Tax Reform, Not Tax Credits Will Grow Pennsylvania’s Economy

By Andrew Holman

Pennsylvania State University’s Center for Evaluation and Education Policy Analysis made headlines with this key finding: 7.7 percent of all Pennsylvania teachers, the “largest” number on record, quit the commonwealth’s classrooms in the past year. According to the center’s recent study, 9,587 teachers left, an increase of nearly 43 percent since 2021.

Moreover, Pennsylvania Department of Education data show new teacher certifications in 2021–22 hit record lows. As such, teacher shortage worries permeate public policy discussions.

Gov. Josh Shapiro’s budget proposal, released in March, includes relief for teachers and other high-demand professions. His plan is a tax credit of up to $2,500 annually for newly certified teachers, nurses, and police officers in the first three years following their certification.

Yet, Shapiro’s proposal misses the mark. The annual quits rate for all jobs in Pennsylvania reached 25.6 percent in 2022, more than three times higher than the teachers’ attrition rate. While this statistic is concerning, an examination of key economic indicators proves that Pennsylvania’s economy has problems far beyond departing employees.

Pennsylvania has the sixth-highest unemployment rate in the country. Since February 2020, payroll jobs in Pennsylvania have increased by a mere 0.5 percent. The state’s labor force participation rate and employment-to-population levels have yet to return to pre-pandemic levels.

The effects of the state’s dismal economic conditions are snowballing. The commonwealth continues to lose residents to domestic migration, with nearly 40,000 Pennsylvanians leaving in 2022. State-to-state migration cost Pennsylvania $1.9 billion in income from 2020 to 2021.

Pennsylvania isn’t just losing out on people. In 2022, the state was a finalist for a U.S. Steel plant that would have brought 900 jobs with an average salary exceeding $100,000. U.S. Steel chose to build the plant in Arkansas, in part because Pennsylvania’s permitting process takes — in Shapiro’s words — “too damn long.”

A targeted tax credit that only benefits three professions will not spur the widespread economic growth our commonwealth needs. Pennsylvania must address the root cause of its economic downturn: an unfriendly business tax structure.

Before last year’s state budget deal, Pennsylvania had the second-highest corporate tax rate in the country. With the current reduction schedule, the state will potentially have the 13th-lowest rate by 2031.

However, many Pennsylvania businesses cannot afford to wait that long for relief. Just last month, 10 central Pennsylvania businesses closed their doors for good.

Thankfully, Sens. Ryan Aument and Greg Rothman introduced Senate Bill (SB) 345 to accelerate the reduction of the corporate net income tax (CNIT) rate. The proposed legislation would immediately reduce the tax rate to 7.99 percent and drop it by one percentage point annually until it reached 4.99 percent. SB 345 promises a lower rate five years faster than last year’s budget deal. By 2026, Pennsylvania would potentially have the 13th-lowest rate in the nation.

Republicans aren’t the only ones who realize the urgency of this situation. On the campaign trail, Shapiro promised to reduce the CNIT to 4 percent, a percentage point lower than SB 345.

In addition to the high CNIT rate, Pennsylvania is one of two states that has a net operating loss carryover cap lower than the federal government’s 80 percent limit. This low limit makes it difficult for businesses, especially new and cyclical businesses that are sensitive to economic fluctuations, to succeed in Pennsylvania. SB 346 — also introduced by Aument and Rothman, alongside Sen. Tracy Pennycuick — would increase the state’s cap to 80 percent over the next four years to align with the federal government’s limit.

These two tax reforms would not just benefit businesses. Research shows that Americans consistently migrate from high-tax states to low-tax states. With lower taxes, more businesses, and more jobs, Pennsylvania could begin to attract residents — including teachers, police officers, and nurses — from other states.

As budget negotiations in Harrisburg quickly approach the June 30th deadline, lawmakers must take decisive action to improve Pennsylvania’s economic outlook. Shapiro’s targeted tax credits will not get the job done. Instead, the state needs the broad-ranging business tax reform that Shapiro promised on the campaign trail. Only then will Pennsylvania see the economic growth it so desperately needs.

Andrew Holman is a policy analyst with the Commonwealth Foundation, Pennsylvania’s free-market think tank.