BCT Editorial – 3/1/06

This page was last updated on March 2, 2006.

No excuses; Editorial; Beaver County Times; March 1, 2006.

This is another editorial in a series trying to convince Pennsylvania taxpayers that our taxation level is OK.

By the time you get to the end of this critique, you’ll find the editorial’s claims are simply smoke and mirrors. As previous editorials citing Tax Foundation results, this editorial can be considered a “true lie.”

Below is a detailed critique of the subject editorial.

“Tax Foundation study shows state’s business tax climate is competitive

“The myth that Pennsylvania is a high tax state continues to crumble, not just in regard to personal taxes but state levies as well.”

[RWC] You will read below that PA ranks #32 and #45 for two tax categories. For the corporate net income tax, PA’s rate is #4 and for the capital stock & franchise (CS&F) PA’s rate is #2, behind only West Virginia. Only 19 states require businesses to pay both of these taxes and PA is one of them. Who in their right mind doesn’t think that’s high taxation?

Aren’t most state/local “personal taxes” “state levies?”

“The Tax Foundation, a Washington-bases [sic] think tank, released its third annual ‘State Business Tax Climate Index’ on Monday, and Pennsylvania was rated as having the 16th best climate of the 50 states.

“What makes the ranking even more impressive is that Pennsylvania has been moving up in the foundation’s rankings. It was 23rd in 2003 and 20th in 2004.”

[RWC] Since when was being #16 considered “impressive?” Would we cheer if the Steelers had come in #7? [Seven (actually 7.36) for 32 teams is the same as 16 for 50 states.]

The editorial omits two important facts concerning the “moving on up” of PA’s ranking.

First, the Tax Foundation changed how it calculates the SBTCI. In previous years, all five components of the index were weighted equally. This year, the calculation gives more weight to individual (28.09%) and sales/gross receipts (22.36%) taxes than to business (19.98%) taxes. In previous calculations, all tax indices were weighted at 20%. When you look at the individual indices, you find they – and PA’s rank for the individual indices – changed little and the vast majority of the overall ranking change is due solely to the different weighting for 2006. PA still has corporate income (PA’s rate ranks #4) and capital stock & franchise (PA’s rate ranks #2) taxes at or near the top, and PA remains one of only 19 states to levy both the corporate income and CS&F taxes.

Second, over the last three years Pennsylvania has actually increased its taxation, both business and individual. Therefore, the change in ranking has nothing to do with anything positive done by the General Assembly or the governor.

“The 10 states with the most business-friendly tax systems this year are: Wyoming, South Dakota, Alaska, Florida, Nevada, New Hampshire, Texas, Delaware, Montana and Oregon.

“The 10 states with the least hospitable business tax climates are: New York, New Jersey, Rhode Island, Ohio, Vermont, Maine, Kentucky, Nebraska, Iowa and Arkansas.

“The commonwealth’s 16th spot makes it competitive with state’s that are usually associated with high growth: Indiana, 11th; Colorado, 12th; Washington, 13th; Alabama, 14th; Tennessee, 15th; Oklahoma, 17th; Utah, 18th; Virginia, 19th; Missouri, 20th; Georgia, 21st; South Carolina, 30th; and North Carolina, 37th.

“Here’s how Pennsylvania stacks up against its neighbors: Delaware, eighth; Maryland, 22nd; West Virginia, 35th; Ohio, 47th; New Jersey, 49th; and New York, 50th.

“When compared to other traditional Rust Belt states not already listed, the state does just as well: Illinois, 23rd; Michigan, 26th; Wisconsin, 32nd; Minnesota, 38th; and Iowa, 42nd.

“The overall index is composed of five specific indexes devoted to major features of a state’s tax system: the state’s principal business tax, usually the corporate income tax; the individual income tax; the sales or gross receipts tax; the unemployment insurance tax; and the state’s system for taxing assets, principally the property tax. These five component indexes are themselves composed of several sub-indexes, and a total of 123 variables are taken into account in each state’s tax system.

“The Tax Foundation points out that while its index is comprehensive, it is not exhaustive. Still, the index is wide enough in scope that it’s possible to assume it is a reasonable reflection of a state’s overall business climate.”

[RWC] I reviewed the report and found it didn’t count PA’s gross receipts tax. According to Gov. Rendell’s proposed budget for 2006/2007, the state collects over $1 billion per year from the gross receipts tax.

“Pennsylvania’s relatively good ranking does not mean that changes don’t need to be made. They do, as a look at the five specific indexes cited above shows: business tax, 32nd; individual income tax, 12th; sales and gross receipts tax, 19th; unemployment insurance tax, 16th; and wealth (assets), 45th.

“Obviously, major improvements must be made in the business tax and wealth indexes to enhance the state’s business climate.”

[RWC] For whatever reason, the author refers to the “wealth tax” index as only the “wealth” index. The wealth taxes include the capital stock & franchise tax, the property tax, and the real estate transfer tax.

“But the overall positive ranking raises a significant point: If taxes are not onerous overall, one major excuse used to explain the commonwealth’s struggle to attract growth, especially in southwestern Pennsylvania, doesn’t hold water.”

[RWC] The editorial seems to ignore the fact that some taxes do more damage than others. For example, while a high income tax is bad, at least you pay taxes only on profits. That’s not the case for all taxes, however. For example, taxes based on a company’s assets (CS&F) and revenue (gross receipts) must be paid even when the business loses money!

“Could it be the political environment that is impeding growth? Perhaps that’s the question that needs to be addressed by the people of Pennsylvania.”

[RWC] What does the author mean by “the political environment?”

The author never mentioned over-regulation, anti-business/anti-employee labor laws (read: closed shops), and cost of labor as possibilities.

The editorial also doesn’t note the potential effects of things we can’t change like terrain, weather, and location. For example, our hilly terrain and weather make suitable business sites more “rare” and more expensive for businesses to develop. That’s one reason we can’t be happy with running in the middle of the pack.