Memo to Pa. House: Pair of Tax Cut Bills Have Little Public Benefit But Create Private Gain for Select Few
To: Members of the Pennsylvania House of Representatives
From: Sharon Ward and Michael Wood, Pennsylvania Budget and Policy Center
Date: February 4, 2013
Re: House Bills 48 (Bloom) – Inheritance Tax Exemption – and 78 (Cutler) – Corporate Loans Tax Repeal
On the eve of the release of the Governor’s budget, two problematic tax cut bills are on the House calendar. House Bills 48 and 78, which were passed out of the House Finance Committee on January 22, raise significant fiscal and tax policy issues. Both bills continue a troubling trend of tax cuts for businesses that require little of businesses receiving the benefits – neither new investment nor jobs. The tax breaks have little PUBLIC benefit, but create significant private gain for individuals. Because there is no offsetting revenue, by enacting these bills you will be reducing available funds for schools, hospitals, agriculture programs or even for other tax cuts. The proposals continue the trend of cost shifting from businesses to individuals, as schools and local governments raise property taxes just to keep services at current levels.
House Bill 48
Pennsylvania currently levies an inheritance tax on assets transferred to heirs at a 0% rate for surviving spouses, 4.5% to most other relatives (grandparents, parents, children, grandchildren), 12% for siblings and 15% for unrelated individuals. In 2012-13, the inheritance tax is expected to generate $862 million, which is almost half of the budget for the Department of Corrections.
House Bill 48 (Bloom) would carve out a special tax benefit for business owners that would not be available to other inheritance taxpayers. Although billed as a “Mom & Pop” benefit, the tax exemption would provide as much of a windfall for Paris Hilton as for the corner grocer.
There are several significant problems with the bill.
- It is likely unconstitutional. The bill gives a preference to assets transferred within single family-owned businesses. The Pennsylvania Constitution permits no such family business preference.
- It contains no offsetting revenue. This ensures further cuts to programs and adds to the state’s structural deficit. The proposal is projected to cost $11 million in two years, about what the Commonwealth spends on all of its adult literacy programs.
- The bill creates significant new tax loopholes. The lack of definition of “business asset” could enable a whole host of unintended assets to be shielded from taxation – including shares of stock owned in unrelated businesses. In addition, the bill only requires the business to remain operational for five years, not that the beneficiaries actually operate the business, creating a huge savings for relatives who have no interest in operating the business. After five years, the relative could liquidate the business and pocket the proceeds.
- It creates a whole host of inequities. Partnerships and other businesses owned with non-relatives would receive no tax benefit – even if assets are transferred to the same heirs.
- The bill further rigs the tax system against the middle class. Wealthy taxpayers hold a larger share of business assets, and would reap the lion’s share of the benefit of this exclusion. Middle-class families will pay full inheritance tax on assets they receive, homes and small income they may need just to pay the bills.
This bill will not create jobs, it will not increase investment, it will simply add to the inadequacy of Pennsylvania’s tax system. Moreover, there are legal strategies through which companies can minimize the tax, and there are insurance policies available for purchase that insulate family members from the bulk of the cost. With reasonable remedies available, the bill is a costly and unnecessary gift.
House Bill 78
The corporate loans tax is a property tax on loans made to businesses by resident individuals. The tax is imposed on the individual (the creditor), but the tax is withheld and paid by the debtor company (corporations or limited liability companies). The tax rate is four mills, or 0.4%, of the amount of the debt. The tax is projected to bring in $12.8 million in 2012-13 from approximately 7,000-8,000 taxpayers.
House Bill 78 (Cutler) seeks to abolish the corporate loans tax in 2014, without replacement of the lost revenue.
The repeal of the corporate loans tax raises some practical issues:
- It adds to a growing tally of no-strings-attached business tax cuts that have shown little impact in terms of job creation or economic growth.
- In certain situations, it could create a loophole that corporations could use to transfer earnings to owners as “interest,” reducing the state tax imposed on the profits.
- 25% of all loans pay tax averaging $49, and 58% pay less than $500 in taxes. Many of the loans are much larger: in 2008, the average value of taxable loans was $325,000, while the estimated median loan was over $100,000.
- At 4 mills (or 0.4% of the loan value), the tax is not excessively burdensome. The tax on the average loan amount of $325,000 is $1,300. A modest amount of interest on such a loan (say 5%) would generate $16,250 in interest in a year.
At a time when state government is resorting to gimmicks and one-time infusions of cash to fund regular and ongoing public services, tax cuts should be looked at with the same scrutiny as expenditure increases. When compared to the impact of the lost revenue, it is difficult to see how tax cuts that benefit such a small share of the population will help Pennsylvanians. Voting to enact these cuts – without concern of the lost revenue – ensures that further budget cuts will be made.