Last week, the state House of Representatives passed a series of PA Chamber supported tax reform bills that, if enacted, will significantly help to improve the Commonwealth’s business climate and overall competitiveness.
A proposal to reduce the state’s excessively high Corporate Net Income Tax rate was amended into House Bill 1960, legislation that would also increase the cap on the state’s Net Operating Loss deductions. At 9.99 percent, Pennsylvania’s CNI tax rate has the unfortunate distinction of being second highest in the nation and serves as a major red flag to potential investors. The amended language would reduce the CNI to 8.99 percent in 2023 and includes a “tax trigger” to initiate further reductions if certain conditions are met. The rate would go down to 8.50 percent in 2024 and 7.99 percent in 2025 if the state’s General Fund has a surplus of at least $500 million in each fiscal year.
The legislation also includes a trigger to increase the state’s cap on NOL deductions – which currently is 40 percent of taxable income. The rate would grow to 45 percent in 2024 and 50 percent in 2025 if there is a General Fund surplus of at least $750 million in each fiscal year. Pennsylvania is one of only two states to impose a cap on net operating losses. This cap is a barrier to start-up companies looking to locate in the state and a burden on cyclical companies looking to manage volatile economic conditions.
The House also passed H.B. 385 – which was amended in the House Appropriations Committee – which would allow for like kind exchanges for small businesses. A “like kind exchange” is the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset. Under Federal tax law, a “like-kind” exchange under Internal Revenue Code Section 1031 allows for tax-deferral when property is exchanged for similar property. Pennsylvania is the only state in the country that does not provide for a similar deferral at the state level, putting PA’s small businesses at a competitive disadvantage. This legislation would align Pennsylvania law to the Federal law by allowing for similar treatment at the state level.
The final tax reform bill advanced by the House was H.B. 2277, which would simplify a complicated and inconsistent aspect of the Commonwealth’s tax code. Under current law, Pennsylvania businesses are required to remit “prepayments” for their sales tax collections. This legislation removes that requirement and allows businesses to remit collected sales tax revenues in accordance with their filing period.
The PA Chamber has long advocated for these proposals as a key to lowering the cost of doing business in the Commonwealth and improving the state’s economic climate. House Bills 385 and 2277 passed the House with unanimous support and House Bill 1960 passed with a vote of 195-8. The bills are currently in the Senate Finance Committee awaiting consideration.