Gov. Tom Corbett’s budget proposal calls for eliminating a capital stock and franchise tax that generates more than $300 million a year in revenue, and the governor is also suggesting that the state work toward cutting the corporate income tax — which generates $2 billion a year in revenue — by almost one-third by 2025.
The two moves combined would remove close to $1 billion in revenue a year from state coffers.
The proposed 2013-14 budget is more than $28 billion.
The state Revenue Department estimates those tax changes would spur economic growth — helping businesses add 18,000 jobs over the next 10 years, increase the state’s gross domestic product by $2.8 billion and increase personal income by $1.9 billion by 2030. That growth would translate into $1 billion in new tax revenue through 2030, according to the revenue department’s projections.
But before any of that theoretical boost to the economy takes place, the state would first have to absorb the loss of revenue. The capital stock and franchise tax, which would sunset in 2014, under Corbett’s plan, was generating $800 million a year when Corbett took office, said Mike Wood, research director at the Pennsylvania Budget and Policy Center. Corbett proposes eliminating the tax entirely by the end of the year, meaning that in the next budget year, the state would have about only $242 million in revenue from it. In the following year, the tax would be gone completely. Last year, the capital stock and franchise tax generated $332 million, said Jay Pagni, a spokesman in the Budget Department.
Because of the tax, Pennsylvania is the only state in the nation that taxes both business income and business assets. In addition, Corbett is calling for the reduction of the state’s corporate net income tax, now at 9.99 percent down to 6.99 percent.
That tax now generates $2 billion a year, meaning that when the tax is phased down to 6.99 percent, the state will be collecting about $660,000 less a year in corporate income tax.
Nathan Benefield, director of policy analysis for the Commonwealth Foundation, said that while such estimates of growth are just estimates, “there is evidence that states with lower tax rates are growing faster.”
State Sen. John Wozniak, D-35, of Cambria County, said that in practice, the things that make a region attractive to businesses are more complicated than just the tax situation. Businesses will make decisions based on things, such as the transportation system, the educational system and access to the type of workers needed.
“You never know; the CEO may be interested in having good shopping for his wife,” Wozniak said.
Wood agreed that tax rates may be overrated when it comes to determining a business climate.
“There are other things that companies will consider, such as infrastructure and access to resources, including human capital, including universities,” Wood said. “It may be a question of ‘do you have customers in the area?’”
Pennsylvania ranks 19th in the Tax Foundation’s State Business Tax Climate Index. The index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.
In that study, Pennsylvania ranked higher than all of its neighboring states, with the exception of Delaware.
Pennsylvania does have the second highest corporate net income rate in the country, lagging behind only Iowa. In making its rankings, the Tax Foundation listed corporate income taxes as being the third most important factor, behind personal income tax and sales tax in determining the business tax climate in a state.
Pennsylvania’s tax climate was highlighted last year when beer titan Dick Yuengling suggested that if and when Yuengling Brewing, based in Pottsville, opens another brewing plant, it will most likely not be in Pennsylvania.
But when it comes to reforming the state’s corporate taxes, Wood said that rather than simply lowering tax rates, the Commonwealth ought to consider exploring methods to ensure that everyone, who ought to be paying taxes, is.
Twenty-three of the states that collect corporate taxes employ “combined-reporting” rules to make it more difficult for businesses to shuffle money from one division or subsidiary to another to avoid paying taxes. By adopting a “combined-reporting” approach, more corporations in Pennsylvania would be paying their corporate taxes, which would then provide an opportunity to lower taxes for all, because there would be a broader tax base sharing the burden, Wood said.
Finnerty works out of the Harrisburg Bureau of Community Newspaper Holdings Inc., which represents The Johnstown Tribune-Democrat, The Meadville Tribune, The New Castle News, The Sharon Herald and The Sunbury Daily Item. Follow him on Twitter @cnhipa.