Statement of Pennsylvania Business Council President & CEO David W. Patti on Business Tax Issues Related to Pennsylvania Budget
HARRISBURG, Pa., Sept. 18 /PRNewswire-USNewswire/ -- Pennsylvania policymakers are putting the final touches on a $27.945 billion budget deal. While the total spending is higher than we might have liked, for Pennsylvania's business community the budget is an acceptable compromise. Pennsylvania businesses have been fearful that high state spending would mean even higher state taxes on our job creators.
From a tax perspective, there is good news for the business community:
No Personal Income Tax (PIT) increase that applies also to businesses organized as sole proprietorships, partnerships, joint ventures, S-Corps, or LLCs.
No insurance premium tax.
No sales tax on business services such as accounting, legal, or information technology, as had been raised in negotiations.
No natural gas severance tax.
Increase of the Net Operating Loss (NOL) deduction limit from 12.5% to 15%.
Increase of the Sales Factor component of the Corporate Net Income Tax (CNI) apportionment from 70% to 85%.
Increase of the Capital Stock & Franchise Taxes (CSFT) to exemption $160,000.
The bad news for business is a temporary return to a 2.89 millage rate for the CSFT with a delayed phase-out over the next five years. This is a significant broad-based tax increase of $2 billion over five years, but efforts to enact a higher CSFT rate, as well as the other tax proposals would have been far worse for business.
Any state budget crafted to bring together all of the taxing and spending decisions for a Commonwealth of 12.5 million people with a myriad of interests is sure to invite disagreement and criticism. In this year's tough economic times, the stakes are higher and fuses are shorter. Facts, however, remain constant.
Spokespersons for organized labor-sponsored groups, including former Revenue Secretary and gubernatorial candidate Thomas Wolf, have attacked the increased NOL deduction and Sales Factor component of the CNI as a "special interest giveaway." But here are the facts:
The CSFT rate hike will increase business taxes by $375 million in this fiscal year, growing to more than $600 million in coming years, for a total of more than $2 billion over five years. The pro-job tax changes will reduce businesses taxes by only $74 million this year and less than $95 million in future years. In other words, this net consequence of this "deal" provides the state far more in additional revenues than business will see as a benefit.
Virtually every state in the nation and the IRS impose no limits whatsoever on the NOL deduction. All firms subject to the CNI - large and small - can and do use the NOL deduction. Cyclical commodity businesses and start-up firms experience huge losses. In the current economic times, losses for many firms are mounting and deductibility in coming years will be very important. In fact, that's why the Obama administration and Congressional leaders on both sides of the aisle have touted NOLs as an important tool to help companies recover from this recession.
It is true that Sales Factor component of CNI apportionment benefits generally larger, publicly traded firms. These firms, however, pay the highest state income tax in the nation at 9.99%. Smaller businesses - like Mr. Wolf's - organized as sole proprietorships, partnerships, joint ventures, S-Corps, or LLCs pay only a 3.07% income tax -- one-third the rate of C-corps. Small businesses benefited by the defeat of Governor Rendell's proposed PIT hike to 3.57%. The important fact of the proposed Sales Factor change is that Pennsylvania's current law penalizes a C-corp that has assets and payroll in our state pays more tax than a firm with identical sales but has no facilities or employees in Pennsylvania. It's not logical and it's not fair to punish firms for having jobs in Pennsylvania. That's why it's a fact that more than a dozen states have completely eliminated the same penalty from their tax codes.
All Pennsylvanians should be working together to support a budget process that supports public functions at adequate and appropriate levels without stressing taxpayers - individuals and businesses - to a point where they leave the Commonwealth. Demonizing one another and ignoring the facts of competition are a singular public disservice.
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