BCT Editorial – 7/5/05

This page was last updated on July 5, 2005.

Laws of inertia; Editorial; Beaver County Times; July 5, 2005.

Once again we have a tax-related editorial with blinders on. Even if the editorial’s contention that Pennsylvania tax spending isn’t high were correct, it ignores other factors affecting economic health. For example, you’ll find no acknowledgement that PA closed-shop labor laws have any impact. You’ll also find no mention that construction in PA is higher than many other locations due to topography and weather.

I lived and worked in the Houston, TX, area for 18 years so I’ll use it as an example. Texas is a right-to-work state so the threat of strikes is much lower. Much of the Houston area is flat so land requires little preparation before building construction can begin. In many cases, land prep is little more than sending in a bulldozer to knock down the pine trees and can take as little as a week. Once building construction begins, there are virtually no weather delays other than an occasional rainstorm. In this area, it can takes months of land preparation before building begins – Best Buy at Beaver Valley Mall is one example – and cold weather can halt certain types of construction activities, like pouring concrete, laying block, et cetera. Texas also has one other “advantage” over Pennsylvania; Texas has a fairly large illegal immigrant population, which helps keep labor costs relatively low.

Below is a detailed critique of the subject editorial.

“Nothing reveals how inert the Legislature is more than its failure to modernize the commonwealth’s tax system.”

[RWC] As you’ve read in numerous editorials, the Times has an obsession with “modernizing” the commonwealth tax system, but has no interest in modernizing commonwealth spending. Indeed, this editorial argues “there’s little wiggle room on the spending side of the ledger.”

“Although property taxes are the prime example of the General Assembly’s inability to move on this issue, business taxes must not be overlooked.

“As just about everybody except some hard-line Democrats recognizes, the state’s corporate net income and capital stock and franchise taxes are among the highest in the nation. This means that even though Pennsylvania’s overall business tax environment is competitive, these two taxes make the commonwealth a much tougher sell.

“Clearly, reducing and/or eliminating them can only help the state attract growth.

“But doing so means one of three things: cutting spending, increasing other taxes to offset the revenue loss or closing the so-called ‘Delaware loophole,’ which allows companies, usually national chains, to shift their profits to subsidiaries set up in that state.”

[RWC] Note the use of the term “loophole.” A loophole is a legal provision of the tax code you don’t like. For example, if you didn’t like the home mortgage interest deduction, you would call it a loophole because the deduction reduces the tax liability of taxpayers who can use it. You would claim the deduction (loophole) allows some taxpayers to escape paying their “fair share” of taxes. That’s what the editorial is doing with legal provisions of the CNI tax code. To increase collections, they want to eliminate certain legal deductions and/or exemptions.

The editorial treats “closing the so-called ‘Delaware loophole’” as if it’s not a tax increase. Any time you eliminate this kind of tax provision, you increase the tax’s effective rate. I’m not passing judgment on eliminating or keeping the provision. I just want to make sure we call its elimination what it is, a CNI tax increase.

“Anti-tax zealots will argue that Pennsylvania is a high-tax state. It is not, for individuals or businesses. All one has to do is check out the spending side of the ledger to see that their claim doesn’t stand up. After all, because the state must balance its budget every year, it can’t spend what it doesn’t have.”

[RWC] Note the author labels those against tax increases as zealots, but does not label those who oppose spending cuts.

“According to Governing magazine’s ‘Source Book 2004,’ Pennsylvania ranked 25th among the 50 states in ‘Total State Spending.’ When calculated on a per-capita basis, the state spends $4,475 per capita. When calculated as a percentage of personal income, state spending comes in at 14.4 percent.”

[RWC] The editorial can’t even be honest about the rank. When I think of #1, I think of something good. That’s not the case with Governing magazine’s ranking. In this case, #1 means you spent the most. (This should tell us where Governing sympathies lie.) Therefore, Pennsylvania really ranked #26 if you believe spending less is better.

“The national averages are $4,446 and 14.4 percent, so state government is as smack-dab in the middle as you can get.”

[RWC] We’re #26! Hip, hip, hooray! What’s the prize you receive when you cross the finish line #26?

“If revenues from the CNI and CSF taxes are going to be reduced - and there’s little wiggle room on the spending side of the ledger - the loss must be made up somewhere.”

[RWC] Is anyone who follows Times editorials surprised the editorial concludes we can’t do anything about spending, despite the fact that 25 states spend less per capita than Pennsylvania? I suspect we’d hear the same conclusion even if Pennsylvania were a top-10 spender.

Another point to consider is the editorial is “grading on the curve.” It ignores the fact that even the states at the bottom of the list may be – and probably are – spending too much. It’s like school; you can be near the top of the grading curve and still fail because you and the rest of the class failed to meet minimum requirements.

“The logical places to look are the state’s income tax, which is among the lowest of the states that levy one, the 6 percent sales tax, which, while on the high side, doesn’t tax food and clothing, or closing the Delaware loophole, as Gov. Ed Rendell’s tax commission has proposed.”

[RWC] Did you note the author didn’t refer to food and clothing escaping the sales tax a loophole?

“But messing with taxes in this way runs into opposition. A sizeable segment within the GOP refuses to consider any tax hike for any reason, and many Democrats don’t want to mess with the sales tax, which does hit poor and middle-income families harder than the well-to-do. Meanwhile, raising the income tax, as low as it is, doesn’t generate any enthusiasm either. The Pennsylvania Chamber of Commerce and Industry, a powerful lobby in Harrisburg, opposes closing the loophole.”

[RWC] “The sales tax, which does hit poor and middle-income families harder than the well-to-do.” This is more liberal BS. Who spends more, “poor and middle-income families” or “well-to-do” families? The more you spend the more the sales tax hits you, and the rich spend more than the poor.

“The end result is tax inertia - not the good kind (a body in motion tends to stay in motion), but the bad kind (a body at rest tends to stay at rest). Pennsylvania won’t be going anywhere until it gets the ball rolling on tax modernization.”

[RWC] I can tell the author didn’t take any of the physics courses I did in high school and college. Neither form of inertia is bad or good. For example, “a body in motion tends to stay in motion” isn’t good when you’re trying to stop your car, and “a body at rest tends to stay at rest” isn’t bad when your car is parked.