Reinvigorating Pennsylvania with One-time American Rescue Plan Funds

SUMMARY

• Pennsylvania’s chronic overspending, mediocre tax structure, and high regulatory burden are limiting growth and investment. We must pass reforms in these areas to make our economy healthier and more dynamic.
• We should use funds from the March 2021 American Rescue Plan (ARP) to assist in this goal, not to hobble our economy further. We offer guiding principles and a few specific ideas for using the federal money.  

REGULATORY AND FISCAL REFORM FIRST

• Pennsylvania was losing ground before COVID-19. In 2019, we were facing years of billion-dollar budget deficits,[1] and we knew we would lose a congressional seat due to slow population growth. We are now well into the recovery, but small business activity is still 25 percent below pre-pandemic levels. Payroll jobs are down by over 400,000, and the Independent Fiscal Office (IFO) estimates it will take six years to recover them.[2]
• To date, our efforts at fiscal and regulatory reform have failed. According to the IFO, at least a dozen Pennsylvania tax credits have underperformed, wasting millions of tax dollars.[3] While targeted tax credits might reach some of their intended recipients, we offer superior solutions, which will benefit all businesses.
• The most critical fiscal reform is the Taxpayer Protection Act (TPA), introduced as House Bill 71 and Senate Bill 286. This constitutional amendment will provide a long-term solution to the deficit problem by controlling spending overruns. Instead of mandating cuts, it will limit spending growth by tying it to population or income growth and inflation.
• Second, we must improve our regulatory regime to ensure that existing businesses survive, and new businesses thrive. Key reforms include liability protection from COVID-19 lawsuits (included in House Bill 605), more scrutiny of expensive regulations (House Bill 72), and regular review of existing regulations (Senate Bill 32).
• Finally, we should offer tax relief to small businesses (see House Bill 395). This will help small businesses recover by allowing them to deduct their 2020 operating losses. Currently, Pennsylvania has “uncommonly stingy” net operating loss rules, according to the Tax Foundation.[4]

HOW TO SPEND $7.2 BILLION

• We have an opportunity to use the latest round of federal stimulus dollars (more than $7 billion from the American Rescue Plan) to strengthen Pennsylvania fiscally and economically. State legislators should follow three principles in allocating the money:
  1. Fund one-time expenses.
  2. Do not fund or expand recurring expenses such as basic education, Medicaid, personnel costs, or transportation maintenance.
  3. Do not spend the money all at once; it lasts until 2024.
• Accordingly, we offer a list of one-time expenditures that will assist in reducing chronic deficits and revitalizing the economy. Some could be allotted in yearly installments until 2024.
  1. Fund kids. School districts have received billions in COVID relief, despite many schools remaining fully or partially closed. A recent McKinsey report found that in 2020, American children lost over half a year of learning, on average.[5] The best way to help kids is to give parents the resources necessary for their children’s education.
     • Back on Track accounts. Back on Track educational accounts, like those introduced by Sen. Judy Ward, would give parents flexible funds to pay for the educational services their children need (e.g., tutoring, online courses).[6]
     • 529 accounts. Lawmakers could also direct funds to kids’ 529 accounts, as in the Keystone Scholars program.
     • Senate Bill 1. The soon-to-be-introduced Excellence in Education for All Act provides a comprehensive solution to pandemic learning loss. The bill would put resources in the hands of parents to address the individual learning needs of their children; allocate funds to facilitate the creation and maintenance of charter schools; provide tax credits to businesses and groups that award scholarships to kids; foster and protect learning pods; and expand kids’ access to high-quality public schools.
• Pay off unemployment compensation debt. Pennsylvania’s public debt is roughly $11,000 per person and nearly $150 billion in total.[7] Lawmakers are not allowed to use ARP funds to address the largest liability, pensions ($67 billion). However, they can use ARP funds to tackle unemployment compensation debt.[8] Since the pandemic hit, Pennsylvania has incurred over $1.5 billion in new unemployment compensation debt.[9] Paying it off would (a) reduce the deficit and (b) prevent payroll tax hikes as the trust fund is depleted, making it easier for employers to hire new workers.
• Incentivize hiring rather than subsidizing unemployment. Pennsylvania’s unemployment rate is above the national average, yet our labor force participation is dropping (down nearly 195,000 from January 2020).[10] The American Action Forum estimates that almost half of Pennsylvania’s workers have an economic incentive not to work, given the scale of current unemployment benefits.[11] Facing similar problems, more than a dozen states are moving to end unemployment bonuses before their September expiration. Pennsylvania should follow their lead and, crucially, offer counterincentives that motivate employers to hire and workers to work (e.g., work and hiring bonuses).