Newly elected Governor Tom Wolf presented his first budget proposal on Tuesday in Harrisburg, which included numerous comprehensive tax provisions that will impact local businesses and individual taxpayers.
The budget proposal is aimed at key initiatives identified by the Governor including eliminating the state budget deficit, restoring funding for the state pension system, increasing revenues for education spending, creating new jobs and reducing state property taxes. It also includes provisions that will increase the aggregate tax burden for certain taxpayers.
The budget proposal includes the following proposed tax changes. Of course, the ultimate outcome of Wolf’s proposals is unknown at this time, subject to negotiation and passage by the Republican-controlled PA Legislature:
- A phased-in 50% reduction to the corporate net income (CNI) tax rate over the next three years. Pennsylvania’s 9.99% corporate net income tax rate applicable for C corporations is the highest in the country and can pose a significant detriment to attracting new businesses to the Commonwealth. This rate reduction will provide a significant return of corporate profits to these businesses. While the rate reduction appears to be a boon to corporate taxpayers, the reality is that the vast majority of businesses operating in Pennsylvania are organized as flow-through entities such as partnerships or Subchapter S Corporations. Therefore, earnings from these entities are taxed under the personal income tax system and are not subject to the corporate net income tax.
- A 20% increase to the personal income tax rate from 3.07% to 3.7%. Because the Uniformity Clause of the Constitution prevents the state from imposing different rates on different classes of taxpayers, a uniform rate increase will be enacted along with a broader or expanded provision for exemption of low income taxpayers.
- An increase in the state sales tax rate from 6% to 6.6%, as well as an expansion of the sales tax on services, including professional services. This is definitely one of the most significant and broad-based tax increases that the Governor is proposing. The impact would be felt by all taxpayers. The only exemptions that would survive include food, clothing, and prescription drugs. At this point, the status of all industry-specific exemptions is unknown.
- Elimination of the capital stock tax effective January 1, 2016. With the 17-year phase-out and reduction of the rate finally drawing to a close, the impact is negligible.
- Migrate to a uniform corporate income tax model. Currently, it is unclear if this reform will be in the form of unitary or consolidated reporting (similar to the federal concept of taxation) or in the form of combined reporting. If unitary or consolidated reporting is enacted, the impact will be much easier to quantify by corporations. This would also serve to eliminate the perceived loophole attributable to corporate taxpayers that own a Delaware Holding Company to hold intangible assets. If combined reporting is enacted, complexity will arise regarding the definitions surrounding “combined” business, apportionment methods, recognition of tax attributes, and the like.
- Reduction to the corporate net income tax net operating loss (NOL) from $5 million (or 30% of net income) to $3 million (or 12.5% of net income). In certain instances, this provision, along with a limited carry forward period already included in the statutes, could cause some companies to lose NOLs before they have a chance to benefit from them.
- A 5% extraction tax on natural gas exploration activities. The Governor anticipates that $1 billion of the estimated annual revenues from this new tax will be invested in the PA communities in which the drilling activities occur. Additional revenue would help to fund the Governor’s policy changes impacting all Pennsylvanians.
The tax increases outlined above are intended to fund a variety of Wolf’s policy initiatives, particularly in the area of education funding. In turn, the Governor suggests that local property taxes will be reduced as a larger portion of education funding is covered by state tax dollars, rather than local tax dollars.
RKL will continue to monitor these developments in Harrisburg as they unfold. If you have any specific questions regarding your Pennsylvania tax impact, please contact your RKL tax advisor.
Contributed by Frank J. Tobias, CGFM, (firstname.lastname@example.org) a principal in RKL’s Tax Services Group. He specializes in the area of multi-state planning and compliance with extensive experience in all areas of Pennsylvania taxation. Frank brings a well-rounded perspective on state and local tax issues with his experience in both public accounting and his previous professional experience overseeing the administration of PA Corporation taxes for the PA Department of Revenue.