3 immediate changes Pa. needs to fix its economy


To be frank, Pennsylvania’s economic outlook is grim, with recent rankings placing our home among the worst states in the nation for job prospects and key economic indicators.

A recent WalletHub assessment pegged Pennsylvania as the fifth worst state to find employment, while analyses from U.S. News and World Report, SimplifyLLC and the Tax Foundation consistently place our state in the bottom third nationwide for economic performance. Alarmingly, the Kauffman Foundation in 2021 revealed Pennsylvania has the lowest rate of new entrepreneurs among all states.

This dire situation is driving a significant exodus of both businesses and individuals from our communities, as highlighted in reports from Axios and the Bureau of Labor Statistics documenting high rates of outbound migration. Amidst these challenges, business optimism in Pennsylvania has plummeted to its lowest levels since 2012, underscoring the urgency for corrective action.

In response to this pressing need for reform, we hosted the House Republican Policy Committee in our legislative districts — specifically Columbia, Northampton and Lancaster counties — to solicit direct feedback from our business community. Testimony across various industries uniformly depicted Pennsylvania’s tax structure as burdensome and punitive, necessitating immediate reforms to retain businesses and residents, and enhance our competitiveness. Key areas for reform that could drastically improve our economy and present opportunities for family-sustaining jobs — including corporate net income tax, net operating losses and the accelerated sales tax — emerged as consistent themes demanding our urgent attention.

During the latest legislative session, Pennsylvania’s General Assembly advanced substantial tax reform aimed at tackling the state’s excessive corporate net income tax rate, then the nation’s second highest at 9.99%. It gradually reduces the corporate net income tax by 0.5 percentage points annually until it hits 4.99% in 2031. We cannot afford to wait until 2031.

Research highlights numerous benefits of reducing this tax rate, including increased investment, gross domestic product growth, higher wages, enhanced property values and expanded job opportunities. Comparisons between states with high and low corporate income tax rates from 2000 to 2020 show a 10% higher growth in state revenues in low-tax states, along with positive correlations with population growth and worker wages.

The transformation of North Carolina through corporate net income tax reform serves as a notable example, with its efforts propelling it from 44th to ninth place in the Tax Foundation’s Business Tax Climate ranking.

Accelerating Pennsylvania’s reduction would significantly enhance our state’s competitiveness, stimulating investment, job creation and economic growth. House Bill 1447, introduced by Rep. Dallas Kephart, R-Clearfield/Cambria, would achieve this.

Pennsylvania’s treatment of net operating losses stands out as an extreme outlier among states’ tax provisions and is another consistent area of concern for our business community.

Net operating loss deductions, a tax provision allowing businesses to carry losses forward and deduct them from future profits, particularly affects two vital business types in our economy: start-up firms and those in cyclical industries like manufacturing.

Currently, Pennsylvania and only one other state cap these deductions below the federal limit of 80% of taxable income. Conversely, 20 states align with federal rules, while 24 states have no deduction cap at all.

Moreover, although corporations can apply a portion of net operating losses against corporate net income, small businesses subject to personal income tax lack this capability, resulting in the “Pennsylvania startup penalty.” Since smaller businesses and entrepreneurs typically lack the capital of larger corporations, the ability to use net operating losses would afford them greater financial control, facilitating business initiation or expansion.

This penalty acts as a barrier to business growth and entrepreneurship, underscoring the pressing need for legislative intervention to sanction this vital tax strategy and eradicate the Pennsylvania startup penalty. House Bill 701, introduced by Rep. Thomas Kutz, R-Cumberland, would achieve this.

Another reform that would greatly impact our business community would be repealing the accelerated sales tax requirement. This requirement mandates that businesses collecting over $25,000 in sales tax in the third quarter of the previous year make monthly prepayments equivalent to 50% of their projected sales tax collections.

To streamline compliance and alleviate paperwork burdens on small businesses, repealing this requirement is essential. Doing so would enable small businesses to remit collected sales tax revenues in line with their filing period without additional complexities. House Bill 1404, introduced by Rep. Jesse Topper, R-Bedford/Fulton, would achieve this.

Our state’s economic challenges are profound, as evidenced by dismal rankings in job prospects and economic indicators. Urgent action is needed to reverse the tide of outbound migration and revitalize our economy. We cannot afford to wait while our businesses struggle to stay afloat amid an unforgiving tax landscape or flee the commonwealth for more prosperous opportunities in other states.

It’s imperative that we prioritize the needs of our business community and enact meaningful tax reform that fosters opportunities for family-sustaining jobs, an environment conducive to entrepreneurship and prosperity for all Pennsylvanians.

Note: This column originally appeared in the Allentown Morning Call.