The Pennsylvania Manufacturers’ AssociationThe Pennsylvania Manufacturers’ Association

October 2003October 2003

SLAYING THE SLAYING THE SILENT KILLERSILENT KILLER

www.pamanufacturers.orgwww.pamanufacturers.org

THE SILENT KILLERTHE SILENT KILLER

Between 1970 and 2002, state and local Between 1970 and 2002, state and local government spending far outstripped government spending far outstripped

population and inflation growth. population and inflation growth.

KILLER FACTSKILLER FACTS

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

THE SILENT KILLER

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Local Spending

Non-General Fund

State General Fund

Population

Inflation Growth

Pennsylvania State & Local Government Spending 1970-2002 in billions

Growth of Inflation: Annual Average 4.9%

10

20

30

40

50

60

70

80

10M12,335,091

$20.9 billion

$45.6 billion

$73.2 billion

State Non-General Fund

State General Fund

Local Gvt. Expenditures

PA Population (in millions)

AgendaAgenda

1.1. PA’s Poor Economic PerformancePA’s Poor Economic Performance

2.2. High Government Spending & TaxationHigh Government Spending & Taxation

3.3. PA Manufacturing Job LossesPA Manufacturing Job Losses

4.4. Twelve Ways to Slay the Silent KillerTwelve Ways to Slay the Silent Killer

PA’s Poor Economic Performance: PA’s Poor Economic Performance: Gross State Product (GSP)Gross State Product (GSP)

From 1990-2001, PA’s economic output – From 1990-2001, PA’s economic output – GSP – grew noticeably slower than the US GSP – grew noticeably slower than the US average.average.

Among the twelve states that are PA’s closest Among the twelve states that are PA’s closest economic competitors, PA’s growth rate was economic competitors, PA’s growth rate was 22ndnd from last over the past 12 years. from last over the past 12 years.

PA’s Economic Competitor States (CS): PA’s Economic Competitor States (CS): CA, FL, GA, IL, MD, MI, NC, NJ, NY, OH, TX & VA*CA, FL, GA, IL, MD, MI, NC, NJ, NY, OH, TX & VA*

*As reported by the Pennsylvania Economy League.

Gross State Product, 1990-2001Gross State Product, 1990-2001

US

CSPA

0%

20%

40%

60%

80%

100%

120%

GA TX NC FL VA US IL CA MD NJ MI NY PA OH CS

63.4%

76.7%77.6%

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

During the 1990s, Pennsylvania During the 1990s, Pennsylvania

lagged national growth in almost lagged national growth in almost

every occupation. Pennsylvania is every occupation. Pennsylvania is

expected to continue this trend.expected to continue this trend.

PA’s Poor Economic PA’s Poor Economic Performance: Job GrowthPerformance: Job Growth

PA and US Employment PA and US Employment Growth by Industry, 1990-2001Growth 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.

PA

-12.67%

US

-7.40%

-20%

-10%

0%

10%

20%

30%

40%

50%

Services Retail Trade Wholesale Trade F.I.R.E.

Manufacturing

Projected PA and US Employment Projected PA and US Employment Growth by Industry, 2000-2010Growth by Industry, 2000-2010

-7.80%

PAUS

3.13%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Services Retail Trade Wholesale Trade F.I.R.E. Manufacturing

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, 1990-2002Personal 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 3PA had the 3rdrd lowest personal income lowest personal income

growth among Competitor States growth among Competitor States

Personal Income Growth,1990-2002Personal Income Growth,1990-2002

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

CS

PA

US

0%

20%

40%

60%

80%

100%

120%

GA TX NC FL VA US MD IL CA NJ MI PA OH NY CS

82.63%

65.97%

81.40%

High Government High Government Spending & TaxationSpending & Taxation

Pennsylvania’s state and local FY 2001-02 nominal spending was at least $73 billion.

State and local governments spent $5,934 State and local governments spent $5,934 for every man, woman, and child in the for every man, woman, and child in the Commonwealth (2002).* 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.

High Growth of Real Government Spending for BothHigh Growth of Real Government Spending for BothDemocrat and Republican Governors, 1970-2003Democrat and Republican Governors, 1970-2003

Source: The Commonwealth Foundation. Data compiled from Commonwealth of Pennsylvania, Governor’s Executive Budgets, 1970-71 through 2003-04

33.3%

14.6%

25.4% 26.2%

0%

5%

10%

15%

20%

25%

30%

35%

Shapp Thornburgh Casey Ridge/Schweiker

……there is one state or local there is one state or local government employee.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%

There are now more There are now more takers than makers.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 Government* Jobs vs. PA Manufacturing Jobs, 2000-May 03PA Manufacturing Jobs, 2000-May 03

720

740

760

780

800

820

840

860

880

2000 2001 2002 2003

Manufacturing Employees

Government Employees

753,300

731,100

In 2000,In 2000, Pennsylvania’s business Pennsylvania’s business taxes per employee were taxes per employee were 158%158% of the of the

United States Average.United States Average.

Source: PA Economy League

State & Local Business State & Local Business Taxes Per Employee, 2000Taxes Per Employee, 2000

Source: PA Economy League. NOTE: CS does not include PA.

CS

US

PA

$0

$100

$200

$300

$400

$500

$600

$700

PA CA MI NJ IL NC US NY TX FL MD OH GA VA CS

$613.17

$388.18 $361.91

……ranks 2ranks 2ndnd in the nation in in the nation in corporate capital taxes (Capital Stock and corporate capital taxes (Capital Stock and Franchise Tax - CSFT)Franchise Tax - CSFT)

……ranks 3ranks 3rdrd in the nation in in the nation in corporate income taxes (Corporate Net corporate income taxes (Corporate Net Income Tax - CNIT).Income Tax - CNIT).

……and West Virginia are the only states in the and West Virginia are the only states in the Top 10 in the nation in rates of taxation on Top 10 in the nation in rates of taxation on bothboth capital and income. capital and income.

Pennsylvania

Pennsylvania Business Taxes

Top Rate Top Rate7.00 mills 12%6.99 mills 10.5%3.00 mills 9.99%2.70 mills 9.975%2.50 mills 9.8%2.50 mills 9.75%2.10 mills 9.5%1.75 mills 9.4%1.50 mills 9%

9%0.75 mills 9%

6.64%

LouisianaArkansasMississippi

Alaska

TennesseeKentuckyAlabama

District of ColumbiaMinnesotaVermont

Highest Business Tax Rates* in AmericaHighest CSFT Rates

West VirginiaPennsylvania (2003)

Massachusetts

Highest CNIT RatesIowaNorth DakotaPennsylvania

(Tied) New Jersey(Tied) Rhode Island(Tied) West Virginia

Note: Pennsylvania and West Virginia are the only states on both lists.

North Carolina

US AVERAGE (2002)**US AVERAGE (2002)

* Tax rates based on calendar year 2002, except PA's CSFT rate. ** Calculated using PA's CSFT rate of 7.24 mills for 2002.

Total CSFT Cash Payments Total CSFT Cash Payments by Industry, 1998-2002 by Industry, 1998-2002 (in thousands)(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.

$0

$250,000

$500,000

$750,000

$1,000,000

21%

11%12%12%

15%

18%

6%

4%1% 0%

$637M

Five year total: $4,160,295,000

Total CNIT Cash Payments by Total CNIT Cash Payments by Industry, 1998-2002 Industry, 1998-2002 (in thousands)(in thousands)

Source: The Statistical Supplement for The PA Tax Compendium, Fiscal Year 2001-02. PA Department of Revenue, Bureau of Research, 02/2002Not classified: Companies that do not fit into the SIC code, listed an invalid code, or left the field blank.

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

29%

11%

15%

18%

9% 8%

6%

2%

1%0%

$1.2B

$0

Five year total:$6,606,997,000

PA Manufacturing Job Losses*PA Manufacturing Job Losses*

228,300 PA manufacturing jobs have 228,300 PA manufacturing jobs have been lost since 1990. been lost since 1990.

118,000 of those PA manufacturing jobs 118,000 of those PA manufacturing jobs were lost in 2001 and 2002 together.were lost in 2001 and 2002 together.

123,800 PA manufacturing jobs have 123,800 PA manufacturing jobs have been lost between January 2001 and been lost between January 2001 and May 2003.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.

Pennsylvania Manufacturing Employment 1990-2003

Source: Bureau of Labor Statistics. Employment is seasonally adjusted

738.9

959.4

700

750

800

850

900

950

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Jobs in thousands

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

mid-February 2024. mid-February 2024.

Pennsylvania Average Annual Pennsylvania Average Annual Salaries by Industry, 2001Salaries 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

$33,458

$42,225$42,986

$0

$10,000

$20,000

$30,000

$40,000

$50,000

Manufacturing State Government Services

Average PA Salary

The manufacturing industry has the The manufacturing industry has the strongest multiplier effect on employment; strongest multiplier effect on employment; every time a manufacturing job is created, every time a manufacturing job is created,

between three and seven jobs result.between three and seven jobs result.

Twelve Ways to Slay Twelve Ways to Slay THE SILENT KILLERTHE SILENT KILLER

12. Research & Development (R&D) Tax Credit12. Research & Development (R&D) Tax Credit PA’s R&D tax credit is capped at $15M and sunsets PA’s R&D tax credit is capped at $15M and sunsets

after 2006. It is claimed against the CNIT, CSFT after 2006. It is claimed against the CNIT, CSFT and PIT. and PIT.

Increases in excess of base year R&D research Increases in excess of base year R&D research expenses within PA generates a 10% tentative expenses within PA generates a 10% tentative credit. credit.

For approved credits in 2001, manufacturers claimed For approved credits in 2001, manufacturers claimed the largest share, over 69%, of approved credits.the largest share, over 69%, of approved credits.

PMA recommends repealing the cap and sunset PMA recommends repealing the cap and sunset provisions to increase the incentive for firms, provisions to increase the incentive for firms, especially manufacturers, to expend resources on especially manufacturers, to expend resources on R&D in PA. R&D in PA.

11. Single Sales Factor (SSF)11. Single Sales Factor (SSF) SSF would eliminate the increase in PA CNIT liability SSF would eliminate the increase in PA CNIT liability

that corresponds with an increase in payroll and that corresponds with an increase in payroll and property (physical plant) investment in PA. property (physical plant) investment in PA.

Current PA CNIT liability is determined by weighing Current PA CNIT liability is determined by weighing payroll, property and sales factors at 20%, 20% and payroll, property and sales factors at 20%, 20% and 60%, respectively.60%, respectively.

SSF would weigh the sales factor at 100%. SSF would weigh the sales factor at 100%.

PA would be the 11PA would be the 11thth state to enact a SSF. 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)10. Career Development Credit (CDC) Enacting the CDC – a job training tax credit - could Enacting the CDC – a job training tax credit - could

achieve better performance results relative to state achieve better performance results relative to state funded workforce programs.funded workforce programs.

The CDC reduces the cost of private employee The CDC reduces the cost of private employee training. training.

PA would be the 19PA would be the 19thth state to offer a job training tax state to offer a job training tax credit. credit.

Funds for the CDC would come from the Funds for the CDC would come from the approximately $400M allocated to the state’s 49 approximately $400M allocated to the state’s 49 separate workforce development programs, which separate workforce development programs, which should be reduced or eliminated. should be reduced or eliminated.

9. Manufacturers' Investment Credit for PA9. Manufacturers' Investment Credit for PA 20% credit for the costs of acquiring tangible 20% credit for the costs of acquiring tangible

personal property, including machinery, equipment, personal property, including machinery, equipment, buildings and structural components of buildings, buildings and structural components of buildings, used in manufacturing as well as processing, used in manufacturing as well as processing, assembling and research in PA.assembling and research in PA.

Non-refundable credit against the PA Corporate Net Non-refundable credit against the PA Corporate Net Income and Capital Stock and Franchise taxes Income and Capital Stock and Franchise taxes where any unused credit would carry over for 20 where any unused credit would carry over for 20 years.years.

PA would be the 14PA would be the 14thth state* to implement a state* to implement a Manufacturers’ Investment Credit. Manufacturers’ Investment Credit.

This would encourage manufacturing expansion in This would encourage manufacturing expansion in PA for economic growth and job creation.PA for economic growth and job creation.

*As of January 2003. Site: Area Development,Online, Site and Facility Planning.

8. Reduce the Corporate Net Income Tax to 8. Reduce the Corporate Net Income Tax to 5.99%5.99% This would place PA in a competitive This would place PA in a competitiveposition by having a maximum rate below the position by having a maximum rate below the 2002 U.S. average of 6.635%. 2002 U.S. average of 6.635%.

7. Continue and Accelerate the Phase-Out of the 7. Continue and Accelerate the Phase-Out of the Capital Stock & Franchise Tax (CSFT)Capital Stock & Franchise Tax (CSFT)PMA recommends not only maintaining the PMA recommends not only maintaining the CSFT phase-out, but accelerating it so the tax CSFT phase-out, but accelerating it so the tax is repealed on or before 2009 as originally is repealed on or before 2009 as originally signed into law.* signed into law.*

*CSFT is scheduled to be repealed in 2010.

6. Enact a Statute of Repose6. Enact a Statute of Repose Establish a ten-year limit on the useful life of Establish a ten-year limit on the useful life of

manufactured goods. manufactured goods. This would protect manufacturers from being sued This would protect manufacturers from being sued

unnecessarily for products that exceed their functional unnecessarily for products that exceed their functional life and result in injury. life and result in injury.

5. Unemployment Compensation (UC) Reform 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.3.6% of taxable wages – the highest in the nation. 0.9% of total wages – 70.9% of total wages – 7thth highest in the nation. highest in the nation.

Lower the UC tax to at least the U.S. average Lower the UC tax to at least the U.S. average of 1.9% (taxable wages) or 0.5% (total wages) and of 1.9% (taxable wages) or 0.5% (total wages) and review eligibility benefits.review eligibility benefits.

4. Place Caps on Damage Awards4. Place Caps on Damage Awards In 2002, lawsuits cost PA businesses $4.2 In 2002, lawsuits cost PA businesses $4.2

billion more than they did in states with a billion more than they did in states with a $250,000 cap on non-economic damage $250,000 cap on non-economic damage awards. awards.

Amend the Pennsylvania Constitution to allow a Amend the Pennsylvania Constitution to allow a cap on non-economic damages.cap on non-economic damages.

Cap non-economic damages at $250,000 – the Cap non-economic damages at $250,000 – the same as California – or less. same as California – or less.

Competitor States with Realistic Competitor States with Realistic Caps on Non-Economic DamagesCaps 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.

Caps >$250,000, 4

No Caps, 7

Caps<$250,000, 1

GA, IL, NC, NJ, NY, OH,

FL, MD, MI, TX

CA

3.3. Enact Right-to-Work (RTW) LegislationEnact Right-to-Work (RTW) Legislation A state with a RTW law cannot force an employee to A state with a RTW law cannot force an employee to

join or support a labor union as a condition of join or support a labor union as a condition of employment. employment.

Between 1970-2000, RTW states created 1.43 million Between 1970-2000, RTW states created 1.43 million manufacturing jobs, while non-RTW states lost 2.18 manufacturing jobs, while non-RTW states lost 2.18 million. Pennsylvania lost 600,000 manufacturing jobs. million. Pennsylvania lost 600,000 manufacturing jobs.

There are 22 RTW states as of November 2002 - There are 22 RTW states as of November 2002 - make PA the 23make PA the 23rdrd. .

Enact paycheck protection: require union officials to Enact paycheck protection: require union officials to get a member's specific permission before charging get a member's specific permission before charging them the cost of them the cost of anyany non-bargaining activities.non-bargaining activities.

Source: The Commonwealth Foundation and PA Right-to-Work

2. Reduce Government Spending 2. Reduce Government Spending Based on Sound Economic PrinciplesBased on Sound Economic Principles From 1991 to 2000, PA had the 2From 1991 to 2000, PA had the 2ndnd largest largest

real per-capita state government spending real per-capita state government spending growth rate among the 50 states, at 61%. growth rate among the 50 states, at 61%.

During that period, PA’s real personal income During that period, PA’s real personal income growth rate per-capita was 19% below the US growth rate per-capita was 19% below the US average.average.

Reducing excessive government spending will Reducing excessive government spending will keep resources in the private sector, keep resources in the private sector, stimulating economic growth. stimulating economic growth.

1.1. Limited to core government functions.Limited to core government functions.2.2. Neutral among individuals and groups. Neutral among individuals and groups. 3.3. Fair and equitable in decision-making.Fair and equitable in decision-making.4.4. Simple and economical to administer.Simple and economical to administer.5.5. Accountable to taxpayers.Accountable to taxpayers.

Enacting these recommendations could saveEnacting these recommendations could savePA taxpayers a little over $2 billion annually inPA taxpayers a little over $2 billion annually inGeneral Fund spending. General Fund spending.

Government spending should be…Government spending should be…

1. Enact Taxpayer Protections1. 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 KILLERSLAYING THE SILENT KILLER

1. 1. PA’s Poor Economic PerformancePA’s Poor Economic Performance:: Slow economic growth relative to other states Slow economic growth relative to other states

2. 2. High Government Spending & TaxationHigh Government Spending & Taxation:: Killing economic opportunity in PAKilling economic opportunity in PA

3. 3. PA Manufacturing Job LossesPA Manufacturing Job Losses:: Manufacturing is the keystone of the Keystone State Manufacturing is the keystone of the Keystone State

4. 4. Twelve Ways to Slay the Silent KillerTwelve Ways to Slay the Silent Killer:: Enact reforms for a more robust economyEnact reforms for a more robust economy

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

- George Santayana - George Santayana

The Pennsylvania Manufacturers’ AssociationThe Pennsylvania Manufacturers’ Association

SLAYING THE SLAYING THE SILENT KILLERSILENT KILLER

www.pamanufacturers.orgwww.pamanufacturers.org