The $28.05 billion budget was adopted without broad-based tax increases, as lawmakers rejected new taxes on smokeless tobacco and cigars, as well as the implementation of combined reporting, which would have been a tax increase for many Pennsylvania businesses. The governor

                          

Federal stimulus
Lawmakers are concerned about the certainty of federal stimulus money, which the governor is relying on to fund his proposed 2010-11 state budget. Budget Secretary Mary Soderberg said that the current allotment of federal stimulus money is set to expire on Dec. 31, but noted there has been vigorous discussion about continuing the Federal Medical Assistance Percentages (FMAP) funds for the next calendar year.

FMAPs are used to determine the amount of federal matching funds for state assistance payments for certain social services, and state medical and medical insurance expenditures. The Social Security Act requires the U.S. Secretary of Health and Human Services to calculate and publish the FMAPs each year.

Soderberg said President Barrack Obama has included two full quarters of FMAPs in his budget, for a total of $850 million. She also said 42 governors have signed a letter requesting a FMAP extension. Soderberg said most states have included these funds in their budgets and they are optimistic it will be passed. However, several lawmakers expressed concerns that the governor’s budget relies too much on federal funds that might not materialize.

Public pension crisis
In responding to questions about the looming public pension crisis, Soderberg said the administration is asking for an “incremental, predictable strategy” for funding the Commonwealth’s pension obligations. She said there will be a $3.5 billion increase in contributions in 2012, and the administration is asking for a $400 to $700 million contribution each year in order to lessen the burden in the next few fiscal years.

Some lawmakers pointed out that it doesn’t make sense for the Department of Education to ask for a $350 million increase in spending when none of it will be directed toward pension obligations.

Other lawmakers expressed concerns with the governor’s plan to address the pension crisis. The administration’s budget calls for several tax increases on business, the revenues of which would be placed into a reserve account to be used in 2011-12 to meet pension obligations. The PA Chamber believes focus should be placed on addressing some of the contributing factors that helped to create the funding crisis.

Film tax credit
During the Revenue Department hearing, House Appropriations Committee Minority Chairman Bill Adolph, R-Delaware, asked Acting Revenue Secretary Dan Hassell why the Film Tax Credit is proposed to increase at a time of economic downturn and when the Education Improvement Tax Credit is being decreased.

Hassell said the education tax credits were not reduced, but fixed in the October budget.

Adolph stressed that the education tax credit has been a successful program, and said he believes that with less money available for the program, more children will attend public schools, which will place a greater strain on the system.

Combined reporting
Lawmakers also inquired about the revenue that would be generated by adopting combined reporting. Hassell said combined reporting is estimated to generate $400 million to $500 million in revenue with the current base, but noted there could be other factors in proposed legislation that could change the exact amount of revenue generated. Hassell said he is aware of the business community’s concerns with combined reporting, and expressed his desire to work with the General Assembly to make combined reporting “as painless as possible.”

State Rep. Gordon Denlinger, R-Lancaster, said contrary to the governor’s argument, under combined reporting, 60 percent of corporations would still be non-taxpayers. He cited as reference at letter from former Revenue Secretary Thomas Wolf. Hassell said the number of non-taxpayers would go down, even if slightly. However, upon further questioning from Denlinger, Hassell said he did not have an updated list of active C-corporations in the Commonwealth.

Article courtesy of the Pennsylvania Chamber of Business & Industry

                          

Now the Commonwealth risks falling further behind in a race that has critical implications for how well the state recovers from the worst financial crisis since the Great Depression.

Three states have recently proposed corporate rate cuts as a way to boost job growth and economic recovery, according to the Council on State Taxation. And all three states already have corporate tax rates that are below Pennsylvania’s 9.99 percent.

A proposal in Arizona would reduce the corporate income tax from 6.97 percent to 4.5 percent over four years, beginning in 2012. In Florida, the governor is crafting a proposal to reduce the state’s 5.5 percent corporate income tax, and in Idaho, House leaders are expected to introduce a plan to lower the 7.6 state corporate income tax by one-third over the next 10 years, despite a projected $150 million budget shortfall.

Meanwhile, Pennsylvania has the 11th highest state and local tax burden in the nation, according to a recent Tax Foundation study. Contributing to the ranking is the 9.99 percent Corporate Net Income tax rate, the second highest of the 50 states. In addition, Pennsylvania is one of only 10 states that also tax business assets, and the 2.89 mill rate is among the highest. With the scheduled phase-out of the Capital Stock and Franchise tax frozen for the third time, that rate will remain in place until 2011. The CSFT is not expected to be eliminated until 2014.

If Pennsylvania were a nation, it would have the highest overall corporate tax rate in the world at 41.5 percent (federal and state, accounting for the state and local deduction). As the study pointed out, “Taxes can clearly create a hostile environment for business investment and job creation, and Pennsylvania appears to be a prime example of that.”

Another recent competitiveness study also gave the Commonwealth low marks for its economic competitiveness, underscoring again the need for improvements to the state’s overall business climate, specifically, its business tax structure.

The American Legislative Council’s “Rich States, Poor States” study ranked Pennsylvania 46th for economic performance, which considers personal income per capita growth, absolute domestic migration and non-farm payroll employment growth, and 42nd in economic outlook, which measures 15 variables, among the 50 states.

Pennsylvania’s high business taxes contributed to the poor showing.

At a time when most Pennsylvanians and Americans will measure true economic recovery on unemployment rates that drop dramatically and job opportunities that are readily available, the Commonwealth cannot afford to fall further behind in the economic competitiveness race.

For more information on PA Chamber members’ state tax policy, visit http://www.pachamber.org/www/advocacy/taxes/business/index.php.