Administration tax proposal would hurt prospects for recovery, job growth

What do Corporate Income Taxes Cost American Families?

Busting the myth that businesses don't pay taxes

Over the past five fiscal years, actual revenue figures, as reported in the Governor's annual executive budget, indicate the following:

• Total corporate tax collection have increased 46%
• Fastest growing revenue component of the Commonwealth's budget
• Far-outpacing the over 30% growth of the total state budget
• Corporate collections represent more than 17%
• Does not include other taxes paid by job creators, including more than 1/3 of the sales and use tax collection or personal income tax collection attributed to pass-through entities and sole proprietorships (which make up the majority of business types in the Commonwealth).
• Corporate net income tax (CNI) collection increased by more than 78%
• More than five time the rate of the sales tax growth
• Nearly twice the rate of personal income tax collections growth
• Represents nearly x% of the state's general fund
• Capital stock and franchise tax (CSFT) collection increased by more than 12%
• Despite the rate decrease from 7.24 mills to 1.89
• In fact, CSFT collection have increased nearly 70% since 1991 when the rate was over 12.75 mills
• CSFT continues to represent nearly the same percentage of the total state budget

A recent study by Ernst & Young found the following about business's contribution to state and local taxes:

• Pennsylvania businesses contribute $23.4 Billion in total state and local taxes
• Sixth highest in the nation
• Businesses finance 42% of state and local government operations in the Commonwealth.
  

Net Operating Loss (NOL)

NOL deductions permit corporations to offset losses against income over an economic cycle that covers more than one tax year. They also allow future income to be offset by an extraordinary operating loss that may occur due to an unusual event.

For federal income tax purposes, NOL deductions are not capped and may be carried back 2 years (five years for NOLs arising in 2001 and 2002) and then forward 20 years.

PA's NOL provisions allow a company to carry forward its NOLs up to 20 years but the amount of NOLs are capped to the higher of $3 million or 12.5 percent of the loss.

Only New Hampshire caps its NOLs, NH limited to $1 Million

Removing the cap on the NOL deduction would help two kinds of firms, both key to Pennsylvania's economy: start-up firms in technology and biosciences which experience huge losses in early years that could be recouped, to some degree, if they reduced future taxes; and cyclical firms, often manufacturers in commodity markets like steel, chemicals, or pulp and paper where profits and losses fluctuate in wide swings.

Mandatory Combined Reporting

What is Mandatory Unitary Combined (MUC) Reporting?

One of the most controversial business tax policy issues currently debated by state legislators, tax administrators, and corporate taxpayers is how a state should determine the corporate income tax base for multistate corporations with multiple businesses and entities. The debate is framed as a choice between two distinctly different corporate income tax systems used by states to answer this question: separate filing and combined reporting.

The first approach to determining the income of a multistate enterprise, separate filing, treats each corporation as a separate taxpayer - Pa. is currently a separate filing state. Under separate filing, each corporation includes only its income on the corporate tax return it files. The second approach combined reporting, treats affiliated taxpayers (parents and subsidiaries) engaged in a unitary business as a single group for purposes of determining taxable income. In the process of determining tax liabilities of the members of the combined group, the separate incomes of the members are added together or "combined." In effect, combined reporting treats the members of the unitary business as though they were a single company in determining their income.

Why Should Citizens be Opposed to Mandatory Unitary Combined Reporting (MUC)?

• MUC will harm Pa's competitiveness for economic development purposes – "Economic theory, empirical studies and economic simulation modeling all suggest that switching from separate filing to combined reporting will have a negative impact on a state's economy. If combined reporting increases tax revenues, it will also increase effective corporate income tax rates, on average, for the states' taxpayers. In response, firms will reduce the level of investment and jobs in states adopting combined reporting (COST Study)."
• Simply: MUC represents tax shifting within the business community - "Combined reporting has uncertain effects on a state's revenues, making it very difficult to predict the revenue effect of adopting combined reporting (Council On State Taxation Study)."
• Places Pa. at a competitive disadvantage: increases compliance and administrative cost because of inherent uncertainty – "The additional compliance and administrative costs associated with combined reporting should be included in a balanced evaluation of the benefits and costs of adopting combined reporting (COST Study)."
• Legitimate reason that a company may not be paying taxes: no assets/income, losses, use of tax credits, etc…: The Administration admits that under MUC more than half of businesses will still not pay any taxes - "The type of filing system a state uses does not provide an explanation for the presence of zero or minimum tax filers. Proponents of combined reporting have frequently argued that combined reporting is justified by the significant percentage of corporate income taxpayers that pay no tax or pay only a state's minimum tax unrelated to corporate profits. The study finds that a high percentage of companies in both separate and combined filing states paid no corporate income taxes in excess of the minimum tax for the years reported (COST Study)."
• MUC is a competitiveness issues, not one of fairness: is it fair to tax a company twice for sales earned in another state and allocated to Pa. for tax purposes? – "Simple comparisons of aggregate state job growth rates, when adjusted to reflect population changes, show that separate filing states are doing no worse or slightly better than combined reporting states (COST Study)."

MUC Overview

Single Sales Factor

Currently, the CNI apportionment formula penalizes Pennsylvania employers for expanding their physical presence and hiring employees because the Commonwealth includes property and payroll in the calculation.

Job creator's profits are apportioned to Pennsylvania using three factors: the ratio of sales in Pennsylvania to all sales; the ratio of assets in Pennsylvania to all assets; and the ratio of payroll in Pennsylvania to total payroll. What this means, is that a company with operations and employees in Pennsylvania has a higher tax liability than a firm that sells goods in Pennsylvania that are made elsewhere. That's hardly an incentive to open factories and operations in Pennsylvania.

Eleven other states calculate corporate net income tax only on a firm's sales. Virginia's legislature is considering making the change. Virginia is already considered a very business-friendly state.

Currently our income apportionment is based 70% on sales, 15% on assets, 15% on payroll. It's time to move the rest of the way to a CNI tax based 100% on sales. This little move would go a long way to creating jobs.

Film Company Tax Credit

Pennsylvania offers a 25% tax credit to films that spend at least 60% of their total budget in the Commonwealth. The program is capped at $75 million for the Fiscal Year July 1, 2008 - June 30, 2009 (Pa Department of Revenue).

Film Companies Enjoy Huge State Tax Incentives: (Heartland Institute)
Ed and Taxpayers Make a Film

Author:
Guest Commentary: Lowman S. Henry

Graham Packaging Decision Background, 05/2006

Helpful links

• 2008 Business Tax Legislative Summary
• American Institute of CPA's Listing of State Departments of Revenue
• CompetePA
• Council on State Taxation
• Department of Community and Economic Development (DCED)
• Essential Links - Taxes
• Federation of Tax Administrators
• Internal Revenue Service
• PA Department of Revenue
• PA Monthly Revenue Reports
• Tax Foundation
• U.S. Census Bureau Business Information