1. The Pennsylvania Manufacturers’ Association October 2003 SLAYING THE SILENT KILLER www.pamanufacturers.org

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

3. KILLER FACTS PA’s population grew by an annual average of 0.14% between 1970-2002 (US = 1.09%). PA’s population grew by an annual average of 0.14% between 1970-2002 (US = 1.09%). US average annual inflation was 4.89% between 1970-2002 and 2.46% from 1993-2002. US average annual inflation was 4.89% between 1970-2002 and 2.46% from 1993-2002. State General and Non-General Fund nominal spending grew by an annual average of 7.80% between 1970-2002. State General and Non-General Fund nominal spending grew by an annual average of 7.80% between 1970-2002. State and Local nominal spending grew by an annual average of 4.75% between 1993-2002. State and Local nominal spending grew by an annual average of 4.75% between 1993-2002.

4. THE SILENT KILLER

5. 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

6. PA’s Poor Economic Performance: Gross State Product (GSP) From 1990-2001, PA’s economic output – GSP – grew noticeably slower than the US average. From 1990-2001, 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.

7. 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.

8. Gross State Product, 1990-2001 Source: Bureau of Economic Analysis, US Dept. of Commerce. NOTE: CS does not include PA.

9. 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

10. PA and US Employment Growth by Industry, 1990-2001 Source: BEA, BLS and the PA Dept. of Labor and Industry, Center for Workforce Development. F.I.R.E. = Finance, Insurance & Real Estate.

11. Projected PA and US Employment Growth by Industry, 2000-2010 Source: BLS and the PA Dept. of Labor and Industry, Center for Workforce Development. F.I.R.E. = Finance, Insurance & Real Estate.

12. Personal Income Growth, 1990-2002 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

13. Personal Income Growth,1990-2002 Source: Bureau of Economic Analysis, US Dept. of Commerce. NOTE: CS does not include PA.

14. High Government Spending & Taxation Pennsylvania’s state and local FY 2001-02 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. 2002 local government figures are estimates. *This figure is a conservative calculation and does not include federal government expenditures.

15. High Growth of Real Government Spending for Both Democrat and Republican Governors, 1970-2003 Source: The Commonwealth Foundation. Data compiled from Commonwealth of Pennsylvania, Governor’s Executive Budgets, 1970-71 through 2003-04

16. …there is one state or local government employee. For every 7.4 private sector employees in Pennsylvania… Source: BLS.GOV. May 2003. Data not seasonally adjusted. State: 164,900 Local: 493,900 Private Sector: 4,905,000. 1990-2003: Private Sector employment grew 9.89%; PA State and Local Government employment grew 16.85%

17. 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.

18. 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

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

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

21. …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

22. Pennsylvania Business Taxes

23. Total CSFT Cash Payments by Industry, 1998-2002 (in thousands) Source: The Statistical Supplement for The PA Tax Compendium, Fiscal Year 2001-02. 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.

24. Total CNIT Cash Payments by Industry, 1998-2002 (in thousands) Source: The Statistical Supplement for The PA Tax Compendium, Fiscal Year 2001-02. 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.

25. PA Manufacturing Job Losses* 228,300 PA manufacturing jobs have been lost since 1990. 228,300 PA manufacturing jobs have been lost since 1990. 118,000 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 2003. 123,800 PA manufacturing jobs have been lost between January 2001 and May 2003. Source: The Bureau of Labor Statistics. *A new standard of measurement, The North American Industry Classification System, went into effect in January 2003. Administrative and warehousing jobs previously considered part of manufacturing were segregated out.

26. Pennsylvania Manufacturing Employment 1990-2003 Source: Bureau of Labor Statistics. Employment is seasonally adjusted

27. 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.

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

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

30. Twelve Ways to Slay THE SILENT KILLER

31. 12. Research & Development (R&D) Tax Credit PA’s R&D tax credit is capped at $15M and sunsets after 2006. It is claimed against the CNIT, CSFT and PIT. PA’s R&D tax credit is capped at $15M and sunsets after 2006. 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.

32. 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.

33. 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.

34. 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 2003. Site: Area Development,Online, Site and Facility Planning.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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 1970-2000, RTW states created 1.43 million manufacturing jobs, while non-RTW states lost 2.18 million. Pennsylvania lost 600,000 manufacturing jobs. Between 1970-2000, 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 2002 - make PA the 23 rd. There are 22 RTW states as of November 2002 - 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

40. 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.

41. 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…

42. 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.

43. …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.

44. 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

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

46. The Pennsylvania Manufacturers’ Association SLAYING THE SILENT KILLER www.pamanufacturers.org