The Pennsylvania Manufacturers’ Association October 2003 SLAYING THE SILENT KILLER

THE SILENT KILLER Between 1970 and 2002, state and local government spending far outstripped population and inflation growth.

KILLER FACTS PA’s population grew by an annual average of 0.14% between (US = 1.09%). PA’s population grew by an annual average of 0.14% between (US = 1.09%). US average annual inflation was 4.89% between and 2.46% from US average annual inflation was 4.89% between and 2.46% from State General and Non-General Fund nominal spending grew by an annual average of 7.80% between State General and Non-General Fund nominal spending grew by an annual average of 7.80% between State and Local nominal spending grew by an annual average of 4.75% between State and Local nominal spending grew by an annual average of 4.75% between

THE SILENT KILLER

Agenda 1.PA’s Poor Economic Performance 2.High Government Spending & Taxation 3.PA Manufacturing Job Losses 4.Twelve Ways to Slay the Silent Killer

PA’s Poor Economic Performance: Gross State Product (GSP) From , PA’s economic output – GSP – grew noticeably slower than the US average. From , PA’s economic output – GSP – grew noticeably slower than the US average. Among the twelve states that are PA’s closest economic competitors, PA’s growth rate was 2 nd from last over the past 12 years. Among the twelve states that are PA’s closest economic competitors, PA’s growth rate was 2 nd from last over the past 12 years.

PA’s Economic Competitor States (CS): CA, FL, GA, IL, MD, MI, NC, NJ, NY, OH, TX & VA* *As reported by the Pennsylvania Economy League.

Gross State Product, Source: Bureau of Economic Analysis, US Dept. of Commerce. NOTE: CS does not include PA.

During the 1990s, Pennsylvania lagged national growth in almost every occupation. Pennsylvania is expected to continue this trend. PA’s Poor Economic Performance: Job Growth

PA and US Employment Growth by Industry, Source: BEA, BLS and the PA Dept. of Labor and Industry, Center for Workforce Development. F.I.R.E. = Finance, Insurance & Real Estate.

Projected PA and US Employment Growth by Industry, Source: BLS and the PA Dept. of Labor and Industry, Center for Workforce Development. F.I.R.E. = Finance, Insurance & Real Estate.

Personal Income Growth, PA’s personal income growth: 65.97% PA’s personal income growth: 65.97% US personal income growth: 82.63% US personal income growth: 82.63% Competitor States: 81.40% Competitor States: 81.40% PA had the 3 rd lowest personal income growth among Competitor States PA had the 3 rd lowest personal income growth among Competitor States

Personal Income Growth, Source: Bureau of Economic Analysis, US Dept. of Commerce. NOTE: CS does not include PA.

High Government Spending & Taxation Pennsylvania’s state and local FY nominal spending was at least $73 billion. State and local governments spent $5,934 for every man, woman, and child in the Commonwealth (2002).* State and local governments spent $5,934 for every man, woman, and child in the Commonwealth (2002).* Source: The Commonwealth Foundation local government figures are estimates. *This figure is a conservative calculation and does not include federal government expenditures.

High Growth of Real Government Spending for Both Democrat and Republican Governors, Source: The Commonwealth Foundation. Data compiled from Commonwealth of Pennsylvania, Governor’s Executive Budgets, through

…there is one state or local government employee. For every 7.4 private sector employees in Pennsylvania… Source: BLS.GOV. May Data not seasonally adjusted. State: 164,900 Local: 493,900 Private Sector: 4,905, : Private Sector employment grew 9.89%; PA State and Local Government employment grew 16.85%

There are now more takers than makers. In December 2002, the number of PA federal, state and local government employees passed the number of PA manufacturing employees.

Source: Bureau of Labor Statistics. Data seasonally adjusted. May 2003 figures. *Federal, State, and Local. PA Government* Jobs vs. PA Manufacturing Jobs, 2000-May 03

In 2000, Pennsylvania’s business taxes per employee were 158% of the United States Average. Source: PA Economy League

State & Local Business Taxes Per Employee, 2000 Source: PA Economy League. NOTE: CS does not include PA.

…ranks 2 nd in the nation in corporate capital taxes (Capital Stock and Franchise Tax - CSFT) …ranks 3 rd in the nation in corporate income taxes (Corporate Net Income Tax - CNIT). …and West Virginia are the only states in the Top 10 in the nation in rates of taxation on both capital and income. Pennsylvania

Pennsylvania Business Taxes

Total CSFT Cash Payments by Industry, (in thousands) Source: The Statistical Supplement for The PA Tax Compendium, Fiscal Year PA Department of Revenue, Bureau of Research, 02/2002. Not classified: Companies that do not fit into the SIC code, listed an invalid code, or left the field blank.

Total CNIT Cash Payments by Industry, (in thousands) Source: The Statistical Supplement for The PA Tax Compendium, Fiscal Year PA Department of Revenue, Bureau of Research, 02/2002 Not classified: Companies that do not fit into the SIC code, listed an invalid code, or left the field blank.

PA Manufacturing Job Losses* 228,300 PA manufacturing jobs have been lost since ,300 PA manufacturing jobs have been lost since ,000 of those PA manufacturing jobs were lost in 2001 and 2002 together. 118,000 of those PA manufacturing jobs were lost in 2001 and 2002 together. 123,800 PA manufacturing jobs have been lost between January 2001 and May ,800 PA manufacturing jobs have been lost between January 2001 and May Source: The Bureau of Labor Statistics. *A new standard of measurement, The North American Industry Classification System, went into effect in January Administrative and warehousing jobs previously considered part of manufacturing were segregated out.

Pennsylvania Manufacturing Employment Source: Bureau of Labor Statistics. Employment is seasonally adjusted

Hypothetically, if Pennsylvania continued to lose manufacturing jobs at the current pace (May 2002-May 2003), all manufacturing in the Commonwealth would be wiped out by mid-February 2024.

Pennsylvania Average Annual Salaries by Industry, 2001 Source: Center for Workforce Information & Analysis, Pennsylvania Department of Labor & Industry SIC figures. Average annual wage = Total wages/Monthly average number of employees

The manufacturing industry has the strongest multiplier effect on employment; every time a manufacturing job is created, between three and seven jobs result.

Twelve Ways to Slay THE SILENT KILLER

12. Research & Development (R&D) Tax Credit PA’s R&D tax credit is capped at $15M and sunsets after It is claimed against the CNIT, CSFT and PIT. PA’s R&D tax credit is capped at $15M and sunsets after It is claimed against the CNIT, CSFT and PIT. Increases in excess of base year R&D research expenses within PA generates a 10% tentative credit. Increases in excess of base year R&D research expenses within PA generates a 10% tentative credit. For approved credits in 2001, manufacturers claimed the largest share, over 69%, of approved credits. For approved credits in 2001, manufacturers claimed the largest share, over 69%, of approved credits. PMA recommends repealing the cap and sunset provisions to increase the incentive for firms, especially manufacturers, to expend resources on R&D in PA. PMA recommends repealing the cap and sunset provisions to increase the incentive for firms, especially manufacturers, to expend resources on R&D in PA.

11. Single Sales Factor (SSF) SSF would eliminate the increase in PA CNIT liability that corresponds with an increase in payroll and property (physical plant) investment in PA. SSF would eliminate the increase in PA CNIT liability that corresponds with an increase in payroll and property (physical plant) investment in PA. Current PA CNIT liability is determined by weighing payroll, property and sales factors at 20%, 20% and 60%, respectively. Current PA CNIT liability is determined by weighing payroll, property and sales factors at 20%, 20% and 60%, respectively. SSF would weigh the sales factor at 100%. SSF would weigh the sales factor at 100%. PA would be the 11 th state to enact a SSF. PA would be the 11 th state to enact a SSF. SSF States: CT, IL, IA, MD, MA, MS, MO, NE & TX. WI signed a SSF into law in 2003 to be fully implemented by 2008.

10. Career Development Credit (CDC) Enacting the CDC – a job training tax credit - could achieve better performance results relative to state funded workforce programs. Enacting the CDC – a job training tax credit - could achieve better performance results relative to state funded workforce programs. The CDC reduces the cost of private employee training. The CDC reduces the cost of private employee training. PA would be the 19 th state to offer a job training tax credit. PA would be the 19 th state to offer a job training tax credit. Funds for the CDC would come from the approximately $400M allocated to the state’s 49 separate workforce development programs, which should be reduced or eliminated. Funds for the CDC would come from the approximately $400M allocated to the state’s 49 separate workforce development programs, which should be reduced or eliminated.

9. Manufacturers' Investment Credit for PA 20% credit for the costs of acquiring tangible personal property, including machinery, equipment, buildings and structural components of buildings, used in manufacturing as well as processing, assembling and research in PA. 20% credit for the costs of acquiring tangible personal property, including machinery, equipment, buildings and structural components of buildings, used in manufacturing as well as processing, assembling and research in PA. Non-refundable credit against the PA Corporate Net Income and Capital Stock and Franchise taxes where any unused credit would carry over for 20 years. Non-refundable credit against the PA Corporate Net Income and Capital Stock and Franchise taxes where any unused credit would carry over for 20 years. PA would be the 14 th state* to implement a Manufacturers’ Investment Credit. PA would be the 14 th state* to implement a Manufacturers’ Investment Credit. This would encourage manufacturing expansion in PA for economic growth and job creation. This would encourage manufacturing expansion in PA for economic growth and job creation. *As of January Site: Area Development,Online, Site and Facility Planning.

8. Reduce the Corporate Net Income Tax to 5.99% This would place PA in a competitive position by having a maximum rate below the 2002 U.S. average of 6.635%. 8. Reduce the Corporate Net Income Tax to 5.99% This would place PA in a competitive position by having a maximum rate below the 2002 U.S. average of 6.635%. 7. Continue and Accelerate the Phase-Out of the Capital Stock & Franchise Tax (CSFT) PMA recommends not only maintaining the CSFT phase-out, but accelerating it so the tax is repealed on or before 2009 as originally signed into law.* 7. Continue and Accelerate the Phase-Out of the Capital Stock & Franchise Tax (CSFT) PMA recommends not only maintaining the CSFT phase-out, but accelerating it so the tax is repealed on or before 2009 as originally signed into law.* *CSFT is scheduled to be repealed in 2010.

6. Enact a Statute of Repose Establish a ten-year limit on the useful life of manufactured goods. Establish a ten-year limit on the useful life of manufactured goods. This would protect manufacturers from being sued unnecessarily for products that exceed their functional life and result in injury. This would protect manufacturers from being sued unnecessarily for products that exceed their functional life and result in injury. 5. Unemployment Compensation (UC) Reform In 2001, PA Unemployment Compensation taxes were: In 2001, PA Unemployment Compensation taxes were:  3.6% of taxable wages – the highest in the nation.  0.9% of total wages – 7 th highest in the nation. Lower the UC tax to at least the U.S. average of 1.9% (taxable wages) or 0.5% (total wages) and review eligibility benefits. Lower the UC tax to at least the U.S. average of 1.9% (taxable wages) or 0.5% (total wages) and review eligibility benefits.

4. Place Caps on Damage Awards In 2002, lawsuits cost PA businesses $4.2 billion more than they did in states with a $250,000 cap on non-economic damage awards. In 2002, lawsuits cost PA businesses $4.2 billion more than they did in states with a $250,000 cap on non-economic damage awards. Amend the Pennsylvania Constitution to allow a cap on non-economic damages. Amend the Pennsylvania Constitution to allow a cap on non-economic damages. Cap non-economic damages at $250,000 – the same as California – or less. Cap non-economic damages at $250,000 – the same as California – or less.

Competitor States with Realistic Caps on Non-Economic Damages Source: US Dept. of Health & Human Services and ATRA. Florida Cap: $500,000 Maryland Cap: $500,000. Michigan Cap: $280,000. Texas Cap: $750,000.

3. Enact Right-to-Work (RTW) Legislation A state with a RTW law cannot force an employee to join or support a labor union as a condition of employment. A state with a RTW law cannot force an employee to join or support a labor union as a condition of employment. Between , RTW states created 1.43 million manufacturing jobs, while non-RTW states lost 2.18 million. Pennsylvania lost 600,000 manufacturing jobs. Between , RTW states created 1.43 million manufacturing jobs, while non-RTW states lost 2.18 million. Pennsylvania lost 600,000 manufacturing jobs. There are 22 RTW states as of November make PA the 23 rd. There are 22 RTW states as of November make PA the 23 rd. Enact paycheck protection: require union officials to get a member's specific permission before charging them the cost of any non-bargaining activities. Enact paycheck protection: require union officials to get a member's specific permission before charging them the cost of any non-bargaining activities. Source: The Commonwealth Foundation and PA Right-to-Work

2. Reduce Government Spending Based on Sound Economic Principles From 1991 to 2000, PA had the 2 nd largest real per-capita state government spending growth rate among the 50 states, at 61%. From 1991 to 2000, PA had the 2 nd largest real per-capita state government spending growth rate among the 50 states, at 61%. During that period, PA’s real personal income growth rate per-capita was 19% below the US average. During that period, PA’s real personal income growth rate per-capita was 19% below the US average. Reducing excessive government spending will keep resources in the private sector, stimulating economic growth. Reducing excessive government spending will keep resources in the private sector, stimulating economic growth.

1.Limited to core government functions. 2.Neutral among individuals and groups. 3.Fair and equitable in decision-making. 4.Simple and economical to administer. 5.Accountable to taxpayers. Enacting these recommendations could save PA taxpayers a little over $2 billion annually in General Fund spending. Government spending should be…

1. Enact Taxpayer Protections Tax and expenditure limitations (TELs) are constitutional or statutory provisions designed so tax and spending growth does not exceed the rates of inflation and population growth or a given measure of statewide economic growth. States with TELs generally have limited government growth and experience more robust economic expansion. “Super-majority” provisions require legislative votes above a simple majority to raise taxes.

…the 14 states with TELs and/or a super-majority provision had an overall employment growth rate of 14.1% and a GSP growth rate of 44.1%. …the 36 other states (including PA) had an overall employment growth rate of 8.1% and a GSP growth rate of 36.3%. Between 1995 and April 2003… Source: Gulibon, Grant R. and Armstrong, Thomas O. “The Case for a Pennsylvania ‘Tax and Expenditure Limitation’.” 14 states with TEL and/or super-majority provisions: AR, AZ, CA, CO, DE, FL, LA, MS, MO, NV, OK, OR, SD, WA.

SLAYING THE SILENT KILLER 1. PA’s Poor Economic Performance: Slow economic growth relative to other states 2. High Government Spending & Taxation: Killing economic opportunity in PA 3. PA Manufacturing Job Losses: Manufacturing is the keystone of the Keystone State 4. Twelve Ways to Slay the Silent Killer: Enact reforms for a more robust economy

“Those who do not learn from the past are condemned to repeat it.” - George Santayana - George Santayana

The Pennsylvania Manufacturers’ Association SLAYING THE SILENT KILLER