In the Fraser Institute’s annual Economic Freedom of North America report, Pennsylvania fared well, ranking 18th among the states. But on significant points like government spending and taxes, the Keystone State could do better.
Pennsylvania ranked 30th on government spending and 37th on income and payroll taxes as a percentage of personal income. On property taxes and other taxes, it was 29th.
“There’s a connection between high government spending and slower economic growth,” Elizabeth Stelle, director of policy analysis for the Harrisburg-based Commonwealth Foundation, told Watchdog.org. “If we want a vibrant economy, if we want people to be able to find jobs, if we want people to prosper, then this study shows we need to reduce government spending and we need to have a better tax structure.”
Dean Stansel, report co-author and associate professor at Southern Methodist University, told Watchdog.org that people consider these factors when moving to more business-friendly states like Florida and Texas, ranked second and third respectively.
For Pennsylvania, this outward migration resulted in the first population decline in 31 years. Between July 2015 and July 2016, Pennsylvania had a net loss of more than 7,600 people, according to new Census data.
“Even in a state like Pennsylvania that’s not at the bottom — more in the top half — you do see people fleeing for friendlier business environments,” Stansel said.
He said Pennsylvania could learn from states like Florida and Texas, which stood out with above average growth of per-capita income and the absence of an income tax.
“While the income tax rate in Pennsylvania is fairly low, it’s still essentially higher than in Florida and Texas, as they don’t have an income tax. That tax is particularly burdensome to individuals,” he said. “It’s essentially a punishment or penalty for productivity.”
Stansel says these taxes could be a bigger burden on the local level, especially in heavily-populated areas like Philadelphia and Pittsburgh. “Some of the reforms that are really needed are local-level reforms,” he said.
Pennsylvania’s ballooning pension costs have not gone unnoticed either. The state ranked 38th for insurance and retirement payments as a percentage of personal income. Multiple attempts at reform failed in the state Legislature, most recently in October. Stansel and Stelle agree that addressing pensions is one place to start to address future state budgets.
Stelle said pension costs impact the property tax ranking too. “Our pension crisis is really fueling a lot of the property tax increases that we’re seeing across the state. It’s squeezing school budgets,” she said.
Compared to other states, Pennsylvania has a low percentage of government workers in the total workforce, but the density of union membership among employees remains high. Stelle says the biggest concern is the lack of transparency in contracts Democratic Gov. Tom Wolf makes with state employee unions.
“It’s very difficult for taxpayers for taxpayers to have any input on what the cost of these employees is going to be,” she said. “Even though we’re paying the bill, we don’t really get to see the receipt until after the purchase.”
Because the report analyzed data from 2014, Stelle said the outlook could be worse under more recent patterns of higher government spending and tax hikes. In July, the Legislature approved a $1.3 billion tax package to balance a $31.5 billion budget. Next year, the state may need to balance a projected $600 million deficit by July. Without action, the deficit could grow to $1.7 billion into the next fiscal year.
One point of redemption for Pennsylvania is that it does well compared to neighboring states. New York ranked 50th, and Delaware, New Jersey and West Virginia ended up near the end of the pack. Maryland tied with Pennsylvania at 18th.
The Canadian-based Fraser Institute ranked all 50 states as well as Canadian provinces and Mexican states. Among all of the North American entities, two Canadian provinces ranked before the highest U.S. state, and all Mexican states ranked below the U.S. and Canada.