PA Governor Proposes Corporate Tax Cuts & Fuel Tax Increases

by McNees Wallace & Nurick LLC
Contact

Pennsylvania Governor Tom Corbett has proposed significant corporate tax cuts and fuel tax increases as part of his proposed 2013-14 budget, presented on February 5th. The General Fund budget would be increased by 2.4%, to $28.4 billion while the total operating budget (including federal funds and other special purpose funds) would be set at $66.7 billion.

 

As with past budgets, the bulk of the funding for the General Fund budget would be derived from the Personal Income Tax (40.2%) and the Sales & Use Tax (32.0%). The Corporate Net Income Tax and Capital Stock & Franchise Tax would account for 9.6%. An overall revenue increase of 1.3% is projected for fiscal 2013-14. A surplus of $232 million in excess of revenue estimates is expected to be available for carryforward from 2012-13.

 

Corporate Tax Reductions
Responding to long-standing requests from the business community to make Pennsylvania’s corporate tax structure more competitive, the Governor has proposed a number of corporate tax changes. Recognizing that current fiscal circumstances limit the reductions that can be implemented immediately, the major changes would be implemented over time.

  • The Capital Stock & Franchise Tax phase-out would be completed, reducing the current 0.89 mill rate to zero as of January 1, 2014.
  • The Corporate Net Income Tax rate would be phased down from the current 9.99% to 6.99% over several years. The rate would be reduced to 9.89% for tax years beginning on or after January 1, 2015, and then phased-down to 6.99% for tax years beginning on or after January 1, 2025.
  • The Corporate Net Income Tax Net Loss Cap would be increased from the greater of $3 million or 20% of taxable income to the greater of $4 million or 25% for tax years beginning on or after January 1, 2014 and to the greater of $5 million or 30% for tax years beginning on or after January 1, 2015.
  • Market Sourcing for Services. Currently, the sourcing of receipts from services in the sales apportionment factor is based on where the income producing activity occurs and, if it occurs in multiple states, where the greater proportion of the income producing activity occurs as measured by the costs of performance. The Governor proposes to amend the apportionment provisions to move to market sourcing for services revenues. The actual language we’ve seen seems to be in a state of flux – currently focusing on where the service is “delivered” and providing alternatives if that cannot be determined. Proposals would also clarify that revenues from sale of real estate and from lease or rental of tangible personal property would follow the location of the property. The specific language for these purposes is still being vetted. If this would be of special concern to your company, we urge you to let us know so that we may assist you in communicating your concerns to those who are working up the detailed proposal.
  • The corporate Loans Tax would be repealed.

Transportation Funding
The Governor’s long-awaited transportation funding proposal would reduce the Liquid Fuels Tax by one cent per gallon as of July 1, 2013 and by another cent on July 1, 2014, reducing the flat cents-per-gallon tax from 12 cents to 10 cents. This would be offset many times over by substantial increases in the Oil Company Franchise Tax which, technically, is imposed on oil companies but is essentially an indirect pass-through to the consumer. Currently, the tax is imposed at a statutory millage rate against the average wholesale price, which is then converted to a cents-per-gallon basis. However, the maximum wholesale price for tax calculation purposes has been capped at $1.25, a level not seen since 2006. The tax is currently levied at 19.2 cents per gallon on gasoline and 26.1 cents per gallon on diesel. If there were no cap, the tax currently would be levied at 47.8 cents and 64.9 cents, respectively. The cap would be phased out over five years:  by one-third on July 1, 2013, one-third on January 1, 2015 and the remaining one-third on January 1, 2017.

The net effect of these tax changes, the redirection of certain existing funds and other changes would generate an additional $510 million in 2013-14, rising to an additional $1.8 billion in the fifth year of the funding change. According to the Governor’s Office, the number of Pennsylvania roads classified as “poor” increased from 7,500 miles in 2007 to more than 9,200 miles in 2011. In his budget address, the Governor said that the average age of a bridge in Pennsylvania is 51 years and more than 4,000 bridges are deemed structurally deficient. We have heard comments from other sources that even more money is required to address this problem than would be produced by the Governor’s proposals.

Personal Income Tax Changes
The Tax Reform Code would be amended to exempt like-kind exchanges and to allow a $5,000 start-up business deduction.

Sales & Use Tax
The Governor’s budget proposal did not include any sales and use tax changes. This is a welcome development in light of the administration’s past attempts to reduce or eliminate the one percent vendor’s collection allowance.

Realty Transfer Tax
Yet-to-be-disclosed language would eliminate current planning used to avoid triggering the 90% deemed “sale” of a “real estate company.”

Tax Appeals
The Governor has included funding in his budget to implement a new Tax Review Commission in place of the current Board of Finance and Revenue. Three commissioners would be appointed by the Governor and confirmed by the Senate for staggered six-year terms. Details are still being developed but early indications suggest that we may finally be nearing a truly independent tax appeal unit to hear appeals from decisions of the Department of Revenue’s own Board of Appeals. We will continue to monitor this proposal closely as past proposals have provided a superficially positive impression, only to disappoint after digging into the details.

Simplifications and Nuisance Taxes
The Governor’s proposal also mentioned “removing obsolete taxation and administrative provisions.” Details, however, have not yet been divulged.

Divestiture of Liquor Stores – Block Grants to Schools
The Governor has proposed to divest the state of its retail and wholesale wine and spirits operations over four years, yielding $1 billion in proceeds that would be distributed through a “Passport for Learning Block Grant” program to the Commonwealth’s school districts. The grants would be targeted to school safety, early learning, individualized learning and programming in science, technology, engineering and math. Tax and other revenues currently generated from the state-owned wine and spirits system to fund other state programs would be maintained. The block grants should reduce pressure for school districts to increase local property taxes.

State Pension Reform
While having no direct impact on taxes, the pressure to generate additional state and local tax revenues would be reduced under state pension reforms proposed by the Governor. The State Employee Retirement Fund and the Public School Employee Retirement Fund are currently funded at only 67.8% of the actuarially sound amount. Current unfunded liabilities of $41 billion would grow to $65 billion over the next few years without any changes. Part of the Governor’s proposal would tweak currently-scheduled payment levels to reduce current contributions by the state, local school districts and other education agencies.

Pennsylvania’s budget is not required to be finalized until June 30th. The Governor’s proposal may undergo substantial transformations as the House and the Senate craft their own versions of the budget. If you have an interest in a particular tax issue, we can assist you in monitoring ongoing developments and in communicating your position to appropriate parties in the General Assembly, the Governor’s Office and the Department of Revenue. Please contact any member of the McNees SALT Group to discuss your needs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McNees Wallace & Nurick LLC | Attorney Advertising

Written by:

McNees Wallace & Nurick LLC
Contact
more
less

McNees Wallace & Nurick LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.