Pennsylvania lawmakers could be on the verge of accomplishing something that has eluded them for years: lowering the state’s corporate tax rate.
It’s an idea that has bipartisan support, with Republicans in favor of slashing the tax rate and Gov. Tom Wolf having similarly pitched a business tax cut in at least five of his executive budget proposals since taking office.
But the idea, at least in recent years, has never come to fruition. But that all changed in late April when House lawmakers approved legislation to lower the state’s Corporate Net Income Tax rate and open the door for further reductions in the future.
Here’s what you need to know about the prospect of a Corporate Net Income Tax cut in Pennsylvania.
What is Pennsylvania’s Corporate Net Income Tax?
Like 43 other states and Washington, D.C., Pennsylvania levies a tax on corporate income. But unlike most states that tax corporations, Pennsylvania’s corporate tax rate is one of the highest in the nation. Pennsylvania currently levies a 9.99% tax on corporate income, which is the second-highest in the country, according to the Tax Foundation. Only New Jersey has a higher corporate tax rate, with the Garden State taxing corporate income at a rate of 11.5% when factoring in an extension of the state’s recent surtax on business income over $1 million. Prior to the temporary 2.5% increase, New Jersey’s corporate tax rate was 9%.
In Pennsylvania, nonprofits, homeowners associations, agricultural cooperatives, business trusts and membership organizations are all exempt from the state’s tax on businesses. Outside of those exemptions, any foreign or domestic corporation that does business in Pennsylvania must pay the state’s Corporate Net Income Tax.
The state’s 9.99% rate has been in place since 1995 when Republican Gov. Tom Ridge signed legislation into law lowering the rate from 11.5% to 9.99%, according to data from the Pennsylvania Department of Revenue.
Who wants to lower the state’s Corporate Net Income Tax?
Reducing the state’s corporate tax rate has supporters on both sides of the aisle. Wolf, a Democrat, has supported the proposal throughout his time in office, and Republican legislators have also backed efforts to reduce the tax rate. Business trade groups and member associations have lobbied for a corporate tax cut, as well.
Supporters of reducing the CNIT say Pennsylvania’s high rate discourages businesses from setting up shop in the state, and that a cut to the state’s 9.99% rate would help attract more businesses – and jobs – to Pennsylvania.
State Rep. Joshua Kail, a Republican from Beaver County, sponsors House Bill 1960, legislation which would lower the state’s current corporate tax rate to 8.99%. He said during a House floor debate that his bill is a “measured approach that rewards growth and also allows us to have more cuts without further legislation.”
Kail told a story of how his siblings left Pennsylvania for jobs in other states, and said lowering taxes on businesses would keep both employers, and workers, in the Keystone State. “My wife and I – we have eight children of our own. And we want to see a day when our kids can graduate high school or college or trade school, and they can pursue their opportunity to the fullest right here in Pennsylvania,” he said. “That's what this bill is really all about … It's about jobs. It's about families. It's about growth. It's about building a better Pennsylvania for our kids and grandkids.”
While many Democrats, including state Rep. Matt Bradford, the ranking Democratic member of the House Appropriations Committee, said the bill didn’t go far enough to reform the state’s corporate tax structure, most Democrats ended up voting for the bill, which passed with a 195-8 vote.
“House Democrats are going to show that we're going to meet you halfway,” Bradford told Republican lawmakers on the House floor.
A spokesperson for Wolf’s office said the governor is looking forward to discussing changes to the CNIT during this year’s budget negotiations.
What would HB 1960 do?
The bill would immediately lower the state’s CNIT to 8.99% beginning on Jan. 1, 2023. However, the legislation doesn’t stop there, as it opens up the door for future reductions to the tax.
If the state has a surplus in its General Fund in certain taxable years after 2023, the state’s corporate tax rate could drop to 7.99% by 2025, as long as the state records budget surpluses that meet thresholds outlined in the bill.
The legislation also includes a trigger that would increase the state’s net operating loss cap over time. The state’s net operating loss provisions currently allow businesses to deduct up to 40% of a net loss in one taxable year against income in a future taxable year.
According to a House Republican analysis of the legislation, reducing Pennsylvania’s CNIT to 8.99% would result in a $127 million General Fund revenue loss for the 2023 tax year. The analysis also estimates that each 1% of the state’s Corporate Net Income Tax generates between $400 million and $450 million each year.
Does anyone oppose HB 1960?
Eight Democrats, mostly progressives within the House Democratic Caucus, voted against HB 1960. Those who voted against the bill expressed a desire for larger changes to the state’s corporate tax structure.
State Rep. Mary Jo Daley, a Democrat who sponsors separate legislation to reduce the CNIT and prevent businesses from shifting profits out of Pennsylvania to lower-tax states, said on the House floor that lawmakers should adopt her proposal instead. “We all know that many businesses, especially corporations with a great deal of business out of state, are incentivized to avoid paying this tax by using various legal and corporate strategies to shift earnings out of state,” Daley said.
The bill is also opposed by the Pennsylvania Budget and Policy Center, a progressive think tank based in Harrisburg. In a statement, Marc Stier, the organization’s director, said Kail’s legislation “includes no provisions to close corporate tax loopholes.”“HB 1960 will cost the state hundreds of millions of dollars per year,” Stier said. “Our initial estimate is that it will reduce state revenues by over $700 million in the fiscal year that begins on July 1, 2023.” Stier said those revenues should instead be used for education, housing, health care and child care.
Will Gov. Tom Wolf sign the GOP bill to lower corporate taxes?
Wolf has not indicated one way or another whether he supports HB 1960. In an email, Wolf spokesperson Elizabeth Rementer said the state’s CNIT needs to be modernized. “Any changes to the CNIT rate must be discussed as part of a larger modernization of CNIT as proposed by the governor and introduced as HB 2510, which the governor supports and would be more equitable for Pennsylvania businesses while making our state a more attractive place to do business,” Rementer said.