The recent election not only brought changes to Washington but also to Pennsylvania. Our new governor-elect is a republican (the prior administration was democrat) and has stated many positions during the election. Well what can we expect when he takes office?
A great article was recently written by Jason Skrinak, one of our tax principals. Jason is a member of the State and Local Tax Committee and Legislative Committee of the Pennsylvania Institute of Certified Public Accountants (PICPA). As such Jason has great insight into what is happen in Harrisburg. His article was recently published on our McKonomics blog, but here is a repost of the entire article.
The 2010 Pennsylvania gubernatorial election results may bring new tax reforms to Pennsylvania businesses once governor-elect Tom Corbett takes office in January 2011. Corbett's economic plan for revitalizing Pennsylvania's economy focuses on innovation, improved job creation, and an educated workforce. Tax reform is a focus of Corbett's intentions for improving the business climate and creating jobs in Pennsylvania. Tax reform will certainly be a highly-debated issue in the coming months, with the Pennsylvania budget deficits growing into the billions of dollars because of decreased state tax revenues, unfunded state pensions, and Federal stimulus money running out. In addition, Corbett plans to revitalize Pennsylvania's economy through a blended tax reform program that assists small and large job creators with the following proposed reforms:
Finish Phase-Out of the Capital Stock/Foreign Franchise Tax - The Capital Stock and Foreign Franchise Tax is imposed on the assets of incorporated entities, including S-Corps and LLC's. The tax is imposed on both Pennsylvania entities and non-Pennsylvania entities that conduct business in Pennsylvania. The tax is scheduled to phase-out by 2014 and Corbett intends to maintain the full phase-out schedule.
Reduce the Corporate Net Income Tax - This tax is currently levied on corporations doing business in Pennsylvania at the flat rate of 9.99%. This rate is the second highest rate in the nation only to Iowa. Corbett would like to reduce the Corporate Net Income Tax to 6.99% over a six year span.
Remove the Net Operating Loss Cap and Initiate Tradable NOL Program - Currently, a cap on Net Operating Losses (NOL) exists in the greater of $3 million or 20% of taxable income. Corbett desires to remove the cap altogether as most states no longer have an NOL cap. He would also like to implement a Tradable Net Operating Loss program that would allow companies to sell their Net Operating Losses to companies that are profitable.
Adopt Single Sales Factor Corporate Net Income Apportionment - A single sales factor apportionment allocates corporate net income to Pennsylvania based solely upon sales. This has been the trend in Pennsylvania and many other states in recent years, as states are moving toward a more heavily weighted sales factor. The plan is to encourage investment in payroll and assets in Pennsylvania without increasing apportionment. Corbett intends to have the single sales factor in use by the beginning of 2014.
Enhance Pennsylvania's Research and Development Tax Incentives - Corbett intends to restore the research and development tax credit to previous levels making the credit more targeted to Pennsylvania research and development, although he does not provide specific detail on how he will accomplish this.
Natural Gas Severance Tax - Corbett has stated on several occasions that he does not favor a severance tax on natural gas extracted from the Marcellus Shale in Western Pennsylvania. In fact, he has stated that he does not favor any new taxes. With the General Assembly unable to reach a compromise last month concerning the method of taxation on natural gas extraction, it is likely that no tax will be enacted in time for Governor Rendell's original January 1, 2011 deadline.
Increased Scrutiny for Related Party Transactions - Corbett would like to statutorily empower the Pennsylvania Secretary of Revenue to investigate related party transactions that seek to shield taxable income through inappropriate royalty and interest payments to out-of-state passive investment corporations. It is uncertain at this point to determine what effect this increased scrutiny may have on companies that implore the use of intangible holding companies incorporated in Delaware.
Governor-elect Corbett's tax reform proposals would certainly have a significant impact on the business climate in Pennsylvania, but of course he will need to garner the support of the Pennsylvania General Assembly to be able to implement his proposals. However, with an almost certain budget shortfall looming, it will be difficult for him to cut spending enough to cover the budget shortfall without also increasing tax revenues.
If you have any questions regarding the contents of this article, please feel free to contact Jason Skrinak, Principal with McKonly & Asbury. As a member of the State and Local Tax Committee and Legislative Committee of the Pennsylvania Institute of Certified Public Accountants (PICPA), Jason continues to evaluate proposed tax legislation and work with the legislators in determining the best course of action. As such, he greatly welcomes any thoughts, suggestions, or concerns that you might have with any future proposed Pennsylvania tax legislation.