Revitalizing Pennsylvania’s Economy with Tax Reform - By Reps. Robert Leadbeter, Zach Mako and Tom Jones

5/15/2024

To be frank, Pennsylvania's current economic outlook is grim, with recent rankings placing our home among the worst states in the nation for job prospects and key economic indicators. 

WalletHub's assessment pegged Pennsylvania as the fifth worst state to find employment, while analyses from U.S. News and World Report, SimplifyLLC, and the Tax Foundation consistently place our state in the bottom third nationwide for economic performance. Alarmingly, the Kauffman Foundation revealed Pennsylvania has the lowest rate of new entrepreneurs among all states. 

This dire situation is driving a significant exodus of both businesses and individuals from our communities, as highlighted in reports from Axios and the Bureau of Labor Statistics documenting high rates of outbound migration. Amidst these challenges, business optimism in Pennsylvania has plummeted to its lowest levels since 2012, underscoring the urgency for corrective action.

In response to this pressing need for reform, we hosted the House Republican Policy Committee in our districts to solicit direct feedback from our business community. Testimony across various industries uniformly depicted Pennsylvania's tax structure as burdensome and punitive, necessitating immediate reforms to retain businesses, residents, and enhance our competitiveness. Key areas for reform that could drastically improve our economy and present opportunities for family-sustaining jobs, including Corporate Net Income tax, Net Operating Losses, and the accelerated sales tax, emerged as consistent themes demanding our urgent attention.

During the latest legislative session, Pennsylvania's General Assembly advanced substantial tax reform with Act 53 of 2022, aimed at tackling the state's excessive corporate net income (CNI) tax rate, then the nation's second highest at 9.99 percent. Act 53 gradually reduces the CNI tax by 0.50 percentage points annually until it hits 4.99 percent in 2031. We cannot afford to wait until 2031. 

Research highlights numerous benefits of reducing the CNI tax rate, including increased investment, GDP growth, higher wages, enhanced property values, and expanded job opportunities. Comparisons between states with high and low corporate income tax rates from 2000 to 2020 show a 10 percent higher growth in state revenues in low-tax states, along with positive correlations with population growth and worker wages.

The transformation of North Carolina through CNI tax reform serves as a notable example, with their efforts propelling them from 44th to 9th place in the Tax Foundation's Business Tax Climate ranking. 

Accelerating Pennsylvania's CNI reduction would significantly enhance our state's competitiveness, stimulating investment, job creation, and economic growth. House Bill 1447, introduced by Rep. Kephart, would achieve this.

Pennsylvania's treatment of Net Operating Losses (NOL) stands out as an extreme outlier among states' tax provisions and is another consistent area of concern for our business community. 

NOL deductions, a tax provision allowing businesses to carry losses forward and deduct them from future profits, particularly affects two vital business types in our economy: start-up firms and those in cyclical industries like manufacturing. 

Currently, Pennsylvania and only one other state cap NOL deductions below the federal limit of 80 percent of taxable income. Conversely, 20 states align with federal rules, while 24 states have no deduction cap at all.

Moreover, although corporations can apply a portion of NOLs against CNI, small businesses subject to personal income tax lack this capability, resulting in the so-called ‘Pennsylvania Startup Penalty’. Since smaller businesses and entrepreneurs typically lack the capital of larger corporations, the ability to utilize NOLs would afford them greater financial control, facilitating business initiation or expansion. 

This penalty acts as a barrier to business growth and entrepreneurship, underscoring the pressing need for legislative intervention to sanction this vital tax strategy and eradicate the Pennsylvania Startup Penalty. House Bill 701, introduced by Rep. Kutz, would achieve this. 

Another reform that would greatly impact our business community would be repealing the accelerated sales tax requirement. This requirement mandates that businesses collecting over $25,000 in sales tax in the third quarter of the previous year make monthly pre-payments equivalent to 50 percent of their projected sales tax collections. 

To streamline compliance and alleviate paperwork burdens on small businesses, repealing the accelerated sales tax pre-payment requirement is essential. Doing so would enable small businesses to remit collected sales tax revenues in line with their filing period without additional complexities. House Bill 1404, introduced by Rep. Topper, would achieve this. 

Our state’s economic challenges are profound, as evidenced by dismal rankings in job prospects and economic indicators and urgent action is needed to reverse the tide of outbound migration and revitalize our economy. 

We cannot afford to wait while our businesses struggle to stay afloat amidst an unforgiving tax landscape or flee the Commonwealth for more prosperous opportunities in other states. 

It's imperative that we prioritize the needs of our business community and enact meaningful tax reform that fosters opportunities for family-sustaining jobs, an environment conducive to entrepreneurship, and prosperity for all Pennsylvanians.