August 1, 2017

Pennsylvania is Profligate

Summary

Pennsylvania raises plenty in taxes; its budget problems are due to overspending.

Pennsylvania’s government places 45th in the George Mason University Mercatus Center’s newest state fiscal health rankings, ahead of only New Jersey, Illinois, Massachusetts, Kentucky and Maryland.

Every state — including first-ranked Florida — has its fiscal problems, and Pennsylvania’s are well-chronicled. This analysis does, however, shed light on the underlying cause of the commonwealth’s struggles. A lack of revenue is not the problem. Instead, our government is living beyond its means.

Unlike some state rankings, which you might see as clickbait at the bottom of your favorite website, these fiscal health measures are profound. They are taken from a comparison of all 50 states’ annual financial reports. And they consist of five dimensions of short-term and long-term financial health that represent government-wide activities, plus other factors such as unfunded pensions and “other post-employment benefit” liabilities. Taken together, these five dimensions help capture a state’s overall fiscal health, which looks poor in Pennsylvania.

The main driver of our low ranking is an abysmal score on cash solvency: 47th.This dimension of fiscal health measures whether a state has enough cash to cover its short-term bills. Pennsylvania has between 71 percent and 136 percent of the cash needed for these obligations at any given moment. That may be enough to slide by in good economic times, but as we’ve seen in the past, it’s important to prepare for more than the best-case scenario.

Furthermore, Pennsylvania’s long-term liabilities amount to almost 60 percent of its total assets — pointing to the prevalence of debt and unfunded obligations in the state budget. These fiscal pressures push our rank below the national average in three measures of solvency:  budget (38th), long-run (36th) and trust-fund (26th).

These low scores more than offset the state's modest service-level solvency rank of 21st, which measures a state’s “fiscal slack” to raise more revenue. The result is an overall fiscal health score that should be of concern to all Pennsylvanians.

An astute reader might wonder if the state’s fiscal problem lies in insufficient taxation. The answer is no.

According to Tax Foundation research, the average person in Pennsylvania had to work until April 22 in 2016 to pay off his or her taxes, which is the 32nd-latest “tax freedom day” in the nation. State and local taxes amount to 10.2 percent of Pennsylvanians’ income, which is the 15th-highest tax burden in the nation. Furthermore, Pennsylvania's 9.99 percent corporate income tax rate is the highest among flat-rate states and second-highest in the nation in general.

These basic stats reveal that Pennsylvanians and their businesses are not being under-taxed. Rather, the state government has an unhealthy appetite for spending that is becoming harder and harder to finance at taxpayers’ expense.

At some point, further tax increases will become prohibitively expensive for the economy, stalling growth and stifling our prosperity. My own research for the Mercatus Center shows that a 1 percent increase in a state’s average effective tax rate leads to an almost 2 percent decrease in its economic growth.

In a rare agreement of economic estimates, Christina Romer, chair of the White House Council of Economic Advisers for President Barack Obama, and her husband, economist David Romer, also find that a tax increase of 1 percent of GDP lowers real GDP by roughly 2 percent to 3 percent.

These estimates suggest that governments need to learn how to spend within their means, and that we as taxpayers and voters must hold politicians accountable for wasteful, excessive or unsustainable spending.