State lawmakers last week delivered a tax cut long sought by Pennsylvania’s business community. But in adopting a $45.2 billion budget on July 8 for the current fiscal year, they left out other sought-after provisions.
- The headline news is the immediate cut and subsequent phase-down of the state’s corporate net income tax, which had been 9.99%
- The levy is falling to 8.99% this year and will drop a half percentage-point per year until it reaches 4.99% over eight years.
- The budget also includes new tax breaks for like-kind exchanges and capital expenses.
- However, the spending plan does not eliminate a requirement that companies estimate and pay their sales taxes in advance, a time-consuming process for many small businesses.
- “There were some wins. There were some missed opportunities,” said Greg Moreland, Pennsylvania state director for small-business advocacy group NFIB.
First, the wins: Businesses have been seeking a cut to the corporate net income tax, or CNI, for years. A burst of state revenue and federal aid helped to finally clear the way.
- Pennsylvania’s rate is among the highest in the U.S., so the cut was welcomed by business lobbyists.
- “We need to send a clear message that Pennsylvania is officially ‘Open for Business,’ and by cutting the CNI rate in half — a goal that our organization and fellow chambers have worked toward for so long — we are doing just that,” Luke Bernstein, president and CEO of the Pennsylvania Chamber of Business and Industry, said in a statement
- However, the cut applies only to companies organized as C Corporations.
- It does not apply to the many smaller businesses organized as LLCs, LLPs and S Corporations,
- They are often referred to as “pass-through entities” because their profits pass through to their owners’ personal income tax returns. They are taxed at the personal income tax rate of 3.07%.
- Moreland estimated that only 25% of NFIB members pay the CNI.
Did they get anything: Yes.
- The budget creates a state-level tax deduction for like-kind, or 1031, exchanges.
- Named for a section of the tax code, the exchanges allow someone who makes money from selling a property to defer capital gains taxes if they take their gains and buy a similar property in a related transaction.
- Pennsylvania had been the only state without a state-level deduction for the exchanges.
- The new budget also allows small businesses to take bigger tax deductions for spending on furniture, equipment and other eligible property.
- The so-called section 179 deduction had been capped at $25,000 per year at the state level. The budget lifts it to nearly $1.1 million, which is the federal limit.
What about tax credits: The budget pours an extra $125 million into a popular tax-credit program that encourages businesses to donate to schools and educational entities.
- The Educational Improvement Tax Credit program will now make $405 million in credits available per year.
- Demand for the credits — which businesses use to offset an array of state taxes — typically exceeds the supply.
What was missed: The opportunity to use billions in extra revenue to eliminate prepayments for sales taxes and to shore up the state’s unemployment compensation fund, according to Moreland.
- The state began requiring prepayments on sales taxes during the administration of former Gov. Ed Rendell as a temporary measure to address state issues with cash flow.
- Ending the requirement would have meant a one-time hit to the state budget of roughly $471 million, according to a recent legislative analysis.
- “It’s expensive, I get it,” Moreland said. “But this was the year to do it.”
- A one percentage-point cut to the CNI costs between $400 million and $450 million per tax year, according to a legislative analysis.
- A bill to end prepayments remains in play, noted Greg Gross, a spokesperson for state Rep. Jesse Topper, the bill’s sponsor. Topper represents portions of Bedford, Franklin and Fulton counties.
- On the unemployment front, the budget pays off debt owed to the federal government, warding off a potential tax increase on employers.
- However, the budget did not add any additional money to the unemployment compensation fund, meaning a recession could quickly tip the scales toward a future tax hike, Moreland said.
What about the gas tax: Still here.
- Despite calls to suspend it — and a push to replace it — the budget does not touch it.
- The state’s gas tax is 58 cents per gallon but revenue from the levy is not keeping up with the things it pays for: maintenance and repair of roads and bridges.
- The budget does make some changes, though.
- Lawmakers redirected $175 million in gas-tax money that had been going to the State Police and are now earmarking it for roads and bridges.
- The State Police had been collecting $500 million a year from the gas tax and other vehicle-related fees, a transfer that has been a target of criticism.
What’s the wild card: Future legislators and governors.
- While the phasedown for the corporate net income tax is enshrined in state law, laws can change.
- In 2000, the state passed legislation phasing out the capital stock and franchise tax, a complicated business levy, over 10 years.
- But governors and lawmakers repeatedly hit pause and the phaseout dragged on until 2016.
Note: This article was updated to include the personal income tax rate.