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2017-11-17 / News

National economy continues to grow as tax reform’s future remains unclear

BY R. BROCK PRONKO
Regional Business Analyst

As the national economic picture continues to improve, business owners in Pennsylvania have become increasingly optimistic about their bottom line for 2017 and the projections for growth in sales and hiring for 2018. However, Pennsylvania employers’ ability to offer health care insurance to their workforce continues to be a concern due to persistent uncertainty over “Repeal and Replace” and the rising costs of health care. These concerns were among the responses from the Pennsylvania Chamber of Commerce’s 27th Annual Economic Survey, which was conducted in August 2017 by Susquehanna Polling and Research.

According to the survey, 65 percent of respondents said that “controlling the costs of healthcare” should be the Pennsylvania Chamber’s top policy priority in its dealings with lawmakers.

“While it’s refreshing to see evidence that employers are more confident in their projections for sales growth and hiring next year, their complaints about rising healthcare premiums – along with problems inherent in Pennsylvania’s workers’ compensation and unemployment compensation systems – are very real burdens that should alert lawmakers of the need to make necessary reforms,” said Gene Barr, president and CEO of the PA Chamber of Commerce in Harrisburg.

“Pennsylvania’s economy is not just driven by itself but to a large degree by what’s going to happen in Washington.

“At this point, tax reform is driving a lot of the debate, and we’re certainly in favor of getting tax reform done this year, but it’s still being kicked around, and each side is trying to figure out how to address the corporate tax issue and how to accelerate the growth of small businesses, but it’s critical that we get something done soon.”

The biggest bottleneck is finding a way to pay for the tax cuts that doesn’t hurt the poor or elderly, provides some relief to the middle class, and most importantly, doesn’t add $1.7 trillion to the U.S. national debt over the next decade, a figure that exceeds the limits Republicans agreed to for their reconciliation bill.

“With the budget deficit and the growing national debt, paying for the tax cuts is the big question, however, that’s only a concern if you look at it purely in terms of static modeling, which says if you’re raising $100 million a year with a certain tax and then you cut it, you’re going to lose $100 million in tax revenue,” said Barr.

“Static modeling overlooks the fact that if the reduced corporate tax grows the economy, and there are a lot of studies that show it would - you cut taxes now and make up for it later by growing companies’ revenues, which will then be taxed.”

According to Treasury Secretary Steven Mnuchin, the GOP’s tax cuts will result in $2.5 trillion of growth, and if it increases GDP by 30 or 40 basis points, the plan is break-even.

A new analysis of the GOP’s tax bill by the University of Pennsylvania’s Wharton School of Business suggests Mnuchin’s projections are far off the mark.

According to the Penn model, even if there is a high percentage of economic growth, the federal budget deficit would still increase by at least $1.5 trillion over the plans first 10 years, and the tax cuts would create at least a $3.6 trillion shortfall in federal revenue by 2040.

Using a more aggressive model for economic growth, the Tax Foundation, a Washington-DC based conservative think-tank, found that the House tax bill would add about $989 billion to the deficit over 10 years.

The Penn model presumed the House’s bill would boost GDP by 0.8 percent in the long run, while the Tax Foundation expected a boost of 3.6 percent. In neither analysis do the tax cuts pay for themselves.

A provision in the House tax bill called “repatriation” could help pay for the cuts, said Barr.

“There is over a trillion dollars in income by U.S. companies doing business overseas that could be brought back, but hasn’t because companies don’t want double taxation,” said Barr.

“For example, by Apple having its headquarters in Ireland, it avoids paying $60 billion in U.S. taxes.

“When you inject taxes on Apple’s and other large companies’ profits back to the U.S. economy, it would certainly be a shot in the arm, and would help to grow GDP and grow wages.” .

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