Version of New Jersey's new law to lure businesses has cost Pennsylvania

As Pennsylvania considered overhauling its business taxes in 2004, Air Products & Chemicals Inc. pushed for a change that would give a big break to major companies headquartered in the state.

The measure, known as the single sales factor, was intended to encourage companies that sell to a national market to hire and expand in Pennsylvania. A director at Air Products, one of the world's largest suppliers of industrial gas, told state leaders that it was a "powerful economic development tool."

Yet the Allentown company went on to lay off hundreds of workers after Pennsylvania began phasing in the single sales factor in 2007. Air Products' state workforce has shrunk 15 percent during that time, which it attributes to business divestitures, attrition, and the recession.

About two dozen states have passed some form of the law to try to lure businesses, but critics question why they give up revenue and don't require anything - such as job guarantees - from the companies that benefit.

In Pennsylvania, the move has cost the state $379.3 million in corporate taxes.

New Jersey became the latest single-sales-factor state last week. Supporters say the law, which will take effect next year, will allow the Garden State to better compete with Pennsylvania and other neighbors.

Advocates say the measure corrects a flaw in the method that Pennsylvania, New Jersey, and other states traditionally used to calculate how much of a corporation's profits are taxable.

That formula averaged the fraction of a corporation's in-state sales, payroll, and property to calculate the tax liability, meaning that more of a company's profits were taxed every time it hired and built another factory in that state.

Consider a company that has 50 percent of its property, 50 percent of its employees, but just 5 percent of its sales in New Jersey. In that state, sales are weighted 50 percent and property and payroll are each weighted 25 percent in the formula. So 27.5 percent of the company's profits would be taxable.

If those numbers applied to a firm in Pennsylvania, where sales are weighted at 90 percent, just 9.5 percent of the profits would be taxed. That drops to 5 percent with a complete single sales formula - 100 percent of the sales and nothing else.

"If you just look at it on its face, if you're going to tax a company for building in Pennsylvania and hiring in Pennsylvania, it seems to be counterintuitive to economic growth," said Gene Barr, vice president of government and public affairs for the Pennsylvania Chamber of Commerce.

The Pennsylvania Department of Revenue has not studied whether increasing the weight of sales from 60 percent to 90 percent over the last four years has spurred economic growth. The state plans to forgo an additional $150 million in revenue through 2016 if Gov. Corbett's plan to move toward a complete single sales factor in the next three years is enacted.

The measure hasn't been a boon to all Pennsylvania businesses: Taxes rose for 22,100 because the law shifts the burden to firms that sell in Pennsylvania without owning assets or employing residents in the state. Businesses with all their property, employees, and sales in the state had no change.

"This is a broad-based, economic development initiative Gov. Corbett supports because it facilitates job creation in Pennsylvania and promotes business competition in a global economy," Revenue Department spokeswoman Elizabeth Brassell said in an e-mail.

One of the 12,000 businesses that pay less in taxes is Air Products, a major employer in the Lehigh Valley.

A company official told the Pennsylvania Tax Reform Commission in 2004 that moving to a single sales factor would encourage new investment and jobs in the state.

But since the law took effect, the company has trimmed its staff as demand declined for its products during the economic downturn. Air Products says it employed 4,092 people in Pennsylvania at the end of fiscal 2010, down from 4,792 three years earlier.

"State taxation is an important factor in making investment and employment decisions, but many other factors are also considered, including general economic conditions," company spokeswoman Beth Mentesana said in an e-mail. "Thus, it is difficult to draw any specific, direct correlation between an increase or decrease in investment or employment with state taxation alone."

Mentesana said that Air Products continued to support weighting sales at 100 percent, and that many other states' adoption of the measure was hurting Pennsylvania's ability to attract and keep companies.

Sunoco, another beneficiary of the single sales factor, has also laid off hundreds of workers in Pennsylvania. The company says the law helped maintain jobs through 2008 but was not nearly enough to counter difficult business conditions in the years after.

"Sunoco's recent reorganizations have nothing to do with the single sales factor and everything to do with business conditions in our industry, a change in company strategy, and the overall need to become more competitive," spokesman Thomas Golembeski said in an e-mail.

Critics say that's just the problem.

The companies' "arguments confirm what many observers have said all along: that the taxes don't drive their investment decisions. . . . Other factors are much more important," said Sharon Ward, executive director of the left-leaning Pennsylvania Budget and Policy Center.

It's unclear how many jobs at Air Products, Sunoco, and other companies may have been saved by the tax break.

But the conservative Tax Foundation in Washington, which annually ranks state business climates, has said that it advises states against adopting the law and that supported tended to inflate benefits of the single sales factor.

One proponent in Pennsylvania was the Hershey Co. An official at the candy-maker sat on the tax commission that recommended the single sales factor, and Hershey is a member of Compete PA, a coalition of businesses that championed the law.

Hershey, which would not comment for this article, said in 2008 that it was eliminating 900 to 1,100 jobs at three Derry Township plants and at a fourth facility, in Lancaster, through voluntary severance and early-retirement programs. The move was part of a plan to scale back operations in North America and shift them to other countries, such as Mexico. Also that year, 250 workers lost their jobs after Hershey closed a plant in Reading.

Last June, the company announced that production would shift from its century-old facility at East Chocolate Avenue in Hershey to a planned expansion of its newer West Hershey facility. The change is expected to result in the reduction of 500 to 600 jobs "as investments in technology and automation result in enhanced efficiency," according to a securities filing.

Similar moves happened at Tyco Electronics, known as TE Connectivity since March and another member of Compete PA. The business has lost 1,000 employees in Pennsylvania - 19 percent of its state workforce - since 2007.

That year, Tyco closed its Exeter Township plant, saying it was shifting that work to Mexico, and shuttered a plant in East Berlin. In 2009, Tyco closed plants in Carlisle and Emigsville and moved their operations to the South.

Company spokesman Michael Ratcliff said in an e-mail that facility closings in 2007 "occurred primarily as part of our ongoing global operations footprint consolidation strategy. Layoffs in 2009 were driven by the global economic crisis and resulting slowdown in our business."

The business has since recovered very well, he said, and TE Connectivity is investing $60 million to renovate its Harrisburg facilities.

David Taylor, who pushed for the law as executive director of the Pennsylvania Manufacturers Association, said jobs are created and lost for different reasons. It's important to have a pro-growth economy, he said, and the layoffs are evidence only that the law should have been passed sooner.

Business groups say the single sales factor is just one part of a package of changes needed to better compete economically. They also want Pennsylvania to eliminate its cap on carrying forward net operating losses and to lower the overall corporate income-tax rate.

In New Jersey, Gov. Christie wants to reduce corporate and personal income-tax rates. Last week he signed into law a change in the tax code that is expected to aid smaller businesses.

But the single sales factor is an incremental step to improving a state's business environment, said Barr, adding: "This is a matter of moving gradually toward a more competitive environment."