Pennsylvania's newly-approved business tax reform law (read H-451/S-52 here) includes a few tax breaks, but mostly seems designed to raise more revenue for state government, not make the slow-growing state more attractive to employers, according to this report by tax lawyers at Philadelphia corporate law firm Ballard Spahr.
Among other reforms, the state:
- Extended the Capital Stock Franchise Tax, which was supposed to end next year, to at least 2015
- Extended Philadelphia's 1% sales tax surcharge, which was supposed to end this year, to at least 2017
- Tightened the "Delaware Loophole" that used to make it easy for companies like Comcast to avoid Pennsylvania income taxes by charging their subsidiaries franchise or intellectual-property fees through Delaware investment subsidiaries
- Extended Philadelphia's realty transfer tax to include more buyers and sellers
- Made it tougher for partnerships and S-corporations to avoid state taxes through payments to related businesses
- Eliminated state credit for foreign taxes
- Extended the bank share tax to cover more financial companies
- Ended a call center tax credit
- Ended the state inheritance tax on small businesses when ownership is transferred between members of a family
- Added a new tax deduction for start-up expenses
- Added tax deductons for "intangible" oil and gas drilling and development expenses
- Added a tax exemption for retail sale or rental of aircrafts and aircraft part services
Past efforts to "close the Delaware loophole" were linked to proposals to cut Pennsylvania's top corporate tax rate of nearly 10%, and with schemes to consolidate tax liabilities among related companies. But neither of those reforms passed; which means Pennsylvania has now made it tougher for businesses to discount losses at some operations from gains at others: "It's as if (the state) is saying, 'Heads I win, tails you lose,'" says Wendi Kotzen, tax partner at Ballard.
An end to family small-business inheritance taxes is welcome; but the survival of Pennsylvania's unusual capital-stock tax makes the state an outlier, she added. Compared to other states, "costs in Pennsylvania will be higher."
Business taxpayers would prefer lower rates and fewer exemptions -- "some kind of wholesale reform that is both fair to taxpayers and raises money sufficient to operate the Commonwealth," Kotzen added. But that would require, among other things, improved state computer systems -- which is a difficult thing to get through the cash-strapped General Assembly, she concluded.