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.