comes to statewide offices in Pennsylvania it is either feast or famine.  This year’s ballot will feature a veritable buffet for voters from President of the United States to U.S. Senate to the already mentioned three statewide constitutional offices. But next year statewide politics goes on a strict diet with only appellate court seats on the menu.

Voters respond accordingly.  Turn-out for the 2012 election topped 58% in Pennsylvania.  The following year, 2013 sported only one statewide race – a seat on the state superior court – and voter turn-out plummeted to less than 17%.  As a side note, that 2013 judicial race was won by Victor Stabile who has the distinction of being the only Republican to win a statewide election in the past four years.

In 2012, President Barack Obama powered a sweep of statewide offices as Democrats were elected state treasurer, auditor general and attorney general. It was the first time since attorney general was made an elected position back in 1980 a Democrat won that office. Four years later, however, former Attorney General Kathleen Kane and former state Treasurer Rob McCord have been convicted of high crimes and await sentencing.  Auditor General DePasquale, it should be noted, has served scandal free.

Corruption in these statewide constitutional or “row” offices is unfortunately not uncommon in Pennsylvania.  Former state Treasurer Barbara Hafer was recently indicted for alleged improprieties dating to her time in office.  Going back a bit further, former Auditor General Al Benedict and former state Treasurer R. Budd Dwyer were convicted of crimes. Benedict admitted his guilt, Budd Dwyer died proclaiming his innocence.

Of course it is impossible to know whether or not a candidate will be honest in advance, but it is clear the currently system has not provided voters with the opportunity to learn enough about the candidates.  While tens of millions will be spent on this year’s U.S. Senate race between Pat Toomey and Katie McGinty, candidates for the row offices will likely be lucky to have a couple of million to present their credentials to voters.

It is unreasonable to expect voters to pay attention to who will be state treasurer, auditor general or attorney general in a year when a presidential campaign dominates the news.  You aren’t going to see Otto Voit and Joe Torsella on the front page of the paper every day – in fact they’ll be lucky to be in the paper at all.  And no television station is going to go live and lead from an appearance by these candidates.  Many voters will go to the polls not even knowing their names, much less with a full understanding of their credentials and plans for the offices they seek.

This will continue to be the case for however long these offices are filled in a presidential election year.  So here is a thought: move the election of these three offices to the year following the presidential election.  In the four year cycle of elections the “off year” following presidential balloting is the lowest profile year.  Only statewide appellate court seats are on the ballot, and – except for home rule counties – there aren’t even county commissioner races to capture voter interest.

By moving the election of the treasurer, auditor general and attorney general to the off year they would become the marque races.  The news media could devote more attention to the candidates.  Fundraising would be easier.  Party activists could devote more time to their campaigns. Voters would be able to focus.  They would go from being a side salad in the electoral buffet to the main course.

With a brighter spotlight on these offices we would hopefully end up with more voters at the polls, and fewer of the officials elected in jail.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

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Road to Ruin: PennDOT Drains Turnpike Cash


The Pennsylvania Turnpike is America’s first superhighway.  It also has become one of the most expensive roads in the country to travel.  If you are in a passenger car driving the entire length of the turnpike from the Delaware River Bridge in the east to Gateway in the west it will cost you $42.30 if you pay cash, $30.32 if you have an E-Z Pass.

Traversing the Pennsylvania Turnpike gets more expensive for truck traffic, significantly more expensive.  That same east-west trip for the heaviest and largest of trucks costs $1,634.35.  As if that isn’t bad enough, recent annual fare hikes are projected to continue into the foreseeable future.

Pennsylvania is known as the Keystone state and for good reason.  Geographically we are centrally located for both north-south and east-west traffic destined for some of the nation’s most populous cities.  For decades the turnpike has been a key traffic route, but now both freight haulers and passenger cars are seeking out other routes – such as Interstate 81 that, while a bit out of the way for some, charge no tolls.

These facts have not escaped the attention of state Auditor General Eugene DePasquale who recently sounded alarm bells over the turnpike’s fragile fiscal situation.  In his audit of turnpike practices DePasquale said: “The plan for the turnpike’s financial future relies on projections calling for a 215% increase in toll revenue between 2015 and 2035 and a 44% increase in traffic volume through 2044.  However, traffic volume has remained relatively flat over the last decade.”

These two projections are inherently contradictory as basic economics dictates that consumers use less of a product as prices rise – especially if prices rise at a much faster rate than the income of the purchaser.  Thus, we can expect the past decade’s “relatively flat” traffic volumes to either remain so, or perhaps even decline as such significant toll hikes continue to be implemented.

It would be easy to blame mismanagement and the turnpike commissions’ often criticized hiring and contracting practices for these annual rate hikes.  But, in this case the problem has been caused by the state legislature, not by turnpike administration.  Act 44 of 2007 requires the Pennsylvania Turnpike Commission to make payments of $450 million per year to the Pennsylvania Department of Transportation (PennDOT).  PennDOT then spends the money on highway maintenance and on subsidizing mass transit operations.  Since the passage of Act 44, $5.2 billion in fare revenue has been diverted from turnpike operations to PennDOT.

Act 44 was passed with the unrealistic expectation that Interstate 80 would be converted to a toll road operated by the Pennsylvania Turnpike Commission. That revenue would offset the mandated subsidy to PennDOT.  State officials appealed to both the Bush and Obama administrations for approval of the scheme, but were rejected. As a result the turnpike has been saddled with making annual payments to PennDOT and no source to fund those transfers except annual fare hikes.

The legislative mandate is also having another impact: the turnpike is reducing planned spending on maintenance, improvements, and expansion. An ambitious rebuilding plan that includes expansion of the turnpike to six lanes in many areas has already been reduced by $1 billion over the next ten years.  DePasquale pointed out the folly of the situation stating: “You can’t cut back on construction and increase traffic 44%, especially while jacking up the toll rates.”

The subsidies to PennDOT are scheduled to end in 2022, but by then the turnpike’s financial situation will be dire. Worse, legislators will then have to determine how to fund the insatiable appetite for subsidies required by the state’s money-losing mass transit systems.

This problem should have been addressed two years ago when the legislature passed and Governor Tom Corbett signed into law a defacto 30-cent per gallon increase in gasoline taxes.  That would have been the time to end “haphazard funding gimmicks” such as Act 44 and placed both the Pennsylvania Turnpike and PennDOT on solid financial footing.

It didn’t happen then. But it needs to happen now before, as Auditor General DePasquale concluded, the system collapses “and leaves the turnpike and people who rely on public transit systems across the state in a world of hurt.”

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

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Regulation Uber Alles


In nearly every study of state-by-state economic competitiveness Pennsylvania ranks near the bottom.  The most recent Keystone Business Climate Survey conducted by the Lincoln Institute found 53% of business owners and chief executive officers think our business climate is getting worse, only six percent think it is improving.

State government is doing everything in its power to prove them correct.

Two recent cases of regulatory excess and job crushing taxation illustrate the point.  The first involves the ride sharing company Uber; the second is the vaping industry.  Ride sharing and vaping have little in common aside from the fact both are being victimized by state government over-reach.  Sadly, they are just the latest example of how public policy in Penn’s Woods discourages business growth and job creation.

In the case of Uber it is an un-elected government regulatory agency, the Pennsylvania Public Utility Commission (PUC) that has levied an $11.4 million fine because the firm supposedly operated for six months without the appropriate license.  I use the word supposedly because the Uber concept was so innovative it did not fit neatly into any existing regulatory category.  What we have here is not a company flaunting the law, but a hyde-bound bureaucracy unable to keep pace with technological advancements.

Rather than work with Uber, the regulators flexed their muscle by issuing a cease and desist order – which Uber ignored.  Uber thus committed the greatest of sins: failure to bow before the power of the bureaucrats.  So out-of-bounds is the fine that Governor Tom Wolf and Republican legislative leaders urged the PUC to reconsider.  Those folks don’t normally agree on much, so their unity on behalf of Uber was striking.

For its part Uber remains committed to Pennsylvania.  The company is testing a new driverless system in Pittsburgh.  Apparently if such a system can navigate the circular roads, hills and bridges of the Steel City it will work anywhere.  That research has brought much needed jobs to the southwestern part of the state – something the PUC apparently failed to take into consideration.

It’s not just regulators who are crushing jobs; some legislators are doing their part.  After splurging on $1.4 billion in new spending in this year’s budget lawmakers went in search of the revenue to pay for their spending spree.  Part of the answer was to impose a 40% tax on vaping stock.

Vaping is an alternative to smoking that utilizes what is in effect a personal vaporizer to turn vaping liquid or juice into steam.  Such liquids can be infused with various amount of nicotine – or none at all – and has been known to help smokers quit using tobacco products.  As vaping has become more popular mom and pop vape shops have sprouted across the commonwealth.

A 40% tax on any product or service is excessive, but in the case of the nascent vaping industry it is a killer.  Since the tax is applied to any items in stock at the time the tax takes effect next month it will crush many if not most of the small businesses.  For example, if a shop had $100,000.00 of vaping stock on hand they will immediately have to write the commonwealth a check for $40,000.00.  For some that exceeds their annual profit margin.

The end result is one of the few industries available for first time or small entrepreneurs will close and disappear, or the industry will be dominated by a few larger operations capable of surviving the tax onslaught.  The end result will be fewer small businesses, lost jobs and fewer choices for consumers.  Oh, and those sales and personal income taxes paid by the vape shops, they go away too.

The General Election campaign is now underway with half of the state senate and the entire state house on the ballot.  This is an excellent time for voters to demand their elected officials stop imposing job killing taxation on businesses and call upon them to reign in the power of regulatory agencies.  Unless a stand is taken at the ballot box Pennsylvania has no hope of shedding its well-deserved reputation as an unfriendly place to do business.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal.  His e-mail address is lhenry@lincolninstitute.org.)

Permission to reprint is granted provided author and affiliation are cited.

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