Memo to Reporters and Editors: A Close Look at Governor’s Tax Cut Plan

PA Budget and Policy Center, 4/10/13

Hidden deep within Governor Tom Corbett’s proposed 2013-14 budget is a plan to enact a 30% cut in Pennsylvania’s corporate net income tax rate over 10 years, along with a number of other tax policy changes, that when fully phased in will cost the commonwealth—conservatively—more than $800 million annually.

The new round of tax cuts come after two years of significant budget cuts and at a time when the commonwealth is having a difficult time meeting its current obligations. It comes on top of 12 years of tax cuts whose value has reached more than $3 billion annually. This includes the final year of the capital stock and franchise tax phase out, which will drain more than $300 million in the current fiscal year.

State tax revenue for 2012-13 is not meeting expectations. The current year surplus that forms the foundation for next year’s budget is dwindling, leaving a potential budget gap. Pension costs will rise over the next few years regardless of whether changes sought by the Corbett administration are enacted, putting added pressure on the budget. Long-delayed transportation infrastructure projects and public transit programs will vie for scarce dollars.

While tax reform would be welcome, this plan falls far short of that goal. It makes modest changes to improve tax enforcement but avoids addressing corporate tax loopholes. Legislation that took steps to close the Delaware loophole passed the House last year, indicating growing support for leveling the playing field for Pennsylvania businesses.

Governor Corbett’s tax cut proposal will cost hundreds of millions of dollars—shortchanging the schools, colleges, health care and infrastructure that are absolutely necessary for our economy to grow. Pennsylvania can ill afford a new round of corporate tax cuts.

The Governor’s tax cut plan will be the subject of a Pennsylvania House Finance Committee hearing at 9:30 a.m. on Thursday, April 11 in Room G-50 of the Irvis Office Building, State Capitol Complex. In anticipation of that hearing, I would like to lay out some of the shortcomings of the Governor’s plan and suggest a better course to achieve true tax reform that closes loopholes and improves accountability.

The Governor’s Tax Plan

* Reduces the corporate net income tax rate from 9.99% to 6.99% by tax year 2025. The plan continues the increase in the Net Operating Loss carry-forward for a maximum of $5 million and 30% after tax year 2015. A conservative estimate pegs the total cost of the proposal at $389 million by FY 2020-21 and $819 million when fully phased in. It puts the vast majority of the cost onto a future administration, as the bulk of the rate cut occurs after 2018.
* Changes reporting requirements for pass-through entities, which includes partnerships, limited liability corporations (LLCs) and sub-chapter S corporations. With the phase-out of the capital stock and franchise tax, these corporate entities may not file a tax return with the state (partners and individual owners are required to file individual returns). This plan would make certain types of tax filing mandatory for these entities, and a $50 fine would be imposed for non-compliance.
* Ends a loophole in the realty transfer tax, through which large property holders are able to avoid state and local taxes.
* Eliminates unused tax credits, including the Call Center Tax Credit and the Coal Waste Removal Tax Credit.
* Provides for a $5,000 deduction for small business startups and conforms with IRS rules for like-kind exchanges for personal income taxpayers.
* Provides clarification for sourcing of sales of services and intangible assets, more important now that Pennsylvania has moved to basing its corporate income tax solely on sales.

A High Cost Plan That Creates Few Jobs

The Corbett administration projects that its tax cut plan will create 18,000 jobs in 2025. This amounts to 0.3% of total state employment and is less than that the 20,000 jobs in education that have been lost since 2010 due to state funding cuts. It is unclear if the administration’s projections take into account job losses as a result of lost tax revenue and service cuts—which could make the net job gains even less than 18,000….

continue reading at PA Budget and Policy Center

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

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