Nathan Benefield: Stagnant Pa. economy requires real business-tax reform

In his final annual budget address, Pennsylvania Gov. Tom Wolf proposed a major reduction in the state’s corporate income tax. Wolf’s tax-cut plan may come as a surprise to some, considering his liberal bona fides, and has been lauded by business groups desperate for relief from the second-highest business tax in the nation.

With the state House and Senate controlled by Republicans, it might seem like this tax cut would sail through to passage. But don’t be fooled. A corporate tax-cut proposal from Wolf is nothing new. This is the sixth time he’s included such a cut in his state budget proposal, and this one is similarly laced with “poison pill” provisions.

Past proposals have included mandatory unitary combined reporting, which would enable the state to tax a portion of a company’s income, including what is earned outside of Pennsylvania. Wolf based this maneuver on the “Delaware loophole,” which alleges that companies dodge taxes through sham payments to affiliates in other states. But there is no such loophole in the law, it doesn’t pertain to Delaware, and there’s no evidence companies are hiding profits through sham transactions.

Such proposals have thwarted prospects of real reform. Business groups have long opposed the immense burden of combined reporting and have rightfully pointed out that it would increase their tax burden despite a lower tax rate.

Even Wolf has acknowledged this. He estimated that combined reporting would result in a tax revenue increasein the first years of the plan.

Wolf’s latest proposal shelves combined reporting and, on its face, does represent an immediate cut in the tax burden. But this time around, the governor has included a host of sly provisions. His plan would disallow paying management fees to an affiliated entity — such as paying corporate headquarters for legal services — though these are valid business expenses.

Additionally, the proposal would require businesses to justify expenses as legitimate to the Department of Revenue – thus assuming businesses are guilty until proven innocent. Worse, Wolf’s tax plan offers no recourse for appeals in court. It gives the Department of Revenue’s tax collectors the final say to determine how much a business must pay in taxes.

That Wolf included these barriers to improving Pennsylvania’s corporate tax laws in his proposal is truly disappointing. Our state consistently ranks among the worst for business, largely thanks to its nation-leading taxes and related regulations. For example, Pennsylvania remains one of only two states that caps what losses businesses can carry forward into future years, making the corporate tax even more onerous than the rate initially implies.

This heavy tax burden undermines the state’s economic stability. Consequently, Pennsylvania lost 287,401 residents to domestic outmigration since 2010 — many to lower-tax states. As of January, Pennsylvania’s unemployment rate was the nation’s fourth-highest. With inflation approaching 8% — much of it driven by government spending — economic concerns are at the top of voters’ minds.

But proposals like Wolf’s show that the governor and his allies aren’t truly interested in reducing taxes to make Pennsylvania more competitive. They prove Wolf’s anti-business, big-government ideology never changes.

A straightforward reduction in tax rates would boost Pennsylvania’s economy, as the 2017 federal tax reform illustrated. The Tax Cuts and Jobs Act yielded numerous benefits — including lower taxes for all income groups, increases in employee benefits, lower utility bills for families, an increase in charitable contributions, and more jobs.

State lawmakers have offered their own solutions. Among these are House Bill 1163 (sponsored by Rep. Greg Rothman) and House Bill 2095 (Rep. Barbara Gleim). Both would result in a Pennsylvania tax rate more competitive with the rest of the nation.

If policymakers are serious about fixing Pennsylvania’s outmigration problem and making the state more business-friendly, they should act now on legislation free of poison pills to cut its oppressive business taxes. Such tax reform would drive economic growth in Pennsylvania and provide the state with much-needed business investment.