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.
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.”
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.