Pennsylvania Tax Giveaways and an Island in the Sun

By Jamar Thrasher, Third and State

A few weeks ago, the Pennsylvania General Assembly fast-tracked a bill in the waning days of the legislative session to allow certain private companies to keep most of the state income taxes of new employees. News reports to follow indicated the new tax giveaway was designed to lure California-based software firm Oracle to State College.

Well, it turns out the CEO of Oracle, which will benefit from the largess of Pennsylvania taxpayers, recently bought his very own Hawaiian island, as CNN reported back in June.

Oracle CEO Larry Ellison, the third richest man in the U.S., purchased about 98% of Lana’i, the sixth largest of the Hawaiian islands. Forbes reported that the deal was rumored to be worth $500 million.

As CNN tells us:

The island includes two luxury resorts, two golf courses, two club houses and 88,000 acres of land, according to a document filed with the Public Utilities Commission.

Which bring us back to Pennsylvania, where Governor Corbett recently signed House Bill 2626, allowing qualifying companies that create at least 250 new jobs within five years to pocket 95% of the personal income taxes paid by the new employees. 

Legislative sources told The Philadelphia Inquirer that “the bill was designed to lure California-based Oracle, the world’s third-largest software maker with $37 billion in revenue last year, to open a facility in the Penn State region, which would provide a pool of highly educated job seekers.”

We’ve already blogged about why this bill is a bad deal for Pennsylvanians, but Larry Ellison’s island provides us with yet another reason. 

Oracle should not be pocketing the withholding taxes of new employees in State College, especially at a time when the state is cutting investments in schools and underfunding infrastructure. 

And especially when the boss is doing well enough to afford an island in the sun.

A Rare Victory In The Endless Fight Against Corporate Welfare

By Mark Price, Third and State

In a rare victory against corporate welfare in Pennsylvania, Ahold USA has withdrawn its request for property tax breaks for a meat-packaging facility it is building in Lower Allen Township, Cumberland County.

As Michael Wood explained before the request was withdrawn:

Ahold is the poster child for a system that is costly, lacks real accountability and leaves the taxpayers paying more…

Paying a profitable corporation for something it was already planning to do makes no sense at all…

Lower Allen Twp. officials decided wisely to put the Ahold tax break on hold. It’s time more public officials followed their lead to stop playing the economic development game and direct tax dollars where they should be spent: on schools, public safety and other vital services. 

In some more mixed news, The Associated Press reports that both the House and Senate have approved House Bill 2626, which allows certain companies to keep new employees’ personal income tax withholdings.

The Pennsylvania Budget and Policy Center came out last week with a Top 10 List of concerns with this plan, laying the foundation for some improvements to the bill made in the Senate this week. They include capping the cost of the program at $5 million per year (the original version could have cost hundreds of millions), and requiring that a qualifying company create at least 250 jobs within five years (100 within the first two years).

The bill still reflects a flawed approach to economic development, but the Senate’s more cautious approach is much better than the initial House version.

Sen. John Blake, D-Lackawanna, said the bill “crosses a line” in smart economic development by diverting tax revenue to a handful of private companies, and it duplicates existing programs in law that offer tax credits to companies that hire people.

The bill, he said, is “essentially an employee paying their boss for the privilege of having a job.”

As Greg LeRoy and Leigh McIlvaine of Good Jobs First explained in an op-ed this week, the “pay your boss to work” approach to economic development is deeply problematic.

It’s one thing to reduce a company’s income tax, property tax or sales tax in hopes of jobs. It’s another to give companies other people’s money. 

The name and idea are imported from Kansas, where they have caused enormous controversy. HB 2626 is modeled on the identically named “Promoting Employment Across Kansas,” or PEAK program, which was enacted in 2009. 

In the wealthy Kansas City suburb of Overland Park, MIQ Logistics and Dex One Service Inc. – two of the city’s largest employers – have so far received a total of $730,000 of their workers’ taxes through PEAK. 

Former Overland Park Chamber of Commerce executive Vern Squier, who worked with Kansas lawmakers to enact PEAK, is now CEO of the Chamber of Business and Industry of Centre County (State College), where he is pushing the copycat HB 2626. 

HB 2626’s sponsors say it would bring new jobs to the state. But PEAK in Kansas cannot be called a success. It is plagued by transparency problems and is fueling a bitter zero-sum jobs war with Missouri in the Kansas City metro area.

In the last three years, media-reported deals alone there have moved about 1,900 jobs from Missouri to Kansas and about 2,200 from Kansas to Missouri. Most of the moves were subsidized, often with the personal income taxes of workers (Missouri has a similar personal income tax giveaway). 

The costly Kansas City-area jobs war has gotten so bad that 17 prominent business leaders there issued a public appeal last year to Kansas Gov. Sam Brownback and Missouri Gov. Jay Nixon, saying: “At a time of severe fiscal constraint the effect to the states is that one state loses tax revenue while the other forgives it. 

“The states are being pitted against each other and the only real winner is the business who is ‘incentive shopping’ to reduce costs. The losers are the taxpayers who must provide services to those who are not paying for them.”

‘How ’bout No, You Crazy Dutch….’

By Mark Price, Third and State

The only proper villain we could find from the Netherlands

On Monday night, the Lower Allen Township commissioners in Cumberland County considered a proposal from Ahold USA, the corporate parent of Giant Food Stores, for a $400,000 property tax abatement on a meat repackaging plant on which the company has already broken ground. (Ahold USA is itself the subsidiary of the Netherlands-based Ahold.)

The company has neglected a basic principle of the economic development game through which companies extract subsidies and tax breaks from states and localities where they were going to build anyway: until you have the subsidy in hand, don't give away that it will not impact your location decision.

But since the company made this error, the title of this blog post, taken from the Austin Powers movie Goldmember, should suffice for the township's answer. (It is pure coincidence that Goldmember, a Dutchman pictured to the right, has a gold G on his velvet sweatsuit.)

Here are two stories on this issue.

The Lower Allen commissioners should continue to say no to Ahold's request because it is a simple giveaway that diverts needed tax revenue from the township. It would be that much costlier if the West Shore School District (which has absorbed $2.2 million in state budget cuts since 2010-11) and Cumberland County (where property taxes for most homeowners and businesses may rise by 22% next year) follow suit.

The repackaging plant will consolidate meat cutting operations for Ahold USA's stores in the mid-Atlantic region. Customers will no longer get their meat freshly cut in the store, instead, the meat cutting and packaging function is being moved to a central location with easy access to the interstate. Some meat cutters will lose their jobs in the process, while others might be offered jobs at the new facility, at a lower wage.

For its $400,000, Lower Allen Township is being promised between 450 and 800 jobs; there is no word on how many jobs will be lost at Giant Food Stores in the region or at the company's Maryland division.   

Normally, a corporate giant like Ahold will approach government officials to inform them they are on the short list for a new facility being planned. Just look at how the Shell Corporation enticed incentive offers from Ohio and West Virginia before securing the mother lode of all incentives from Pennsylvania (a $1.67 billion, 25-year tax break).

Unfortunately for Ahold USA, the company has already broken ground on the meat repackaging plant. So the township commissioners made the right move by putting the request on hold. Why divert scarce tax dollars to a profitable corporation to do something they are already doing anyway?

While they make good beer in the Netherlands, Ahold corporate honchos could learn a thing or two about economic development blackmail from Dick Yuengling Jr., the owner and president of D.G. Yuengling & Son’s.

Although the company recently expanded distribution in Ohio, making Western Pennsylvania an economically attractive location to expand production, the brewing scion doubts he would build a new brewery in Pennsylvania. Yuengling wasn't specific about what he means by business climate, but it is pretty clear from a Patriot-News interview that he doesn't think Pennsylvania as a rule offers enough taxpayer cash to corporations. (Although, Yuengling says his decision of where to build will not be based on the incentives offered.)

The decision comes down to taxes, incentives and the state’s business climate, Yuengling said. 

In the interview, Yuengling hinted that there are far more business-friendly states. And while he didn’t directly criticize any Pennsylvania administration, past or present, he said he can never be certain which way the state is leaning in terms of its tax and business policies. 

By contrast, he said enticing incentives offered by other states might be too good to pass up. However, he declined to cite any states he might be considering for the brewery… 

“We don’t necessarily base business decisions on incentives like that. But if they are going to give them to somebody, we would stand there and take them.” 

Fact Checking the Corbett Jobs Record…and Some Unsolicited Advice

By Stephen Herzenberg, Third and State

The Corbett administration has a new summary of Pennsylvania’s recent job performance. Today’s news that Pennsylvania’s unemployment rate is as high as the national unemployment rate underscores, however, that the state’s recent jobs record is not  good. Let’s take a closer look.

PA vs. U.S.: The Corbett jobs summary notes that Pennsylvania’s unemployment rate is below the national rate – and it was when the summary was first released. This was not a new trend: the Pennsylvania rate was a point or a point-and-a-half below the national rate for most of the four years before Governor Corbett took office. A year ago, the gap between the Pennsylvania and U.S. unemployment rate was still statistically significant. (See Table A.) But the gap between the two rates – the “Pennsylvania advantage” – has been shrinking steadily since 2010 until the Pennsylvania rate finally climbed to the U.S. level in August 2012, both equaling 8.1%.

Private-sector Job Growth: While the administration touts private-sector job growth in 2011, the numbers reflect a national trend, rather than a unique Pennsylvania story. 

The U.S. economy has had 30 consecutive months of private-sector job growth. In fact, Pennsylvania’s rank for the percent growth in private-sector job growth has fallen from 8th in 2010 to 36th in the 12 months ending in July 2012. One of the reasons that Pennsylvania’s private-sector job-growth ranking is down is the deeper cuts in public employment in Pennsylvania compared to other states. Deep cuts to Pennsylvania public schools and colleges led to a loss of 14,000 education jobs alone in 2011.

These layoffs impact the classroom and Main Street too. Unemployed teachers, like unemployed factory workers, don’t have money to spend, which affects the broader economy. 

Manufacturing Job Growth: Manufacturing jobs growth improved in 2011, but again reflects national trends. In fact, Pennsylvania’s manufacturing job growth since early 2010 is slightly below half the national increase. (See The State of Working Pennsylvania 2012.) 

New Hires in Marcellus Shale: Not this one again. The administration is touting natural gas industry growth by citing the number of new hires. As we’ve explained repeatedly, new hires are not new jobs (most new hires replace people who quit or are fired). In fact, the number of new hires is basically a meaningless number. Statewide there were 580,400 new hires during the 2nd quarter in Pennsylvania, while total non-farm employment rose between the 1st and 2nd quarter by less than 300 jobs. In other words, the only reason to cite new hires is to make the job gain seem substantially larger than it really is. 

The gas industry has led to some job growth in Pennsylvania, just not on the scale claimed by the industry. Between the 4th quarter of 2008 and the 4th quarter of 2011, employment in the core Marcellus Shale industries grew by 18,000. That gain was largely wiped out by the loss of 14,000 education jobs in just one year. Even using the most generous estimates, employment in the Marcellus Shale in direct and ancillary industries in the 4th quarter of 2011 (as published by the Pennsylvania Department of Labor and industry) was 238,400 – about 4.2% of total state employment.

Here’s the unsolicited advice: Twenty months into Governor Corbett’s first term, there is still time for the Governor to pursue policies that will improve Pennsylvania’s job performance. There are multiple options that have strong bipartisan and business support. For example, investing in transportation infrastructure as recommended by the Governor’s own transportation commission. 

In manufacturing and workforce development, the administration is also saying some of the right things. But talk is cheap: we need actual investment in skills and innovation if our job performance is going to improve relative to other states and the nation.

Business Subsidies 101: Take The Money and Run

A blog post by Mark Price, originally published at Third and State.

The Allentown Morning Call reports that a plant operated by International Battery in the Lehigh Valley has closed its doors. The facility opened in 2008 with $4 million in incentives from the commonwealth:

International Battery, which opened an Upper Macungie plant in 2008 that was expected to create hundreds of jobs, has abruptly closed without explanation, workers said, surprising local officials who worked for years to attract the company to the Valley…

Phone messages left with various company representatives were not immediately returned. A message left with Wexford Capital, a Greenwich, Conn., hedge fund that invested $35 million in International Battery in 2010, was not immediately returned.

International Battery, which makes rechargeable lithium-ion cells and batteries for the military and industrial uses, was seen as a recruiting win in 2008 when it decided to invest millions of dollars in the Lehigh Valley and create manufacturing jobs.

On that note, I will leave you with the Steve Miller Band.

PA Economic Development Programs Rank 40th on Job Creation, Job Quality Standards

A blog post originally published at Third and State.

A new national study sizing up hundreds of state-level tax credit, cash grant and other economic development subsidies has some bad news for Pennsylvania.

The commonwealth scored a D and ranked 40th place among the states in the Good Jobs First report, Money for Something: Job Creation and Job Quality Standards in State Economic Development Subsidy Programs. Some of the five Pennsylvania programs reviewed by researchers lack job creation requirements and wage standards for workers at subsidized companies. None of the programs required companies receiving state tax dollars to provide health benefits to workers in jobs or facilities funded by the subsidy.

Researchers looked at Pennsylvania’s Film Production Tax Credit, Job Creation Tax Credit, Keystone Opportunity Zone (KOZ) Program, Opportunity Grant Program, and Research and Development Tax Credit. Combined, these programs cost state taxpayers $181 million a year.

Learn more about the Pennsylvania findings here.

The Good Jobs First study confirms the Keystone Research Center’s 2010 study which found that nine major Pennsylvania business subsidy programs had low or no job quality standards.

Hopefully, lawmakers in Harrisburg get the message and take steps to improve economic development accountability. Senator Pat Browne has proposed legislation in past sessions to address these issues. Remarking on the Good Jobs First study, he said in a Keystone Research Center press release yesterday: “Certainly, the overall process would be improved by setting clearly defined accountability standards for all of the various economic development programs in Pennsylvania.”

Could It Be the Weather?

(The decline in the number of returns could also reflect more Pennsylvanians dropping under the poverty level and, thus, not required to file a return.  That’s an argument FOR unions. – promoted by John Morgan)

A blog post from Michael Wood, originally published on Third and State.

The Delaware County Daily Times reprinted a story from the PA Independent (the state news service started by the Commonwealth Foundation) which mistakenly blames unions for the out-migration of taxpayers in the state.

Here is the claim:

The Tax Foundation, a Washington, D.C., tax policy nonprofit, tracks tax  returns filed in every state to determine how shifts in population affect working by tracking the Social Security numbers of income tax returns filed with the IRS each year.

Between 1999 and 2008, Pennsylvania saw an overall decline of 84,000 tax returns. The top three destinations for people leaving Pennsylvania during that time – Florida, Virginia and North Carolina – are all right to work states. The data is the most recent available.

There are a couple of problems with this rationale.

1. Not many people move between states as a share of the population. According to data on the IRS’s website for the period 2004 to 2009, Pennsylvania lost a net 21,847 filers. This equates with less than 0.2% of our population. Most people who move do so to neighboring states.

2. Included in these numbers are retirees. If you aren’t in the workforce, I don’t think workforce policies are high on your priority list.

3. A bigger issue, particularly for retirees, is likely weather. I don’t hear about people retiring to Minnesota or New Hampshire, but I do hear about people going to where it is warmer – places like Florida, California, Arizona, North and South Carolinas, and Texas come to mind –  and that is precisely where people are going, the data show.

In fact, when you look at the 2004-2009 data, nine of the top 10 states receiving filers who lived the previous year in Pennsylvania enjoy milder winters than we do.

PA Filers Lost to Warm Weather States

Filer information comes from the IRS. Weather data come from the NOAA.

One thing that can’t be claimed from this data is that people are moving to lower their income taxes. In these top 10 net destination states, all but Texas and Florida have higher personal income taxes than Pennsylvania. For many retirees, Texas and Florida offer little in terms of income tax savings, as Pennsylvania doesn’t tax pension income.

The Center on Budget and Policy Priorities recently took a look at whether taxes have much impact on where people decide to live and found that other factors, including home prices and weather, are more important to people.

So how should Pennsylvania deal with this manufactured crisis? Abolish unions so employers can pay people less, give everyone a heat lamp and raise Pennsylvania’s income taxes?

In Case You Missed It: Third and State Blog for Week of March 28

Senator Jeff Piccola expanding school vouchers concept to include Pennsylvanians trapped in low-performing families? A state worker stunned to learn her mid-level administrative job is no pathways to riches? A Corbett speechwriter struck with a rare illness afflicting writers of overwrought clichés?

Either Friday was a particularly zany news day – or it was the first of April!

In Third and State’s Friday Funny, we passed on an April Fool’s take on the latest un-news coming out of Harrisburg. (Our thanks to a loyal blog reader for passing this one along.)

In other news last week, we blogged about the taxes gas drillers do (or don’t) pay, why the minimum wage matters, imaginative tax avoidance strategies, and much more!

IN CASE YOU MISSED IT:

  • For much of the week, it was the Mark Price Show at Third and State. On wages, Mark explained just how much the minimum wage matters and why the failure of policymakers to peg it to growth in productivity (or even inflation) has had a wide-ranging impact on American society.
  • On jobs and unemployment, Mark blogged about imaginative tax avoidance strategies at work at General Electric.
  • And on fiscal and monetary policy, Mark wrote about the Federal Reserve’s policymaking role and why it is so important to the economic recovery.
  • Finally, Michael Wood has a post on the taxes that natural gas drillers in the Marcellus Shale are (or are not) paying.

More blog posts next week. Keep us bookmarked and join the conversation!