Small Steps Toward Reform But Special Tax Breaks Remain

Sharon Ward |

Among the final pieces of the 2013-14 budget package now before the Governor is a Tax Code bill that sets tax rates and makes permanent changes in tax law.

The bill, approved by the House and Senate last week, includes two very important provisions: 1) It maintains the capital stock and franchise tax, which was set to expire at the end of 2013, for two more years, and 2) For the first time, it takes steps to close the Delaware loophole — although not until 2015.

These changes are a step in the right direction, providing some additional revenue to support schools, health care, and other critical state needs. The bill, however, is filled with new special interest tax breaks for private aircraft owners, banks, gas drillers, satellite TV companies and wireless companies like Verizon and Sprint. These items were added at the last minute, in some cases with no public debate.

The capital stock and franchise tax was set to be completely eliminated in 2014. Under this plan, the tax is extended for two more years, but the rates are quite low. The tax rate declines from the current 0.89 mills to 0.67 mills in 2014, declines again to 0.45 mills in 2015, and is eliminated in 2016. The tax rate has already been reduced by 85% since 1998, when the rate was 11.99 mills.

The bill also acknowledges that corporate tax loopholes are a problem and should be closed but takes only tentative steps to do so. Corporations will be required to “add back” to their income any payments they have made to related companies in Delaware and other states to avoid paying Pennsylvania taxes.

Three-quarters of states with corporate income taxes have passed laws to end this and other tax avoidance practices. Pennsylvania’s new rules are loosely based on a Virginia law, itself one of the weakest in the nation, and is much weaker than laws in neighboring New Jersey and Maryland. The provisions do not go into effect until 2015 and are expected to generate $40 million to $60 million per year in revenue in 2015.

Overall, the bill is expected to increase tax revenue by only $52 million in 2013-14 and $162 million in 2014-15 (with no measure on the future impact). While this is a modest improvement, the bill leaves a great deal of money on the table and weighs the Tax Code down with more special interest tax breaks that will drain revenue for years to come.

Read the Pennsylvania Budget and Policy Center’s full analysis of the Tax Code bill here.