Let’s Make Deal on a Transportation Bill

Democrats and liberal op-ed writers are busy beating up Republicans for refusing to do what Republicans are supposed to always do, shut and vote for higher taxes to fund roads, bridges and public transit.

Republicans should agree on some revenue enhancements when Democrats are ready to make two key concessions. First, Democrats will agree to unlink highway funding from transit funding. The issues need separate priority and have many differences when it comes to the best way to fund them and at what level they should be funded. Second, Democrats will stop opposing the elimination of prevailing wage requirements.

Simply having Republicans hold their noses and vote for revenue enhancements for transportation will not serve the Commonwealth’s long term best interests. Savings opportunities will have been foregone and needed structural changes will not be enacted.

There is a reason Pennsylvania is now facing a multiplicity of serious financial problems. The state government-for too long-has kicked cans down the road as it kowtows to the power and influence of unions. Teachers, transit workers and other government workers have had their way with legislation regarding strikes, prevailing wages, pensions, layoff rules, and so on for decades. Every problem is met with demands for more money to feed the monster that has been created. Especially noteworthy are the Port Authority of Allegheny County as well the largest school districts in the state.

Previous governors have redirected highway funds to keep the Port Authority from going on strike robbing Southwest Pennsylvania of dollars needed to keep roads and bridges maintained. Why do the complainers about Republican inaction not want to hear about that abuse of power? Then too, tens of millions of Federal highway funds were redirected to the North Shore Connector in Pittsburgh. Where was the outrage over that? Likewise, almost a hundred million in state and local tax dollars were required to build the Connector. That’s a lot of road and bridge work. But as always the supporters of public transit were 100 percent behind building the tunnel regardless of costs: one that provides free rides to users.

The mindlessness encapsulated by this venture is the single greatest argument for Republicans to demand some concessions from Democrat and transit supporters before folding and voting for the higher revenue status quo fans want.

A New Federal Urban Agenda?

A Pittsburgh newspaper whose op-ed writers are hopelessly enamored of Federal government programs to solve any and all problems now think it would be just grand if the Federal government would launch a new urban agenda. One has to wonder where the writers have been.

Does anyone need a reminder of all the efforts the Federal government has launched over the decades to help cities? Public housing funding, block grants, all sorts of welfare programs, dollars for education programs, major financial assistance for mass transit infrastructure, and so on and so on.

Did all those programs stop Detroit or Philadelphia or Stockton, California and countless other cities from developing very serious or crisis proportion financial problems and massive loss of population? No. The cause of the problems can largely be laid at the feet of horrendously counterproductive policies by the local, state, and national governments. Public sector unions, a breakdown of law and order (in many cities), a collapse in public education quality as a result of educational folly masquerading as reforms (including a refusal to allow publicly funded voucher programs) and political correctness run amok.

The argument that people moved out of cities for greener pastures because they were induced to by Federal policies is getting stale. People left because living in the suburbs was more attractive than staying in the cities. Lower crime, better schools and all the reasons people want to be safe and comfortable.

Perhaps the original exodus was initiated by demographic and social phenomena, but there can be little doubt that the headlong rush toward public sector unionization, the attendant sharp rise in expenditures and tax burdens, runaway crime problems and rapidly decreasing academic performance in public schools encouraged more people to leave. Many cities became increasingly dominated by one party rule-the party being one of statist and government growth inclination and a party with practically no patience with free market capitalism. An almost guaranteed slow downward spiral began in many of the currently worse off cities. The worse they became the more Federal and state financial assistance was forthcoming in some form or other. Economic development, redevelopment, infrastructure, housing, education, social welfare payments, early childhood education, learning programs, jobs programs-the mind boggles.

And still, Detroit bankruptcy happened, Philadelphia is scrambling to open schools this fall because of a lack of money, Pittsburgh is under state oversight and is likely to remain so for a long time, Chicago is closing schools at a breakneck pace because students have abandoned city schools and it has gigantic pension problems looming.

These wounds have been self-inflicted by politicians and policies that can only be described as progressive, liberal, statist, and politically correct. Politically correct is a polite term for trying to force adherence to certain acceptable behaviors and thoughts through intimidation, ostracizing, or attempting to shame or embarrass anyone not subscribing to the latest fad in liberal dogma-dogma that gets more bizarre by the month. Little wonder thinking people want no part in it.

The worst part: calling for a new Urban Agenda is just a dreamed up politically correct scheme to avoid dealing with disasters created by earlier statist schemes.

Twice as Many Counties Using 100% PDR

Near the start of 2013 the Governor signed Act 2 of 2013, which moved the formerly independent State Tax Equalization Board into the Department of Community and Economic Development. We wrote about this change in a Brief earlier this year and the Tax Equalization Division has its own section of the DCED website.

There’s some data available (some it was there when STEB had its own site) but one interesting aspect is to look at the pages on common level ratios in 2002 and 2012. Besides showing that four other counties reassessed at the same time as Allegheny County (on the 2012 page, but they went into effect in 2013) it is interesting to see that there has been an increase in transparency since 2002 in terms of counties equalizing their pre-determined ratio (PDR). This ratio is defined by the PA Tax Manual as "the ratio of assessed to actual value". Allegheny County used to have a PDR of around 25%: that is, if a house’s market value was $100,000 it would have an assessed value of $25,000. Millage rates appeared much higher (from 1996-2000 the millage rate was 25.2). Following the 2001 assessments the PDR was changed to 100% and now assessed values are the same as market values. Only applied discounts (homestead exceptions) lower the assessed value relative to the market value.

Looking at the 2002 common level ratio page, 20 counties in Pennsylvania had a PDR of 100%. In 2012, 41 counties have moved to a PDR of 100%. Act 93 of 2010 requires counties (not Allegheny, which operates under Act 71 of 2005) to adjust their millage rates to be revenue neutral if they make a change to the PDR.

Plum School Board Caves

After a May vote to hold the line on taxes and spending that would have led to 23 staff layoffs, the Plum School Board made a sharp U turn and approved a budget June 26th that raises taxes and uses nearly a million dollars of its reserves in order to save most of the jobs previously slated for elimination. All this with no concessions from the union. Remember the principal causes of the budget crisis are the additional million dollars or so required for teacher pensions and the cost of living increases for teachers.

The board has done what governing bodies have done for years: kick the can down the road. Assuming the pension payment is about the same next year and teacher cost of living increases are about the same, the budget shortfall will be back. Only next year the reserves will be too low to allow another million dollars to be tapped to close the shortfall. Than will mean going to the state for an exception to the allowable tax rate hike or a referendum to ask for permission to boost taxes for a second straight year. Alternatively, but highly unlikely, they might decide it is time to make the staff reductions needed to prevent more tax hikes.

One thing is for sure: as long as they are taking guidance from the union and the students who do not have to pay the bills, the board will keep making bad decisions that will come back to haunt them later. Leaving the May vote in place would have accomplished two important things. It would have dealt fairly with taxpayers and precluded next year’s budget angst. Secondly, it would have sent a strong signal to the union that the board will be very hardnosed at the next round of contract talks.

One thing we have learned in recent years is that school boards operate by and large on the dictates of the teacher unions. This episode proves once gain how powerful the union is and how little taxpayers are considered when spending and taxing decisions are made.

Plum taxpayers (and others across the state) will now begin to learn the reality of the underfunded pension mess as it appears the state is in no mood to make the serious reforms that will reduce the unfunded liabilities.

Teachers and Legislators Getting Schooled on Bad Policies


Facing a large budget deficit, the Plum School Board has voted to lay off 23 teachers.  The principal causes of the $1.48 million deficit are salary increases of over $900,000 and a requirement to boost the District’s pension contribution by $1,000,000 for the upcoming fiscal year. Limited to raising tax revenues over the current fiscal year by a state imposed index, the School Board has opted not to apply for an exemption from the Department of Education to increase tax rates.



Teachers were asked to voluntarily forgo the salary increases called for in the contract but rebuffed the request, necessitating the personnel reductions. As required by a state law that does not allow teacher layoffs for economic reasons but does permit layoffs for enrollment declines or program eliminations, the Plum school board is targeting several programs for elimination including ROTC, television production, and family consumer science among others.  Predictably, the teachers’ union head responded that “children should not be held hostage”-adding that the union wants to save all programs now and in the future. 


How ironic. Teachers’ unions have pushed for and received the job protection legislation that prevents school boards from making teacher layoffs across departments and working to achieve the least disruptive results of layoffs.  By forcing school boards to eliminate entire programs in order to make layoffs, the legislation does exactly what the teachers want; hold taxpayers hostage. They pit parents against taxpayers knowing students and parents of children taking classes in the programs targeted for elimination will raise a fuss and clamor to preserve the programs.  This strategy of pitting parents against the taxpayers and the school board on behalf of teachers works well when strikes or threat of strikes occurs. It is very clever to set up a scheme that deflects attention from the creators of the problem to the school board.


All this is now occurring in the reality of the massive and growing shortfalls in the Pennsylvania teachers’ and state employees’ pension plans.  These shortfalls will necessitate very large additional contributions from the state coffers as well as school districts over the next few years if major changes in the pension laws are not forthcoming. The reforms proposed by the Governor earlier this year would go a long way to dealing with the problem.  However, these reforms face enormous opposition from state employee and teacher unions with the threat of court challenges.

The plan to implement a new payout scheme for future years of service of employees who are currently employed while preserving the benefits earned to date is a major obstacle. Outcomes in the court are not assured and reforms could be nullified completely or delayed for many years.


But the lesson from Plum for teachers and the Legislature could not be clearer or starker.  With the billions of dollars that will have to be poured into pensions over the next several years if dramatic pension reform is not enacted, the state and school districts are facing an excruciatingly difficult dilemma of deep spending cuts or tax hikes. And as long as the law is in place that requires program elimination to layoff teachers, school boards will eventually be forced to cut into education muscle and bone.


Here is the reality. If teachers and state employee unions are not willing to accept the proposals outlined by the Governor, they will inevitably see their wages and non-pension benefits cut and many of their associates lose their jobs. The only alternative will be tax hikes that will cost many private sector jobs and hurt the state’s economy, a situation that over the long term helps no one-and certainly not the public sector unions.


It is now incumbent on the General Assembly to move quickly on substantial pension reform legislation to avert the coming disaster. It should also immediately amend the statute that requires entire programs be eliminated in order to have teacher layoffs.  And that should be followed by emulating the states, including the addition of Wisconsin in 2011, that do not permit teacher strikes. Teacher strikes are the ultimate argument against public sector unions.  Nowhere is the Madisonian admonition for the government not to create and/or side with powerful interest groups more in evidence. The opportunities for powerful public sector unions to use their considerable resources and influence to get friendly legislators elected and to have those legislators work for legislation favorable to the unions are demonstrably antithetical to good governance and sound fiscal policy. And they are the ultimate weapon against taxpayers.


The teachers and state employees have a decision to make. Will they fight pension reform with great zeal and vehemence and likely win a pyrrhic victory wherein they cause great damage to themselves and the state’s economy and taxpayers?  

Letter Writer’s Shock Should Be Channeled

A letter to the editor today from a resident of Mechanicsburg who still owns property in Allegheny County who just received his 2013 County tax bill expresses outrage over a 60% tax increase in his taxes. The letter does not divulge the location of the property (only that the writer "still own[s] property back in the Pittsburgh area, but had to move to Mechanicsburg for employment 25 years ago") or its type (if it is residential, commercial, industrial, land, etc.)

Let’s assume for simplicity sake that the writer owns a single family home in Penn Hills that was assessed at $50,000 in 2012. He could not take the homestead exemption as that is not his primary residence, so at the 2012 tax rate of 5.69 (following the millage rate hike), his Allegheny County tax bill would have been $284. If his 2013 County bill is 60% higher, or $454, that means the value of the structure would have risen to around $95,000 (almost doubling) based on the 4.78 millage rate that was printed on the County tax bill. That increase in value would be far in excess of the percentage changes for the County and all municipalities based on December assessment data.

The writer is angered as well because someone unspecified said he "…should not worry about my taxes going up quickly as there is a clause in the tax code that limits the increase to 5 percent". This is incorrect in that the state law applying to Allegheny County says after a reassessment tax rates must be rolled back to be revenue neutral and then, if the taxing body so wishes, they can raise tax rates so that they can get an additional 5% from the prior year’s revenue and then if more is desired, a petition to the courts can be undertaken. What someone at the County in person or through public pronouncements should have done is to explain that an increase in one’s property value has to be gauged against the increase of the taxing body to determine if taxes go up, down, or remain unchanged.

What is perhaps most amazing is that the letter writer, presumably as a real property owner in Mechanicsburg, which is located in Cumberland County, somehow forgot that his home county just reassessed in 2010. Maybe the reassessment did not result in a significant jump in his county taxes, which is entirely possible, or it did, which is also possible. Cumberland County, which assesses property at 100% of market value just like Allegheny County, just increased taxes in 2013 (from 2.045 mills to 2.274 mills), which meant a tax increase for him and all other taxpayers in the County.

If the letter writer really wants to get steamed he might calculate what his assumed $95,000 home in Allegheny County would pay in county real estate taxes vs. his assumed $95,000 home in Cumberland County would pay-it’s a $236 difference. There might be a lesson about the cost of county government in there.

High Taxed Cities Shows One Surprise

The website 24/7 Wall Street took a report done by Washington, DC’s Office of Revenue Analysis that examined the property, sales, and automobile taxes paid by a hypothetical family of three earning one of two levels of income ($25,000 or $150,000) to see which city had the highest tax burden. To be clear, the data does not look at all cities, only the largest city in each state. So for Pennsylvania only the City of Philadelphia is examined (it ranked second highest for both hypothetical earning levels, taking 13.3% of income for the higher earning family, 18% for the lower earning family).

The highest taxes city was Bridgeport, CT. Its high property taxes add to that distinction, and New York, Los Angeles, Detroit, and Baltimore fill out the top ten. One surprise would be the city that came in fourth, taking $18k from a family earing $150k and $3.5k for the $25k earning family, was Louisville. Readers of our work will recall that Louisville was the last major city to merge city and county functions (in January of 2003), and was the shining star of merger advocates in the southwestern Pennsylvania region (they ignored the example of Philly, which has been a merged government for a very long time) and many officials from Louisville took junkets here to trumpet their successes. A September 2003 article noted "Of particular interest to Pittsburgh, the Louisville merger allows the metro city to be more efficient…Instead of two information-technology departments, there is one. Instead of two human resources offices, there’s one. By eliminating redundant offices, the city will eventually save money not only on personnel, but also on rent, once leases on county office buildings expire." Though not sold as a money saver and rather as an image booster, one would expect that there would be some tax savings through consolidation.

Looking at the statistical section of two of Louisville’s financial audits-the 2003 one and the 2012 one-gives a perspective on the ten years leading up to the merger and the ten years since shows the rates levied on real and personal property by the City of Louisville (now known as the "urban services district") and Jefferson County (now known as the "metro government") shows that from 1993 to 2002 combined real and personal property tax rates fell 7% from 1.325 to 1.236. From 2003 through 2012, the combined rates on those taxes still fell, but by 0.8%, a rate much lower than pre-merger. But who’s in the position to complain about a tax cut of any shape or form these days? Especially when one notes that the combined real, inventory, and personal rates of the long consolidated school district (not part of the 2003 merger) went up 18% since the merger?

Taxing Non-Profits

A state Senator has proposed levying Pittsburgh’s Payroll Preparation Tax (PPT) on non-profits with 250 or more employees. The PPT is a flat rate levy of 0.55 percent on the total payroll of businesses within the City. This tax was imposed back in 2004 and was part of package of tax reforms that lead to abolishing the mercantile tax and the business privilege tax-two very onerous revenue taxes that were not based on company earnings and were quite punitive for some businesses.

The proposed PPT for non-profits would apply to the charitable part of a non-profit’s activities since presumably they are paying the tax on any activities that have been deemed for-profit. Note there are no taxes on the non-profits that could be eliminated as part of a deal sweetener for them.

This issue was debated at the time the PPT was being drafted into law. The arguments then and the arguments are still about the legality and constitutionality of taxing purely charitable organizations. There is also the issue of whether the taxing power can be given to the City if it is not part of a law that would allow other taxing bodies in Pennsylvania to levy the tax on non-profits.

Beyond those technical considerations, there is the political angle. Without question, the foundations, universities, churches and other non-profits in the cultural, educational and economic development community will be up in arms about the tax. These groups have many loyal and powerful friends who will point out all the good they do for Pittsburgh to help maintain its high rankings in many desirable amenities and attention to community needs. These friends will also be calling Harrisburg to make sure this bill never gets out of committee.

There are legitimate questions about what constitutes a qualified charitable organization. It is high time the Legislature update any laws pertaining to the criteria that must be met to qualify as a charitable organization and to delineate clearly when the activities they engage in are for-profit and must pay taxes.

All this is complicated by the rise of the mega-hospital such as UPMC where revenues have on occasion exceeded expenditures by large amounts. The laws need to recognize and deal with those situations by forcing the non-profit to lower its prices, allocate their excess to free care or donate to other hospitals that need financial help. Universities will also need a lot of examination to determine whether they are stepping over the lines in some areas into for-profit activity. This is not easy but it will have to be dealt with if we are to put an end to the annual cries for non-profits to do more.

Will the Senator also ask that governmental entities including authorities to also pay the tax as the law currently exempts them?

Rebutting Business Owner’s Support of Higher Taxes


In a recent editorial in a Pittsburgh newspaper, a small business owner argued that if the Bush tax cuts for the richest two percent of taxpayers are not extended, small businesses like hers will not get hurt.



But worse, the editorial goes on to argue the Bush tax rates should not be extended. The business owner justifies support for President Obama’s plan with a set of deeply flawed arguments and assertions of purported facts that are either incorrect or misleading.



The writer of the op-ed disagrees with the claim that taxes affect the economy or job creation. The argument is that when demand for a firm’s product increases the business will hire more people to meet the demand. By this reasoning the only real creator of jobs is the growth of demand for products.  While this might sounds reasonable to some, it is not the whole story by a long stretch. But it is the prevailing view of those who believe that government stimulus is net new real demand and consequently a job creator.  



How about firms that hire people and spend large amounts of money developing new and/or improved products?  What was the demand for the personal computer, the automobile, or hula hoop before they were invented and marketed?  The magic of the free market, entrepreneurial economy is that growth stems largely from the pursuit of profit that in turn encourages innovation and invention-the very lifeblood of sustained prosperity. It also rewards the firms that keep costs down compared to competitors, domestic and foreign.



Government can stymie the market based economy with burdensome regulations and misguided, counterproductive policies such as those that spawned the runaway housing bubble in the last decade.  Creating artificial incentives or disincentives leads to over and under allocation of resources that end up damaging the economy. The President’s current policy of wanting to raise taxes on high income earners will be a disincentive to invest at a time when weak investment is the biggest drag on the economy’s ability to grow. 



On the other hand, the op-ed writer is partially correct when she says the vast majority of small business will not be affected if the tax rates go up on the top earners.  And that is because the vast majority of small businesses (small businesses are defined as businesses with fewer than 500 employees) are very small, have only a handful of employees and pay only a fraction of the payroll paid by the relatively tiny number of “small” businesses with 50 or more employees.  According to government data for 2010, there were 5,160,404 businesses with fewer than 20 employees and 3,575,340 with four or fewer employees (63 percent of all small businesses.) The firms with four or fewer employees had 5,826,452 workers and payrolls totaling $226.5 billion, just 10.8 percent of all small business payrolls and only 4.5 percent of total business payrolls. These data presumably do not include the self-employed which are not captured under the government’s industry classification system (NAICS). 



Meanwhile, there were only 193,922 small businesses with 50 or more workers, a mere 3.4 percent of all 5.72 million businesses with fewer than 500 employees. These firms are critical because they are subject to and likely to be negatively impacted by the Affordable Care Act provisions regarding mandatory minimum health insurance coverage. However, those 193,922 companies hired 23,524,000 workers and had payrolls totaling $973 billion, 46 percent of all small business payrolls. That is to say, the 193,922 small businesses with over 50 employees hire four times more workers than the 3.6 million four or fewer employee firms and have well over four times the payroll. This is not to disparage the very small businesses. Many will grow to be very successful firms and hire lots of workers. It’s the American way.



The point at hand however is that larger firms will typically earn higher profits and have much greater capital investment than the 4.2 million firms with 10 or fewer employees that make up the overwhelming majority of all small businesses. Therefore, imposing higher tax rates on business owners who have to be concerned about the effect on large capital investments -they are already paying a 35 percent marginal income tax rate and will be less inclined (all other things equal) to increase investment or hire as many employees.  



In short, the argument that the vast majority of small businesses will not be directly affected by tax hikes on the highest two percent of earners might well be true for most low value added firms that do not generate high levels of income. But that is not the basis on which policy should be made considering that it is a comparatively small number of firms with employment between 50 and 499 workers that account for nearly half of small business employment and payrolls. These are the small businesses that will be hit hardest by the tax hike.



While the smaller firms might escape the initial direct effects of higher taxes, they will surely be impacted by any economic slowdown that occurs when the small businesses that account for a quarter of all private sector employees begin to cut investment and hiring. And that does not take into account the impacts higher taxes could have on the firms that are over 500 employees. In sum, the argument that the vast majority of small firms won’t be affected by the raising of the tax rate on the upper two percent of income earners is shortsighted and not a position business owners who hope to see a strong economy that boosts everyone’s opportunities should ever make.



To top off the liberal talking points editorial, the writer declares confidently that Bush tax cuts led to the serious recession of 2008.  Never a word about the colossal housing bubble that burst and collapsed the financial house of cards underpinning the bubble. The housing market calamity was fostered by policies created primarily by Democrats with some Republican assistance. If Bush gets any blame, it is because his administration did not work hard enough to curtail the outrageous expansion of mortgage credit by Fannie Mae, Freddie Mac and the FHA that aided and abetted the corruption of prudent lending practices. Then with the aid of failures of credit rating agencies to appropriately assess loan quality, the bad loans were packaged into mortgage backed securities by the hundreds of billions and sold to investors who believed the high bond rating they came with.



Inevitably, this scheme had to blow up.  And it did in 2008 with the attendant massive decline in asset value producing an entirely predictable impact on the economy. The truth?  The Bush tax cuts were not the cause of the housing and financial bubbles no many how many times the administration’s spokespersons claim otherwise. Here is the relevant question for those making the preposterous claim that Bush tax cuts caused the deep recession. If tax rates on the richest two percent had been at the 2001 pre-tax cut level in 2007 and 2008 would that have prevented the runaway housing bubble from collapsing? The answer is absolutely not.  Case closed.



Sadly, the inability or refusal to understand correctly what has happened in the past leads to prescriptions about future policies that are as nonsensical as the ones that produced the previous debacle. 

Business Owner Thinks Taxes are too Low

An op-ed so full of logical errors that the mind boggles to see so many crammed into one article has just appeared in a Pittsburgh newspaper-one with a left leaning editorial page. The author of the piece says she doesn’t believe tax rates affect small businesses and that letting the tax rate go up on January 1st for the top ratepayers is a good thing. After all, that increased revenue would go for good things like social programs and public education. Never mind that the U.S. and its states spend more on education per child than any place on the planet already and that the plethora of social welfare programs cost taxpayers $60,000 per year for each household getting benefits and that does not include Social Security.

She argues that tax rates under President Clinton left us with a surplus. She doesn’t mention that the dot com bubble produced enormous capital gains revenue and that defense spending was slashed-the so called peace dividend. Nor does she mention that the Republican controlled House forced welfare reform and held the line on spending far better than the President would have done otherwise.

She blames the Bush tax cuts for the deep recession. Au contraire, it was not the tax cuts, it was the insanity of the housing bubble-a product of Democrat social engineering and loose monetary policy-that plunged the economy into a deep dive. So little actual knowledge of what happened has enabled Democrats to foist blame on to Bush for their own disastrous policy efforts.

The writer hints at but does not acknowledge that she is part of a group called "sustainable businesses" and is a certified B Corp, both of which have strong social and environmental agenda and are far less worried about profits and growth than they are supporting liberal causes. That’s fine if she wants to be in that line of business, it’s a free country. But don’t go lecturing other businesses about what is important economically when that is not your main concern.

Finally, the author does not tell us that she is a very small business-fewer than ten people, maybe even as low as four according one website-and that her work is free from many of the environmental and other regulations that plague larger "small" businesses. Obamacare is not going to force her to decide whether to cut hours or people to remain profitable.

In short, the op-ed is useless as a guide to economic policy. It is a liberal’s cry for bigger government for doing social reform and protecting the environment. She does admit if demand for her product was stronger, they might add employees. But rather than hoping for a stronger economy resulting from natural market forces and the profit motive, she wants more government stimulus-the moral equivalent of amphetamines. They might work for a time or two, but quickly becomes addictive and destroys the mind and body. But that is a lesson some people choose not to learn.