Gov. Rendell and PA's Business Climate: Rhetoric Doesnt Match Reality

As election time draws nearer, Gov. Ed Rendell is issuing a flurry of press releases to convince voters that his administration has improved Pennsylvania’s competitiveness and economic growth. To that end, the governor is citing various publications to make his case.

One report that Gov. Rendell claims to show “that Pennsylvania’s business climate is one of the best and most business-friendly” in our region is the “State Business Tax Climate Index” by the Washington, D.C.-based Tax Foundation. More recently, the governor touted a Site Selection magazine ranking of Pennsylvania as one of the top states for new corporate facilities and expansions as evidence that his debt-funded “economic stimulus” plan is working.

However, a closer look at Gov. Rendell's record reveals that the bulk of the positive changes to Pennsylvania's business taxes – namely the phase-out of the Capital Stock and Franchise Tax (CSFT) – pre-date his administration. Indeed, many of Rendell’s changes have negatively impacted Pennsylvania’s competitiveness, and he has blocked modest reforms that would provide much needed relief to the state’s job creators. The result has been continued economic stagnation for Pennsylvania – the same stagnation that occurred when the Ridge Administration was winning applause from Site Selection in the 1990s and early 2000s.

The Tax Foundation explicitly states that its Index is not designed “to attempt to measure economic opportunity or freedom, or even the broad business climate” of the states. And while the study praises certain aspects of Pennsylvania’s business tax system – such as the flat rate structure of its corporate net income (CNI) tax and personal income tax (PIT) – it is also critical in its analysis.

Those positive features existed long before Ed Rendell was elected governor. More importantly, his administration has missed opportunities to reduce Pennsylvania’s corporate and wealth taxes (such as property, capital stock, inheritance, and estate), and the Tax Foundation’s analysis reflects this fact.

Rather than taking steps to improve Pennsylvania’s business tax climate, Gov. Rendell increased the personal income tax by 10% as part of the 2003 budget deal (after initially proposing an increase of 34%), which negatively affected many small business owners.

When Gov. Rendell had a legitimate opportunity to reduce Pennsylvania’s business taxes last December, he vetoed House Bill 515 – a measure that passed both chambers of the General Assembly with overwhelming bi-partisan support. In vetoing the bill, the governor argued that he was taking the “financially responsible” action – despite the fact that the tax relief it contained was equivalent to less than one-fifth of one percent of the current year’s General Fund budget.

Finally, the cornerstone of Gov. Rendell’s “business-friendly” agenda – his billion-dollar “economic stimulus” borrowing plan – is a sign of Pennsylvania’s economic weakness, not its strength. As the Tax Foundation study notes:

Lawmakers create (subsidy) deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business climate plagued by bad tax policy.

In contrast to the Tax Foundation’s limited scope and qualified praise, one study that does consider the overall climate for “economic freedom and financial prosperity” – the “U.S. Economic Freedom Index 2004,” published by the Pacific Research Institute in association with Forbes magazine – ranked Pennsylvania 45th among the 50 states.

So, given the dueling analyses, how does Pennsylvania truly rank?

The numbers telling the most accurate story are those revealing Pennsylvania’s abysmal rankings among the 50 states in employment growth (38th), population growth (43rd), and personal income growth (43rd) during the first three years of the Rendell Administration.

At the end of the day, Gov. Rendell’s rhetoric about Pennsylvania’s business climate fails to match the reality most employers are facing in our Commonwealth. And no amount of press releases can paper over a record of business tax increases and missed opportunities.

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Grant R. Gulibon is a Fellow and Matthew J. Brouillette is president & CEO of the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent public policy research and educational institute located at the foot of the Capitol in Harrisburg.