Wednesday, October 22, 2008

Five Ways to Transform Pennsylvania’s Economy

Everyone is understandably focused right now on getting through the current financial and economic crisis facing the country. But it’s important for Pennsylvanians to also think about how to best position the state and their communities for growth in the post-recession economy. Although Pennsylvania has many strengths, the world will likely be a very different place in the years ahead, and it’s time for us to take bold action to make the state as competitive as possible in that new environment.

Here are five ways to do that. Some require state legislation, but all require action by citizens, business leaders, and local officials – in other words, by you and me! (These five suggestions first appeared in the new online magazine Keystone Edge.)

#1 Encourage and Support Entrepreneurs

Many of Pennsylvania’s biggest employers – Air Products, Alcoa, Medrad, PPG, Respironics, U.S. Steel – were started by entrepreneurs, some as long as a century ago. But we can’t rely just on the businesses we have to keep our economy growing; we need new entrepreneurs to create new businesses that will grow and become the state’s large employers of the future.

Over the past 25 years, starting with the creation of the Ben Franklin Partnership in the Thornburgh Administration, Pennsylvania state government has put in place one of the most extensive arrays of entrepreneurial and technology support programs in the nation. But those programs are intended to complement community support, not substitute for it. Without private sector investors, lenders, customers, and employees, startup firms can’t succeed no matter how many public programs are available. And it’s particularly important to help support startup businesses now as bank credit and consumer spending have tightened.

What can you do to support entrepreneurs in your community?

1. Invest in them. Entrepreneurs particularly need “angel investors” to provide the early stage capital for developing and market-testing their products or services. Risky? Sure. But the so-called safe investments aren’t looking too good right now, either! Analyses have shown that investments in early stage capital have had significantly better returns than either later stage venture capital, buyouts, or traditional stocks.

2. Buy products and services from them. After getting its initial financing, the most critical milestone for a new business is finding its first customers. But many startup businesses in Pennsylvania claim that they can’t get in the door to sell their products or services to existing firms. We shouldn’t force our own businesses to go out of state to find their initial sales.

3. Celebrate them. When was the last time you saw headlines about a startup company’s success on the front page of the paper? When was the last time you saw a story about an entrepreneur on the television news? The public needs to understand the critical role that entrepreneurs play in creating the jobs of the future. Parents and guidance counselors can help by conveying to children that success can be “starting your own business,” not just “getting a job with a big company.” And many of the most successful entrepreneurs failed one or more times before succeeding, so we need to encourage those who fail to try again!

#2 Hold Schools Accountable for Performance

In the years ahead, businesses of all sizes will increasingly need a workforce that is proficient in basic skills, particularly mathematics. And unless workers have those skills, they’ll have trouble finding employment at a good wage.

Although Pennsylvania has a national reputation for having a high-quality workforce, we’re at risk of losing that advantage in the new knowledge-based economy. Last year, almost half (44%) of Pennsylvania’s 11th graders weren’t proficient in math, and over a third couldn’t read at a high school level. If you think your school district doesn’t have a problem, you’re probably wrong - only two school districts in the entire state had 90% of their 11th graders proficient in math, and only 19 (out of 501) had 80% or more proficient in math.

The problem starts much earlier – over a quarter of Pennsylvania’s 5th graders can’t do math properly and almost 40% can’t read at a 5th grade level.

What business could survive if 25-40% of its products were defective? How can Pennsylvania expect to be competitive in the global economy if a third of the young people entering the workforce can’t read or do math properly?

The standard excuses are that the tests are bad or that schools need more money to do better, particularly those that have many low-income students. But there are schools in Pennsylvania and in other states that have achieved high levels of proficiency on standardized tests for all children, including low-income children, while spending below-average amounts per child.

The solution isn’t more money or new state or federal laws. It’s local citizens demanding better performance from their schools for their children. What can you do?

1. Find out where your local schools rank on student proficiency. Most people know how their local high school football team is doing, but not how their local school students are performing on basic skills. You can get statistics on student proficiency for every school in the state from the Pennsylvania Department of Education website.

2. Find out if your school district has a plan for improving proficiency. Ask if the district has a goal of 100% proficiency for children, and ask if they have a plan for achieving it. Ask if they’re using tools like Value-Added Assessment to determine which schools and which teachers are performing below-par and how they are addressing problem performers.

3. Elect school board members committed to proficiency. It’s not the President, the Governor, or state legislators who oversee schools, it’s the 4,500 school board members across the state who do, and about half of the seats will be up for election next year. If your school district isn’t performing as well as it should, elect new school board members who will hold the superintendent and teachers accountable for improving performance.

#3 Create a Value-Driven Healthcare System

One of the biggest problems facing the nation in the years ahead is the high and growing costs of healthcare. It’s making our businesses uncompetitive, and it’s the primary culprit behind the growing problem of the uninsured. No plan for expanding access to health insurance will be sustainable if costs aren’t brought under control.

Imagine what it would mean for attracting both businesses and residents if Pennsylvania became the first state in the nation to reduce health care spending while improving quality. Impossible? No – a big part of the solution lies in changing the way we pay for healthcare. Under current payment systems, physicians, hospitals, and other healthcare providers receive strong financial incentives to deliver more services to more people, but they are often financially penalized for providing better services and improving health.

To fix this, people need to start choosing healthcare services based on both cost and quality, so that healthcare providers have an incentive to eliminate the estimated 40% waste and inefficiency in the healthcare system.

Read the October 5 Pittsburgh Post-Gazette for an example – a story profiled a man who found that his medication cost $46 at one pharmacy and $557 at another, but his insurance plan would pay 80% of the cost regardless of where he went, and the high-priced pharmacy said that because of that, they compete on convenience, not on price.

Or look at the 2007 report from the Pennsylvania Health Care Cost Containment Council (PHC4) showing that heart surgery costs more than twice as much at some hospitals as others in the same region, with no difference in quality, yet most health insurance plans give people no incentive to choose the lower-cost care.

What do we need to do?

1. Reauthorize PHC4 and issue public reports on healthcare providers’ costs and quality. Pennsylvania was actually a pioneer in providing information on hospital quality and costs when it established the Pennsylvania Health Care Cost Containment Council over twenty years ago. But more recently it has fallen behind other states and regions by failing to expand quality reporting to physicians and outpatient services. And now, even the hospital reporting is at risk because of the Governor’s and General Assembly’s failure to reauthorize PHC4.

2. Use health insurance plans that pay based on value. Businesses and state government in Pennsylvania should follow Minnesota’s lead and create incentives for employees to use higher-value healthcare providers. Rather than charging employees more for all of their healthcare, charge them less for using higher-value providers and more for using lower-value care.

3. Choose healthcare providers based on quality and price. National studies have shown that higher-cost healthcare doesn’t mean better quality healthcare. Just like any other product or service, the only way to lower spending is for all of us to ask about both price and quality, and use the healthcare providers that deliver the best value.

#4 Make Business Taxes More Competitive

Although there are many reasons why businesses should want to locate or expand in Pennsylvania, many never learn about them because the state publishes a big red STOP sign for economic development.

It’s called the state Corporate Net Income (CNI) Tax. Pennsylvania’s CNI tax rate is 9.99%, the highest flat tax rate in the country. (Iowa has a higher rate – 12% – on net income over $250,000, but businesses in Iowa with less than $100,000 in net income pay only 8%.)

On top of that, Pennsylvania is also one of only two states to limit the ability of companies to deduct prior-year losses from their current year’s income. That makes Pennsylvania’s high CNI tax even more uncompetitive for entrepreneurial startup firms and for some of our largest and highest-wage businesses like steel and chemicals that operate in cyclical industries.

As if that wasn’t bad enough, Pennsylvania also imposes a Capital Stock and Franchise Tax (CSFT) on non-manufacturing businesses. Fewer than half of the states even have such a tax. Although Pennsylvania is phasing out the CSFT, it won’t be gone until 2011, and that’s assuming the state doesn’t delay the phase-out, as it has twice in the past.

The bottom line is that Pennsylvania has the most uncompetitive state business taxes in the country. Pennsylvania’s worst-in-the-nation ranking sends a “take your business elsewhere” message that undercuts all of the other valuable economic development initiatives the state has undertaken. And in our current difficult economic times, businesses are going to be looking for states and regions that help them be competitive, not ones that overtax their earnings.

Pennsylvania hasn’t always been this unfriendly to businesses. Twenty years ago, the state’s CNI tax rate was reduced to 8.5%, improving the state’s ranking to 16th. Job creation in the state soared. But the success was short-lived, because the state increased the rate dramatically in 1991, making it the highest in the country, and the state’s job growth rate plummeted.

State officials will say there’s no way we could even consider cutting business taxes now, with the state facing a budget deficit this year. And it’s unfortunate that the state spent all of its big surpluses over the past several years, rather than cutting business taxes when it could afford to do so, or saving more in the Rainy Day Fund.

But even in the current economic climate, the state can enact a cut in the CNI tax – it just needs to delay implementation until 2010, the same way it has enacted future cuts in the CSFT in order to phase it out affordably. Businesses don’t make investment decisions based on what the tax rates are this year, but on what they expect the tax rates to be in the future. And a lower tax rate will encourage business growth in the state, thereby increasing state revenues from all taxes, including the personal income tax and the sales tax, helping get state finances back on track.

What can you do? It’s simple:

Ask your state legislator to make Pennsylvania more competitive by supporting a reduction in the Corporate Net Income Tax.

#5 Create Regional “Home Rule”

In today’s global economy, regions compete for jobs, investment, and talent, not states. Businesses choose between Pittsburgh and Charlotte, Erie and Buffalo, and Philadelphia and Boston, not Pennsylvania vs. Massachusetts, New York, or North Carolina.

It’s no surprise to anyone that Pennsylvania’s regions are very different places. It’s not just that we call soft drinks “pop” in the west and “soda” in the east. More important things, like land and infrastructure issues, differ dramatically across the state. For example, one of the most critical challenges in western Pennsylvania has been finding money for industrial site development and reuse of brownfields to enable business growth, while a pressing need in southeastern Pennsylvania has been controlling development of farmland from pressures for new housing. Western Pennsylvania has an abundance of water, but it has problems keeping it clean, while eastern Pennsylvania has been plagued by droughts. Pittsburgh and Philadelphia have sought predictable funding for transit systems, while the rest of the state has been more concerned with highway funding.

Yet the decisions about how to deal with each region’s unique issues are made not by the regions themselves, but by officials in Harrisburg. Although regional planning commissions develop regional transportation plans and prioritize projects, PennDOT still decides which projects will be funded, not the regions. Although county and regional agencies plan, organize, and prioritize economic development projects, the decisions about which projects get funded are made by the Department of Community and Economic Development or the Governor’s Office, and do not always match local priorities. There is no flexibility to create special programs or to reallocate funds to respond to regional needs – all programs have to be statewide, and the funding amounts and program guidelines are all established in Harrisburg.

In many of its key economic development and infrastructure programs, the state should allocate a portion of the funding and delegate the decision-making authority for spending it to those regions that have effective regional planning and decision-making mechanisms in place. For example, Southwestern Pennsylvania has demonstrated that it can effectively plan and set economic development priorities at the regional level. For over a decade, beginning with the Southwestern Pennsylvania Growth Alliance and now through the Southwestern Pennsylvania Commission, ten counties have worked together to identify priorities for infrastructure investment and business climate improvements. But all too often, the state has chosen to ignore the region’s priorities.

So what can you do?

1. Demand that the state follow regional priorities. The next time the Governor or your state legislator come bearing “gifts” from Harrisburg, ask whether the projects they’re funding were regional economic development priorities.

2. Urge that state funding programs be regionalized. What good is planning if you can’t assure that funding will follow the plan? Just as many municipalities have been given “home rule” powers by the state, state economic development and infrastructure programs should be modified to explicitly delegate decision-making responsibility to capable regional entities.

If we enable each of the state’s regions to compete effectively for jobs and talent in the post-recession economy, we’ll see greater economic success for the state as a whole.


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