One-sided Methodology Biases Commonwealth Foundation Job Loss Claims

HARRISBURG (June 17, 2009) - Questionable methodology underlies claims made by the Commonwealth Foundation this week that a personal income tax increase would result in the loss of thousands of Pennsylvania jobs.

The foundation doesn't detail the methodology, data, or results of its model (developed by the Beacon Hill Institute at Suffolk University) used to project the job loss numbers, limiting the ability to assess the validity of the foundation's claims. This model has been criticized by academic and tax policy researchers, including a 2003 analysis by the University of Arizona, according to Michael Wood, Research Director for the Pennsylvania Budget and Policy Center (PBPC).
 
"Tax/Expenditure models are only as good as the data and assumptions that go into them," Wood said. "The model employed by the Commonwealth Foundation excludes the economic impact of public sector spending, which is considerable. Any reports based on this model, issued with questionable assumptions and little transparency regarding methods and data, should be regarded cautiously at best."

Pennsylvania has the second-lowest top income tax rate of the 42 states with individual income taxes. Even with a rate increase, Pennsylvania will still have among the lowest rates in the nation and a rate well below the state's economic competitors.

Economic research has shown that tax increases are acceptable and can be preferable to budget cuts during a recession, Wood noted. Nobel Prize-winning economist Joseph Stiglitz and Peter Orszag, now the Director of the U.S. Office of Management and Budget, wrote during the last recession that "economic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions."

Wood said that maintaining public spending during an economic downturn on such things as transportation systems and higher education will help Commonwealth businesses be more competitive when the economy recovers.

The Commonwealth Foundation has also argued that public sector economic stimulus doesn't work, noting that Pennsylvania has continued to lose jobs after the passage of the federal economic recovery plan earlier this year, despite statements by President Obama and Governor Rendell that it would create or retain 130,000 jobs in Pennsylvania.

"To date, only a fraction of the multi-year federal recovery funds has been spent, so it would be unrealistic to see a radical downgrade in unemployment rates, particularly when the scope of the world-wide recession is still growing," Wood said.

Read PBPC's full analysis of the Commonwealth Foundation's claims regarding the impact of a personal income tax increase.