Letter to Lawmakers: Proposed Tax Credit Ripe for Misuse [HB 2626]

[see also video on this general topic “REUTERS VIDEO: IS YOUR BOSS POCKETING YOUR STATE INCOME TAXES?]

The Pennsylvania Budget and Policy Center, October 2, 2012

PBPC Director Sharon Ward and Research Director Michael Wood sent the following letter to members of the General Assembly. Download a PDF version here.

We write to ask you to oppose House Bill 2626 (the Promoting Employment Across Pennsylvania Tax Credit Program). The bill allows new companies to keep the income taxes paid by employees rather than sending those tax payments to the state. By supporting this bill, you are shifting responsibility for payment of corporate taxes from the companies to their workers, without the workers’ knowledge or consent.

This is a new type of business subsidy that has serious potential for misuse. Employers could move a site just across the state border, from Ohio to Pennsylvania, for example, employ the same number of people, and reap credits by changing the address. A company could move a line of business to Pennsylvania, close an existing line of business in a related company in Pennsylvania, “rehire” the same workers and still get the credit. The bill creates a monitoring and enforcement challenge for the Department of Revenue as it tries to account for employee taxes which are never sent to Harrisburg.

This bill would be very expensive. It has no annual cap, meaning an unlimited number of state tax dollars could be lost to the incentive each year. Most tax credit programs have annual limits in order to plan for the budgetary impact. The Commonwealth is hurt, too, as tax dollars that normally would be used to help pay for schools, healthcare, and infrastructure would now be redirected. Companies have argued that they need economic incentives to create jobs. The bill eliminates the spillover benefit to the state for the job creation, even if costs to the state — for schools, roads, colleges, public safety and human services — go up from that activity.

There are already job creation tax credit programs in existence, which make this new program unnecessary.

Despite our concerns with the bill’s diversion of personal income tax as a mechanism for funding the tax benefits, HB 2626 has a number of features that promote accountability. These standards are higher than in many of the state’s existing tax credit programs. The bill includes clear and measurable program goals and standards. It requires jobs generating credits to be retained for specific time periods, contains wage and benefits standards, and tries to ensure that low-wage jobs are not being subsidized. It also contains effective benefit clawbacks in cases when employers do not live up to their end of the benefit agreements.

Amendment A13275 (Boyd) attempted to deal with the unfair competition created when some companies get this incentive but in doing so creates an even steeper problem by allowing existing companies, not just companies that move to Pennsylvania, to participate. The amendment would allow the existing bill’s loose definition of new employees to apply to new hires, even though new hires are not new jobs. Job churn (having people leave jobs and having them filled with other workers) is extremely common and every person filling a position would qualify even if the number of new jobs is unchanged. Companies are likely to be hiring as the economy recovers; this incentive will pay them for positions they already intended to fill.

In the second quarter of 2012, the Pennsylvania Department of Labor and Industry indicates 580,400 new hires took place in Pennsylvania. That is roughly equal to 10% of the state’s total workforce. New hires are not new jobs, yet under A13275, these new hires would qualify for the credit as long as the “new” workers had not previously worked for the company. This will cause a serious erosion of the state’s tax base in a very short time.

This type of smokestack chasing economic incentive has proven to be expensive and the benefits short-lived. Companies often take advantage of tax breaks, and then close when the incentive ends. In the past, at least some taxes were paid during that period – by the companies and their workers. This incentive means companies get all the benefits and contribute nothing to the Commonwealth or our communities.

Pennsylvania has already enacted numerous incentives, worth $2.4 billion, for manufacturers and other businesses, including the phase-out (without replacement) of the capital stock and franchise tax, adoption of the single sales factor and 100% bonus depreciation, in addition to other tax credit programs. These programs were designed to reduce business tax liabilities in order to create jobs. Before enacting new incentives, you should give these incentives time to demonstrate their effectiveness.

This bill promotes interstate job piracy, with companies benefiting at taxpayer expense. With little capacity to distinguish new jobs from existing jobs, you would be creating a new loophole that will further shift the cost of critical services onto individual taxpayers. Please oppose this bill.

Thank you for your consideration.

Sharon Ward, Director Michael Wood, Research Director
Pennsylvania Budget and Policy Center

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Filed under Economy, Labor, Tax, PA govt & politics

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