Torts, taxes hinder Pennsylvania’s prosperity

Editor’s note: This is the fifth in a series of occasional commentaries on how Pennsylvania can turn around its economic fortunes.

Wrongheaded economic development policies and one of the nation’s worst labor climates are serious impediments to Pennsylvania’s prosperity.

As if those obstacles were not enough, the commonwealth also has saddled itself with a tort system that deters job and income growth and a collection of taxes on business that puts the state at a severe disadvantage in startups and attracting companies and capital from out of state.

A 2008 ranking of state tort systems by the Pacific Research Institute (PRI) rates Pennsylvania 45th in the Index of Tort Liability as measured by monetary costs of lawsuits and litigation risks.

Pennsylvania also ranked 45th in the index measuring the laws and regulations governing tort litigation.

In short, Pennsylvania is among the most litigious states in the country and promises to retain that status given the “favorable” climate for lawsuits created by state laws and regulations.

Compounding the situation, lawsuit abuse is a national phenomenon. PRI estimated national “excessive tort costs” at $589 billion in 2007. Other studies comparing the U.S. to other industrialized economies find our per capita tort costs to be at least double the average of other modern economies’.

Thus, Pennsylvania ranks among the worst states in a country that stacks up very poorly in the global economy as far as lawsuit abuse is concerned.

Predictably, there is a price to be paid by states where lawsuit abuse is rampant. Several studies have found a significant negative impact of litigiousness rankings and economic performance.

PRI finds the top 10 ranked states in the tort liability index enjoyed 25 percent faster gross state product (GSP) growth and 24 percent faster local government revenue gains than the bottom 10 ranked states during 2006.

Meanwhile, researchers using U.S. Chamber of Commerce state rankings have also found a clear and significant correlation between tort ranking and per capita GSP.

And if the tort situation isn’t bad enough, the state’s business tax climate creates an even more uncompetitive environment.

Consider several salient facts taken from The Tax Foundation’s latest ranking of state business tax climates. Pennsylvania has the second-highest corporate net income tax in the country; the state has the fifth-highest capital stock of the 22 states that levy the tax; the Pennsylvania property tax index ranks as the 47th worst in the nation; and, finally, Pennsylvania is only one of two states that limit the operating loss carry forward. As a package, this combination of Pennsylvania tax policies produces a very unfriendly environment for business, especially corporate business.

The Tax Foundation does give Pennsylvania reasonably good marks for its flat and relatively low personal income tax and the sales tax exemptions. But it must be borne in mind that the foundation’s rankings are done as statewide average comparisons. Thus, the low state ranking on taxes levied on business is made more problematic by the much higher tax rates paid in Philadelphia and Allegheny County, the two largest counties that account for about a fourth of the state’s population.

Philadelphia has a hefty income tax (3.9 percent for residents) and commuter tax (3.5 percent) as well as an 8 percent sales tax (an extra percent just approved by the Legislature). Allegheny County has a 7 percent sales tax, a 7 percent hotel tax, a drink tax, a car rental tax and combined county, school and municipal property taxes that average about 3 percent of appraised market value.

Briefly put, the economies of the two largest counties are more burdened by taxes than the state as a whole.

In sum, Pennsylvania’s tort system and tax burdens on business are serious hindrances to growth — obstacles that taken together with a poor labor climate and misguided and wasteful economic development policies are hamstringing the state’s ability to prosper.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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