National Manufacturing Day— which fell on the first Friday of October— was a great opportunity to recognize the manufacturing sector’s immense contributions to Pennsylvania’s economy: $79 billion in gross state product and 575,000 jobs. Regrettably, the day also highlighted one of the sector’s biggest hurdles: an unfriendly business climate created by state government.
This year, Pennsylvania’s attractiveness to manufacturers earned a dismal “C-minus” from Ball State University’s Center for Business and Economic Research— down from a “C” in 2015.
One of the main factors dragging Pennsylvania’s grade lower is our tax climate, which is on the cusp of a failing grade, garnering a “D-minus.” This has a major influence over where manufacturers and logistics firms locate their operations.
“I think it’s fair to say that in Pennsylvania the effective tax rate is rather burdensome,” says Michael Hicks, director of the Ball State research center.
From a manufacturer’s perspective, Pennsylvania ranks near the bottom of the 50 states in two key areas— corporate tax structure (44th) and unemployment insurance tax composition (45th), according to the Tax Foundation.
Why should companies put down roots in the Keystone State when dozens of other states are more tax-friendly? Companies are right to ask this question, especially considering the sorry state of economic growth in the last few decades.
Between 1991 and 2015, Pennsylvania ranked 46th among the states in job growth, 45th in personal income growth, and 46th in population growth. Last year alone, 41,000 more people decided to leave Pennsylvania than move here.
Yet while Pennsylvanians were fleeing to greener pastures, Harrisburg pushed through record-breaking spending and continued to look for more things to tax. In fact, over the past 25 years, the size and scope of state government has grown almost 200 percent, from a $27 billion operating budget to nearly $80 billion this fiscal year.
Are we better off because of it? Pennsylvania’s unemployment rate stands at 5.7 percent— nearly one percentage point above the national average. Of the 50 states, Pennsylvania had the second largest increase in the unemployment rate over the past year.
Politicians wedded to the status quo propose raising the minimum wage and increasing government spending to drive economic growth. In reality, both are proven disincentives to private-sector employment.
Corporate subsidies are another failed solution. Pennsylvania leads the nation in these handouts to select companies, doling out $800 million this year alone to convince politically connected businesses to remain in an unwelcoming environment.
The real solution is controlling state spending growth. Eliminating millions in corporate subsidies would be a great first step, allowing lawmakers to lower taxes on all businesses, not just those with the most lobbyists in Harrisburg.
Additionally, lawmakers must address our astronomical corporate income tax rate. At 9.9 percent, it ranks second in the nation. Add the federal tax rate, and Pennsylvania’s corporate income tax rate is the second highest in the world.
Companies have undoubtedly been dissuaded from making Pennsylvania their home as a result of this high tax rate. And when companies move elsewhere, that means fewer jobs for Pennsylvanians and less investment into our economy.
The solution is simple, but it will take political will. Harrisburg must control its habitual overspending and enact true reforms to the state’s primary cost drivers. This includes addressing our public pension crisis— a perennial black mark on the state’s resume for business investors.
Pennsylvania has a rich manufacturing tradition dating to the 19th century, when its steel industry began to establish a leadership position it has since lost.
Significant government reform can revitalize the state’s manufacturing future— a key source of jobs and prosperity— giving Pennsylvanians even more reason to celebrate National Manufacturing Day for generations to come.
Gordon Tomb is a senior fellow with the Commonwealth Foundation, Pennsylvania’s free market think tank.