Pa. budget-related bill would extend business tax

HARRISBURG, Pa. - July 5, 2013

The bill, full of tax code changes, won approval from the Republican-controlled Legislature this week after being negotiated in private. It was awaiting House Speaker Sam Smith's signature, expected Monday, before it can head to Gov. Tom Corbett's desk.

A spokesman for Corbett, a Republican who pledged not to increase taxes when he ran for office in 2010, did not return messages Friday asking whether he would sign it.

Some of the changes will have immediate implications for the new fiscal year, which began July 1, and those implications will grow. Some will lower taxes for businesses, others will not.

"It's definitely a mixed bag," said David Taylor, executive director of the Pennsylvania Manufacturers Association.

The changes mean that the amount of taxes that businesses would pay would rise in the short term by an estimated $52 million in the just-begun fiscal year, $162 million in 2014-15 and $69 million in 2015-16. But the expiration of the capital stock and franchise tax, now delayed by two years until 2016, likely would mean the bill lowers business taxes after that.

Under the bill, the state sales tax would no longer apply to aircraft parts and repair services. It also would allow companies established as S corporations to deduct expenses they incur before drilling oil or gas wells, such as wages, surveying, fuel, land clearing and geologic studies, according to the Department of Revenue.

It is designed to eliminate inheritance taxes on family-owned business interests and raise the cap on operating losses that businesses can deduct from $3 million or 20 percent of taxable income to $5 million or 30 percent of taxable income in 2015.

Several loopholes are targeted, including the Delaware loophole, in which companies shift profits to an affiliate in a lower-tax jurisdiction. Services provided in Pennsylvania would be booked as profit in Pennsylvania under another provision, affecting telecommunications services and many other out-of-state businesses, the Department of Revenue said. Another provision targets a loophole in which companies were avoiding the real estate transfer tax in purchases of commercial properties.

The biggest issue is the extension by the Republican-controlled government of the capital stock and franchise tax, albeit at a lower rate, over the protests of the state's biggest business associations, traditional Republican allies.

It had been set to expire Jan. 1 and was expected to deliver an estimated $360 million business tax cut in the just-started state fiscal year. However, the bill would extend its life through 2015, in an effort to raise $340 million to balance the state's rising costs in the next three years.

The rate would drop from 0.89 mills in 2013 to 0.67 mills in 2014 to 0.45 mills in 2015 to 0 in 2016.

Then-Gov. Tom Ridge and the Republican-controlled Legislature set the gradual elimination of the tax into motion in 2000, and business groups have long viewed any extension of the capital stock and franchise tax as a tax increase.

On Friday, Gene Barr, the president of the Pennsylvania Chamber of Business and Industry, said the extension could herald the beginning of numerous tax increases at the state and local levels to deal with rising pension obligations.

"We're not happy with it," Barr said. "Our concern is we'll never see the end of it."

In a June 28 email to lawmakers, the Pennsylvania Manufacturers Association warned that "any vote to delay the phase-out of the capital stock and franchise tax is a vote to increase business taxes."

On Friday, Taylor shied away from calling it a tax increase.

"They couldn't make it as good as it was supposed to be," Taylor said, "but they're making it better than it has been."

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