Bloomberg’s latest release, the Economic Diversity Index, found that Pennsylvania has the most diverse economy in the country. We even edged out Texas. Economic diversity is essential, because it allows the Commonwealth to avoid the worst impacts of economic downturns. It’s like the adage of not having our eggs all in one basket. Our geographic proximity to a large swath of the US population, abundant natural resources, and world-class, high-tech research should be the perfect mix for a booming economy. But, it is not what is happening. Although our growth rate is higher than many of our neighbors, we continue to be held back.
The problem can be traced to two primary sources (which as loyal readers you can probably guess): a high corporate tax rate, and over-regulation. Pennsylvania’s corporate tax rate is 9.99 percent. The second-highest in the nation. Our elected officials are quick to point out that due to various corporate welfare programs, and “economic incentives,” most businesses do not pay that rate. While technically accurate, when we look at the last fifty years, we need only ask ourselves if the legislature’s preferred approach of picking winners and loser has paid off? Judging by the shortage of newly formed businesses, and the relative loss of population, the answer is clearly NO.
The second and more pernicious source of drag on our economy is the Commonwealth’s regulatory environment. Businesses face a literal mountain of regulations. In 2017, James Broughel painted a stark picture in testimony to the Pennsylvania House Committee on State Government:
“As of earlier this year, Pennsylvania has 153,661 regulatory restrictions in its administrative code. Some of these restrictions are vital for protecting the health and safety of citizens, but others just make the code unnecessarily complicated. There are 208 restrictions governing the design and use of ladders in the state, and there are 190 restrictions setting standards for consumer packages and containers. Surely some of these restrictions are not necessary for safeguarding public health, safety, or the environment.” (Emphasis added)
The scope, and occasionally contradictory nature, of Pennsylvania’s regulations, means that small and medium-sized businesses are forced to divert their attention from the actual “business.” They spend considerable time and money focused on complying with regulations; not making money and growing. Larger businesses are by no means exempt from the regulatory burden, but their size allows them to delegate the task of compliance to dedicated staff. There is no doubt that the money larger businesses spend on compliance could be better spent, but the impact is relatively higher for smaller firms.
The practical impact of overregulation cannot be overstated. Referring back to Mr. Broughel’s testimony:
“If Pennsylvania’s economy were to grow at 4 percent per year, it would take just 18 years for its real GDP to double. This means that if a child were born in Pennsylvania today and the state grew at 4 percent per year, that child would enter college in an economy twice the size of the economy in which he or she was born. By contrast, growing at 1 percent per year takes 70 years to double real GDP, just 9 years shy of the life expectancy at birth of someone born in the year 2014. Since the year 2000, Pennsylvania real GDP growth has averaged just 1.5 percent per year.” (Emphasis added)
Cutting the corporate tax rate and the overall regulatory burden would unleash Pennsylvania’s economy. It is, unfortunately, the road less traveled in part because politicians don’t have the same opportunity to get their picture taken with a giant cardboard check.
There are currently twelve pieces of legislation waiting for action that have been assigned to the Senate Committee on Intergovernmental Operations. Four of those bills have already passed the House. The Senate has an opportunity to make long-term changes in how the Commonwealth approaches regulation.