Tax reform boosts growth

By Nathan Benefield

and Michael Head

For decades, Pennsylvania has lagged the nation in job and income growth. Contrary to its nickname, the Keystone State ranks among the 10 worst states for businesses, according to a survey of CEOs, and 39th in state competitiveness, according to the Beacon Hill Institute. Residents continue to flee Pennsylvania for greener pastures. According to IRS data, Pennsylvania netted a loss of more than 77,000 taxpayers to interstate moves from 2000 to 2010.

Gov. Corbett's call for business tax reform could help make Pennsylvania competitive again, according to a forthcoming report coauthored by the Commonwealth Foundation and the Beacon Hill Institute.

One of us (Head) offered detailed testimony in Harrisburg yesterday on the report's conclusions. Here's the short version: Revamping our state's business tax code will lead to more jobs, more business investment, and more money in your wallet.

The governor's tax reform proposal has five main parts, each dealing with a specific component of the tax code. The first reform is the largest: End Pennsylvania's unique - or, rather, uniquely foolish - double tax on business income, as well as business assets, by finally eliminating the job-killing capital stock and franchise tax. This would be coupled with a multiyear reduction in the corporate income tax - from 9.99 to 6.99 percent - and several other additional reforms.

If these proposals were enacted, the effects on job growth and economic gain would be surprisingly large. With businesses freed from higher taxes, the state would spur an additional $440 million in business investment - and that's just in the next five years.

More investment also means more job growth: We estimate that, in the near term, 1,260 additional jobs would be created as a direct result of these tax reforms. This number would grow further over time, as investments increased.

With a boost in employment, the benefits of business tax reform would extend to consumers. Based on our projections, real disposable income would grow by $210 million in the near term.

This is a real stimulus package that would allow businesses to invest more, in turn creating additional jobs and more income for working Pennsylvanians. Compare this with the federal "stimulus," where taxpayer money was simply redistributed from one sector of the economy to another without actually creating anything.

With job creation, business investment, and growth in personal income, Pennsylvania's economy would become more vibrant, and its fiscal position would be stronger than under the current state tax law.

That's why Pennsylvania isn't alone in taking the road to tax reform. In Louisiana, Gov. Bobby Jindal has been working to eliminate the corporate income tax and reform the individual income tax to spur business investment and economic stimulus. Gov. Pat McCrory in North Carolina has hinted at the same approach, although the details of his plan have not yet been released. If reforms pass, these states would join six others, ranging from Washington to Texas to Ohio, that have seen the light on onerous corporate taxation.

Significant reforms to its business tax structure would give Pennsylvania a leg up on its neighbors - and restore prosperity to its citizens.