Governor Wolf's Proposed Corporate and Personal Income Tax Changes

Newly elected Pennsylvania Governor Tom Wolf released his initial budget proposal, and as anticipated, it contains several modifications to Commonwealth's corporate and personal income tax systems.  Most modifications have been introduced in one form or another by Governor Wolf's predecessors, namely Ed Rendell, who just so happened to be Governor when Mr. Wolf was the Commonwealth's Revenue Secretary. 

The changes likely to create the most water-cooler conversation are those related to the corporate and personal income tax rates.  The Governor's proposal calls for an immediate 40% reduction in the corporate net income tax (CNIT) rate, with the rate being slashed from 9.99%, the second highest in the country, to 5.99%.  For 2016, the CNIT rate would be further reduced to 4.99%.  Governor Wolf has indicated that he believes that the reduced CNIT rate would create a pro-growth business climate and incentivize capital investment and job creation within the Commonwealth.  On the flip side, the personal income tax (PIT) rate would increase by 20%, from 3.07% to 3.70%.  Despite the large percentage-wise increase, Pennsylvania's PIT rate would remain among the lowest in the country.

Other, more substantive and anti-taxpayer changes have also made their way into the budget proposal, yet again.  First and foremost being "closing the Delaware loophole" by requiring mandatory combined reporting for companies that file a consolidated federal income tax return.  Pennsylvania currently requires companies to file returns and report income on a separate-company basis, which allows companies to implement certain strategies involving intercompany transactions to reduce their state income tax liabilities.  A move to required combined reporting would effectively nullify these strategies, but the downside is that taxpayers with legitimate business reasons for the transactions would be unfairly penalized.  While the general trend among the states has been the move to combined reporting, it seems unlikely that the Commonwealth could institute such a monumental change so abruptly, as it would likely take a number of years, or a phase-in period, to implement fully.  

The Governor also proposed decreasing the cap on net operating losses from prior years which can be utilized to reduce income earned in the current year.  The cap for the 2015 tax year is currently the greater of $5 million or 30% of income, but the Governor has suggested that the limit be decreased to $3 million or 12.5% of income.  The mere existence of the cap is an unfair policy and further limiting it only exacerbates the issue.             

Given the magnitude of the Governor's proposed changes to the Commonwealth's income tax systems, his budget is sure to meet significant opposition and will undoubtedly be difficult to pass in its original form.   

For more on the Pennsylvania new budget proposal and the proposed sales tax changes, read our other articles by the Schneider Downs State and Local Tax Advisors.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Pennsylvania 2021-2022 Budget Expands the Educational Improvement Tax Credit Program
Ohio Update on the Unemployment Benefits Exclusion for Taxpayers Who Filed Prior to the Enactment of the American Rescue Plan Act
Ohio Sales Tax Holiday 2021
Florida Enacts Sales and Use Tax Economic Nexus
Nonresident Taxpayers May Be Eligible for Refunds of Ohio Tax for Gain on the Sale of a Business Interest
Is Your Association Required to File a Pennsylvania Decennial Report?
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.