Tax wars, Fla. vs Pa.: Why Keystone State looks worse than it is

Philadelphia investment banker Andrew T. Greenberg, the Fairmount Partners managing director who was Pennsylvania Gov. Robert P. Casey's whiz-kid Commerce Secretary way back at the start of the 1990s, sheds light on Florida Gov. Rick Scott's shaky claims that his state is a comparative tax haven:

"Pennsylvania taxes are lower for S-corporations, limited-liability companies, and other entities whose profits flow through to the owners and are then taxed at the individual rate" -- in short, for small firms, professional-service firms and the great majority of businesses, which Florida more often treats like corporations and taxes at the higher corporate rate. Pennsylvania charges its usual 3.09% individual tax on personal profits from these companies -- a fraction of its nearly 10% corporate tax rate (down from a peak of 12.25%).

Sounds good? But this exemption for most small businesses is part of the reason that Pennsylvania "actually gets the worst of two worlds: lower revenues from business, as your article notes," compared to Florida; plus, "a reputation for being a higher-tax environment, based on the corporate net income tax base rate," which most businesses don't actually pay, Greenberg added.

Will Wolf go through with his proposal for a graduated income tax? When the General Assembly last majorly wrestled taxes, "the politics were not even close to being there - and if you look at Article VIII of the state Constitution, it is pretty clear you would need an amendment in order to tax individuals for the same thing at different rates," Greenberg told me.

Should Pennsylvania belatedly "close the gap" between personal/personal-business and corporate tax rates? "Not so clear," says Greenberg. "You've lost continuity with much of the group of C Corporations that elected S status or became LLCs in the early 90s.  If you implemented that change (a graduated personal tax rate and a lower corporate rate), you'd be primarily be burdening a lot of smaller, newer businesses, including those at the center of the state's entrepreneurial culture.  In turn, you'd be giving a benefit to the larger C Corporations that  have more resources and have had 20-plus years to implement tax-minimization strategies."

In sum, "I would leave these rates undisturbed and push hard against the idea that Pennsylvania is a high business tax state.  It's a high corporate net income tax state, but the low personal rate continues to be a benefit for the many smaller businesses organized as flow-through tax entities" taxed at the lower personal rate.

Is Gov. Wolf likely to improve taxation and Pennsylvania's tax reputation? "The advance body language suggests (Wolf's tax initiatives) will be frankly redistributive and will employ one fixed-base rate with credits or adjustments applied disproportionately to lower income taxpayers.  If that is the case, I think it will be seen as a transparent attempt to end-run Article VIII."