Pennsylvania Governor Tom Wolf presented his 2016-2017 budget yesterday, but those expecting to hear his plans for the upcoming fiscal year in Pennsylvania were disappointed. Instead, the Governor’s main topic was the lack of a completed budget from the prior fiscal year. Any hope for uniting the General Assembly behind a fiscal plan for the Commonwealth seemed distant as both jeers and cheers erupted during the budget address, and post-address interviews with Democratic and Republican leaders underscored a deep rift between the two parties.
Upon further review, the details of the proposed budget look very similar to last year’s proposed budget. To resolve the state’s structural budget deficit, state leaders are faced with two options: fiscally responsible spending and revenue enhancers (translation: taxes). Let’s take a closer look at what the proposed tax changes could mean for Pennsylvanians.
Personal Income Tax
The first item that jumped out from the Governor’s proposed budget is one that will catch the attention of most citizens: an increase in the personal income tax rate. The proposed tax rate would increase from 3.07 to 3.4 percent and this increase could possibly be enacted retroactively. The increased personal income tax rate would result in approximately $1.3 billion of additional revenue for Pennsylvania per year. This increased tax rate would amount to approximately $248 of additional tax over a year or under $5 a week in tax liability for a family with $75,000 of taxable Pennsylvania income.
Sales and Use Tax
Another area of revenue enhancement (a.k.a. tax increase) is the expansion of the sales and use tax base. This would result in over $414 million of additional revenue over the prior year’s sales tax collection. The idea of sales tax expansion should be reviewed further to ensure a complete understanding of what the expansion is tied to, but revisiting how Pennsylvania’s outdated sales and use tax is structured makes sense, especially in our changing economy.
A good illustration of this is the concept of taxing music records versus digital downloads. When those of us with a little more gray in our hair bought a record or compact disc, sales tax was applied. However, a digital download of a song or album is not taxed. Both purchases are similar transactions, so it makes sense for Pennsylvania to examine if we are taxing the ultimate outcomes similarly.
Of course, expanding the sales and use tax to apply to essential tangible personal property needed by citizens or services for required compliance with state and federal government mandates should be met with greater resistance. Additional scrutiny should also be placed on the various exemptions currently offered for sales and use tax purposes in Pennsylvania. Certain exemptions and exclusions make sense and provide benefits, such as the manufacturing exemption, which leads directly to more manufacturing jobs coming into Pennsylvania and helps keep current manufacturing jobs within the Commonwealth. But certain exemptions are currently offered to such a small segment of Pennsylvania businesses, that it is safe to assume that the exemption could have its enactment tied to a strong lobbyist as opposed to being tied to making Pennsylvania a better place to live and work.
Corporate Net Income Tax
Perhaps the most striking aspect of this year’s budget proposal compared to the prior year’s budget is the fact that Pennsylvania’s Corporate Net Income Tax rate was not discussed at all. Pennsylvania had previously enacted add-back legislation to eliminate certain inter-company transactions that became effective January 1, 2015, but the thought process was that the elimination of these valid expenses was to be in conjunction with reducing the highest corporate net income flat tax rate in the country. The stigma of Pennsylvania’s 9.99 percent corporate tax rate is often cited by businesses outside of the state as a main deterrent to expanding or moving business operations here. Pennsylvania’s decision to remove business expenses previously taken, while also keeping the corporate tax rate the same, is an example of another attempt to “enhance revenues.”
As with all tax and budget proposals, the devil is in the details. This year, Pennsylvania’s leaders must contend with not only the budget for the upcoming fiscal year, but also the unresolved budget for the prior fiscal year. What we can say for sure is that there will be many “interesting” budget negotiations in the near future – or maybe based upon our experiences from last year, more of the status quo. Whatever the developments in the state capitol, RKL’s tax experts will monitor them for any tax impact and provide the latest updates and analysis.
Contributed by Jason C. Skrinak, CPA, State and Local Taxes (SALT) Practice Leader for RKL’s Tax Services Group. Highly regarded throughout the region for his deep knowledge and expertise in SALT consulting, Jason has significant experience representing taxpayers before Pennsylvania’s Board of Appeals and Board of Finance and Revenue.
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