New tax credit has successes elsewhere, but groups point to flaws
The state's newest economic development tool has seen measured success in other states but faces hard scrutiny from groups who say its results are inflated.
Pennsylvania's program, known as PEP (Promoting Employment across Pennsylvania), allows companies that create a minimum 250 jobs over five years to keep 95 percent of the personal income taxes withheld from new-employee paychecks. Gov. Tom Corbett signed the law in October. It expires in 2018 and is capped at $5 million per year in benefits.
Although similar laws have seen some success in other states, Pennsylvania groups from both sides of the aisle find fault with it. The liberal-leaning Harrisburg think tank Pennsylvania Budget and Policy Center raised warnings about the bill early in the legislative process.
An analyst at the Harrisburg-based libertarian policy group Commonwealth Foundation said continued reliance on such incentive programs bribes a few businesses to come here without addressing the underlying issue of Pennsylvania's economic competitiveness.
"It sounds good, but it's not addressing the real issues," said Nathan Benefield, the foundation's director of policy analysis.
Beyond our borders
PEP's closest cousin is a program from Kansas known as Promoting Employment Across Kansas, or PEAK. There, companies keep 95 percent of the withheld taxes on new-employee paychecks, and the total benefit is capped at $4.8 million per year, increasing to $6 million per year starting in 2013 for in-state companies.
Kansas has no cap on the tax credit for out-of-state companies relocating.
The Kansas and Pennsylvania programs also share a common promoter: Vern Squier, president and CEO of the Chamber of Business & Industry in Centre County. In 2009, Squier worked in his native Kansas to promote PEAK with businesses and legislators.
In Kansas, the incentive has been successful, he said. The state estimated the program would create 10,666 new jobs this year with an estimated new payroll of $781 million, according to stats Squier provided.
The Kansas Department of Commerce, which manages PEAK, did not respond to requests for analysis of its program.
Squier backs Pennsylvania's program and aided legislators such as PEP author Rep. Kerry Benninghoff, a Republican representing Centre and Mifflin counties. PEP is said to be tailored to benefit California software giant Oracle, which might be considering moving a facility to the State College area, according to published reports.
Opponents also have criticized such incentives as simply moving jobs from state to state or region to region without creating new ones.
Squier said states need to constantly re-evaluate how they develop their economies. Credits and incentives are just tools to do that.
"If you're going to understand economic development, you have to ask, 'Do we try to regain some of the job losses over recent years?'" he said. "And if economic development is a worthy pursuit, we have to recognize that happens in an environment of competition."
To Pennsylvania's west, Ohio has had a similar job-creation tax credit for nearly 20 years. Since 1993, the state has seen success with a program that allows companies to keep 75 percent of income taxes withheld from new employees. The program doesn't have a cap, and minimums were set at 10 new jobs until 2009, when the state switched to a payroll quota.
In 2010, Ohio had 180 companies participating in the program, a 106 percent increase from the first year, according to an analysis from the state's Department of Development. Those firms committed to creating 15,370 new jobs, a 38 percent increase. And the average hourly wage of the jobs — adjusted for today's value — has grown from $18.35 to $21.20.
However, nearly every year of the program, between 20 and 30 percent of companies dropped out before completing their contracts, according to the state. In most years, between 20 and 40 percent of projects were terminated by the state without seeking repayment of tax benefits.
Fewer than 10 percent have their contracts terminated and are required to repay benefits to Ohio, according to the report.
"I don't think you would hold out Ohio as your stand-out over the last seven years," said Zach Schiller, research director for Policy Matters Ohio, a liberal nonprofit research group.
Ohio has lost about 240,000 jobs since the recession started, Schiller said. Between 2004 and 2010, Ohio's tax credit created 88,178 jobs, according to company commitments made to the state.
Of the incentives that concluded in 2010, 17 out of 54 companies complied with their contracts, Schiller said. Given the withdrawal and termination rates, that means Ohio's version is creating far fewer jobs, he said.
"We've had a long history with these incentives, and we haven't seen jobs growth or population growth or economic growth," he said. "It doesn't generate a great deal of confidence that these programs are doing what they're supposed to do, and that's create jobs."
Pennsylvania is now outlining the regulations that will govern its tax credit program, so PEP is not yet operational, said Steven Kratz, a spokesman for the Department of Community and Economic Development.
"We're sitting down with the Department of Revenue and looking at how to most effectively administer the program to result in the most significant job creation," Kratz said.
Some regulations are written in: the $5 million cap, the job-creation thresholds of 100 in the first year and 250 over five years, and a requirement that jobs pay equal to or more than the average salary in the county where the company is locating jobs.
The state also can require companies failing to create jobs to pay back money to the state. These rules will keep the program on track and prevent abuse, proponents said.
"If (companies) perform, they get a benefit," the chamber's Squier said. "If they don't perform, they don't get a benefit, or they lose the right altogether and the state recaptures the benefit."
But continuing to put too much faith in incentives, tax credits, grants and other types of subsidized economic development won't help Pennsylvania's overall competitiveness, the Commonwealth Foundation's Benefield said. If you took all of the state's programs and cut them, you could reduce corporate taxes by 1.5 percent across the board, he said.
"That certainly would make Pennsylvania high on the list to attract business and would help companies," he said.
Tax incentives and budgets: Much debate, big effects
States have varying impacts that can be measured from their economic development programs: Numbers of jobs created. Wages. Spinoff economics.
And impact to their state budgets, which have been constrained by recession and changing markets in recent years.
In 2010, Ohio’s job-creation tax credit was worth nearly $70.8 million in tax benefits to companies, according to the state. Yet it collected just $36.1 million in taxes from payrolls associated with the program.
Pennsylvania’s similar PEP program is capped at $5 million a year, which means if the 95 percent of personal income tax withholdings going to companies for created jobs hits that threshold, the state will collect just $263,158 in taxes, or the remaining 5 percent.
Some critics have pointed out that large budget cuts over past several years and complex problems such as the $41 billion in unfunded state pension liabilities or the $3.5 billion annually needed to address transportation infrastructure don’t leave the state a lot of room to cut revenue sources.
Balancing budget needs for transportation, education and other issues was a chief concern for the Pennsylvania Budget and Policy Center when it cast a critical eye on the new law in its early stages.
The debate continues on how much the state needs to cut from its budget, the Commonwealth Foundation’s Nathan Benefield said. But it shouldn’t necessarily be looking to maximize revenue, he said. If you cut out subsidies from the budget, you could lower corporate tax rates, which would benefit all companies, he said.
Then again, economic development programs are popular among politicians because it’s a large visual aid, he said. They don’t have ribbon-
cutting ceremonies when a laundry hires a worker as a spinoff from broader tax reduction, even though there might be thousands of small businesses across the state hiring for the same reason, he said.
“If you maximize job growth, the state revenue will take care of itself,” Benefield said.