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When business leaders consider locating or expanding their operations in the Pittsburgh region and throughout the Commonwealth, one of their primary concerns is the relative tax burden on businesses in the region. Addressing the uncompetitive aspects of our business taxes and promoting reforms that encourage economic development are essential to our ability to compete successfully for new jobs and investment.
State taxes represent the majority of the taxes paid by our region’s businesses. And historically, business leaders and corporate site selectors have cited the state business tax structure as one of the region’s most glaring obstacles to expansion and new facility location. Therefore, in 2005, the Conference and its Affiliates worked to establish CompetePA – a statewide coalition representing more than 100 of Pennsylvania’s largest private sector employers and business organizations invested in seeing Pennsylvania compete successfully in the global marketplace.
Although some headway was made in the 2006-07 budget year, there are still significant hurdles to overcome to ensure Pennsylvania’s competitiveness.
Corporate Net Income Tax
The Challenge:
Pennsylvania’s major state tax, the corporate net income (CNI) tax is uncompetitive due to three primary factors:
- Pennsylvania’s CNI tax rate of 9.99 percent is the second-highest in the country. This creates a very strong negative first impression for potential investors because CNI rates are widely (though inappropriately) used as a major indicator of a state’s business climate.
- Pennsylvania is the only major state that caps the amount of net operating losses (NOLs) that a company can carry forward and offset against their CNI tax liability in future years. This means that cyclical manufacturers and high-growth start-up companies face tax rates that are several times higher than in any other state.
- Pennsylvania’s CNI tax apportionment formula penalizes companies for expanding their physical presence and hiring employees in Pennsylvania because, rather than basing 100 percent weight on sales – “a single sales factor” as is used by many competitor states – Pennsylvania weights sales at 70 percent.
The Solution:
If the CNI tax were reformed, Pennsylvania’s state tax burden on businesses would be more competitive with other states and regions for most types of businesses, resulting in greater economic growth. The following changes are needed:
- Remove the cap on carryforward of net operating losses. Pennsylvania should join all of its competitor states by eliminating the any cap on the amount of NOLs that can be carried forward to future tax years.
- Raise the sales factor weighting in the income apportionment formula for the CNI tax to 100 percent from the current 70 percent.
- Reduce the CNI rate. Meaningful reductions to the CNI rate should be made to bring Pennsylvania into line with its competitor states.
Meanwhile, the Capital Stock and Franchise Tax phase-out should continue as currently legislated with a complete phase-out by 2011. In addition, no new taxes shall be imposed on businesses that would erode our tax competitiveness.
For more information on these and other Pennsylvania taxes visit the Pennsylvania Department of Revenue.
Recent Successes
In 2006, the work of the CompetePA coalition resulted in some significant gains toward a more competitive business tax climate: Nearly $300 million in business tax reforms were included in the 2006-2007 state budget. Among the reforms were:
- an increase in the sales factor apportionment for the corporate net income tax – from 60 percent to 70 percent – with property and payroll factors reduced to 15 percent each
- a higher cap on net operating loss carryforwards – from $2 million to the greater of $3 million or 12.5 percent of taxable income
- a continued phase-out of the Capital Stock and Franchise Tax in addition to a one-time acceleration
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