Pennsylvania's economic growth is woefully inadequate compared to other states. Pennsylvania’s Gross Domestic Product continues to trend below the US average rate and the Commonwealth continues to lose its working population as other states gain job creators and workers. Pennsylvania’s tax structure contains some of the highest rates and most restrictive provisions in the nation. Several of these tax changes were adopted as part of the 1991 tax increase that US News and World Report classified at the time as one the "Worst Economic Decisions in the Nation." Study after study shows Pennsylvania’s business taxes to be among the highest and least competitive in the nation. This fact was exacerbated in 2009 when the scheduled phase-out of the Capital Stock and Franchise Tax was reversed and the rate retroactively increased to 2.89 mills. The “sticker shock” of high taxes makes it difficult to show a business relocation prospect all of Pennsylvania’s many attributes. Click Here to send a letter to your state legislator to support tax reform.
To be competitive, it is essential that Pennsylvania change its high tax perception. Governor Tom Corbett in February 2013 recommended a comprehensive business tax plan that addresses these concerns.
To sum Pennsylvania’s current situation briefly:
- Some states have a corporate tax based on assets; some on income. Until the Capital Stock and Franchise Tax (CSFT) is finally and completely eliminated, Pennsylvania has both.
- Pennsylvania has the highest flat rate and second highest marginal rate corporate next income tax in the nation. And, since the United States has the highest national corporate net income tax in the world, Pennsylvania therefore has the second highest marginal CNI on the face of the earth.
- Most states and the Internal Revenue Service allow 100 percent deduction of net operating losses in the following profitable year. Pennsylvania is one of a handful which does not, and presently limits the write-off to 20 percent.
- And, Pennsylvania’s tax appeal process is so convoluted, long, and arcane that hundreds of millions of dollars are neither available to the firm for investment in job-creating capital, nor paid to the state to fund government operations.
Governor Tom Corbett’s plan would:
Finally eliminate the Capital Stock & Franchise Tax (CSFT). While it took longer than planned, the CSFT phase-out is a critical step to making Pennsylvania more competitive.
Other than the CSFT elimination, the most notable element of the proposal is the attack on Pennsylvania’s least attractive feature and greatest economic development challenge: the optics of our high corporate net income tax rate. This proposal would phase down the CNIT rate from 9.99 percent to 6.99 percent– or about the national average – by 2025. Economic development professionals around the Commonwealth have for years shared this goal.
Less understood outside the world of tax professionals is the challenge posed by the limitations on net operating loss (NOL) carryforward. The NOL deduction is currently capped at the higher of $3 million or 20 percent of taxable liability. The proposal would scale up the NOL carryforward to $5 million or 30 percent of tax liability per year. Pennsylvania’s business community hopes that, in the future, we will re-visit this issue and set a time table to increase the deduction to 100 percent. But, in the meantime, we are quite pleased with this proposal.
NOLs are often described as important to start-ups in high tech and emerging industries which is true, but NOLs are an issue of immense importance to Pennsylvania’s older industries, utilities, and energy firms. NOL deductions smooth out the tax liability of cyclical firms that experience wide swings in profits and losses. This economic performance is typical of commodity products of which Pennsylvania has so many manufacturers in steel, chemicals, plastics, coatings, aggregates, and forest products.
The need to deal with the tax appeals process is interesting. Perhaps as much as a billion dollars is economically “side-lined” in Pennsylvania by appeals. When a firm appeals a tax ruling, it withholds payment and the state does not realize the revenue. But while the appeal is pending, recent Securities Exchange Commission rules require the firm to reserve the disputed amount on its books on the possibility it could receive an adverse judgment and be required to make the payment to the government. Small and medium firms, in fact, may actually have to set the funds aside and forego investments in their business to ensure their ability to pay if they lose their appeal. In either case, nobody wins.
If the cases decided quickly and fairly, hundreds of millions of dollars would flow back into productive investment and hundreds of millions of dollars would be realized by the Commonwealth in a sudden windfall. Over the long-term, the goal should bea quick, fair, consistent, and predictable appeals process that ensures all taxpayers pay no less, but also no more than their tax liability demands.
The Governor’s proposal would do more:
- Eliminate the tax on loans taken by Pennsylvania headquartered firms. This arcane tax serves only as another disincentive to locating a business HQ in the Commonwealth. The tax generates little revenue. The change will pay for itself by making Pennsylvania more attractive to business location and retention.
- The Governor’s proposal would provide entrepreneurs the ability to write-off start-up costs as a business expense deduction.
- The proposal would provide small business the opportunity to make “like-kind” exchanges so that resources are re-invested in assets that produce jobs and economic growth.
PA Competitiveness with Sen. Mike Regan
The goal of Pennsylvania policymakers should be to make it the smart business decision for employers to locate, expand, and hire here in this commonwealth rather than in one of our competitor states. Likewise, the goal of federal policymakers ought to be to optimize conditions for economic growth in the United States so American businesses can compete worldwide. This means we must restrain state spending, enact pro-growth business tax relief, provide limits on lawsuit abuse, improve the regulatory climate, and ensure we have a trained workforce. Our state government cannot tax-and-spend the way to good fortune for all; but we can grow the private sector by attracting new business investments and expanding the tax base, then prosperity will surely follow.
PENNSYLVANIA GOVERNMENT 101
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