Corporate Tax Breaks Considered as Part of Budget Deal

August 10, 2009

Budget negotiators are considering a proposal that would cost the state an additional $100 million in revenue in 2009-10, worsening the state's budget crisis.

The proposal comes as vendors and nonprofits that do business with the state are laying off staff and programs are closing.

Some state budget negotiators have proposed a special interest tax break as the "price" for a temporary delay in the Capital Stock and Franchise Tax phase-out - one of the proposals on the table to solve the state's budget crisis.

The Capital Stock and Franchise Tax is scheduled to be reduced in 2009-10. A proposal currently on the table would delay the current year reduction. Businesses subject to the tax would pay at the 2008 rate, rather than get a tax cut this year. Freezing the rate temporarily at 2008 levels now will generate $374 million in needed revenue to balance the 2009-10 state budget.

The multi-year Capital Stock and Franchise Tax phase-out was previously delayed after the 2001 recession to help reduce a revenue shortfall during former Governor Mark Schweiker's tenure.

Senate negotiators have proposed a companion tax break for a select few companies known as the Single Sales Factor (SSF). The Pennsylvania Department of Revenue estimates the tax break will cost $100 million this year, and will benefit only 12% of Pennsylvania corporations. Most Pennsylvania businesses - the 59% whose sales are primarily in state - will see no benefit from this tax change, while 29% of corporations would actually pay more under the plan.

This sought-after tax break also amounts to a permanent tax cut in exchange for a temporary revenue source from delaying the Capital Stock and Franchise Tax phase-out. Over the long run, it will make Pennsylvania's tax system even more unfair and out of balance.

On August 5, business leader and former State Revenue Secretary Tom Wolf sent a letter to the Governor and Legislative leaders urging them to reject this proposal. Click here to read that letter.

Last week, PBPC released policy briefs on this issue. Click on the following links for:

The Scranton Times-Tribune penned an editorial on August 7 strongly opposing tying the freeze in the Capital Stock and Franchise Tax phase-out to a special interest tax break. Click here to read it.

The Philadelphia Inquirer also editorialized against this concept, writing in the August 11 piece: "To give a select few big companies a tax break while boosting taxes for others and cutting funding for hospitals and schools would be particularly soulless." Click here to read it.