4Thought Blog


Pennsylvania Budget Proposal Seeks $1 Billion in Business Tax Changes

Posted by Tony Deutsch on Tue, Feb 14, 2017

Find me on:

pa biz tax changes.jpgPennsylvania Gov. Tom Wolf’s proposed 2017-18 budget contains no broad-based tax increases, but does include some important tax changes for the state’s businesses.

The $32.3 billion spending plan – which the Governor unveiled Feb. 7 to a joint session of the Pennsylvania General Assembly – includes about $1 billion in new, recurring revenues.

Overall spending increases by $670 million, or 2.1 percent, above the current 2016-2017 budget. The proposal includes increase spending for public education, special education, early childhood education, and higher education, but it also identifies a number of opportunities for cost savings and spending reductions of over $2 billion that appear to have bipartisan support.

A chief change for C Corporations would be the reduction of the state’s 9.99% corporate net income tax, which is currently the second highest in the nation. The Governor has proposed reducing it gradually through 2022 as follows:

  • 8.99% for 2019
  • 7.99% for 2020
  • 6.99% for 2021
  • 6.49% for 2022 and thereafter

While this change will certainly be welcome by many businesses, a stipulation tied to the change may not be. The Governor also proposed mandatory combined reporting beginning in 2019, which requires multistate corporations to add together the profits of all of their subsidiaries, regardless of their locations, into one tax report. Republican lawmakers and business leaders have opposed combined reporting in the past.

Also tied to the lowering of the corporate net income tax rate would be a limit on how much C Corporations can deduct in net operating losses. The current cap is the greater of $5 million or 30 percent of taxable income, but beginning in 2018 the Governor is looking at a cap of only 30 percent of taxable income, a significant change.

Even with the overall corporate net income tax reduction, because of the NOL and combined reporting changes, Wolf anticipates the three changes combined would raise an additional $81 million annually.

READ MORE: Pennsylvania Expands and Extends Tax Credits for Businesses

The Governor also is proposing an increase to the state's minimum wage to $12 per hour from its current level of $7.25 per hour. It’s tied to the budget because it counts on another $95 million annually in income tax revenue.

New Call-to-actionThe Governor’s budget also proposes ending some sales tax exemptions enjoyed by businesses effective July 31, 2017. They include the exemptions on:

  • Custom computer programming
  • Design and data processing (Canned software purchased off the shelf is currently taxable.)
  • Commercial storage (Excludes farm product, warehousing storage and transportation services. Self-storage is currently taxable.
  • Airline catering (All other catering is currently taxable.)
  • Aircraft sales, use and repairs (Vehicles and repair are currently taxable).

Combined, the elimination of these sales tax exemptions is estimated to raise $490 million annually.

Other business tax changes target certain industries. For the insurance industry, the Governor proposes expanding an insurance premiums tax to include entities that are current exempt, such as non-profits and HMOs, which is estimated to raise $141 million annually.

The state’s natural gas industry would face a 6.5% severance tax with no post-production deductions. The impact fee would remain in place and is credited, and is estimated to raise $293.8 million for the state.

READ MORE: Pennsylvania, N.J. Income Tax Agreement to Remain in Place for 2017

Reaction to the Governor’s budget has been mixed, though it’s gotten a bit of a better reception from Republicans (who control the State Legislature) than the Governor’s prior two budgets. The Marcellus Shale Coalition and the conservative Commonwealth Foundation decried the Governor’s proposed tax increases.

Each of the above items will require closer scrutiny and also raise a number of questions as to their impact. For instance, what will the higher minimum wage mean for small businesses and their owners? What impact will the changes to the NOL provisions have on Pennsylvania’s ability to attract and keep corporations? How will the reduction in the corporate tax rate and impact tax revenue?

There’s still a lot of time between now and June 30th when the state budget has to be approved. We will be following these proposed changes as the budget process continues.

Here’s a link to the Governor’s Budget In Brief document: https://www.governor.pa.gov/wp-content/uploads/2017/02/2017-18-budget-in-brief.pdf.

Sign up for more Timely Tips for Businesses

Topics: Business tax planning

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

Subscribe for more Timely Tips for Businesses