The Legislature should reject Gov. Tom Corbett’s plan to cut the corporate income tax rate by 30 percent over 10 years.
Measuring a state’s business climate is complicated and controversial. At 9.99 percent, Pennsylvania’s corporate income tax rate is one of the highest in the country. According to the Corbett administration, that rate causes sticker shock for companies considering the commonwealth as a possible location for a new facility.
However, as the state’s Independent Fiscal Office has pointed out, the way Pennsylvania permits corporations to calculate their profits for tax purposes mitigates the impact of the high tax rate.
Furthermore, the profits of fewer than 10 percent of Pennsylvania’s businesses actually are subject to taxation at the 9.99 percent rate.
The profits of more than 90 percent of the commonwealth’s businesses (including most small businesses) are taxed at the same 3.07 percent rate that Pennsylvanians pay on their wages.
In addition, the Tax Foundation’s annual index ranks Pennsylvania as the 19th-best state for business tax climate. That’s better than each of the states bordering the commonwealth, except for Delaware.
Admittedly, what is favorable for some types of businesses is unfavorable for others. For example, a joint study by the Tax Foundation and KPMG compared the states’ tax climates for larger corporations.
According to that study, Pennsylvania’s tax climate is relatively good for larger corporations engaged in manufacturing. However, the commonwealth ranks at or near the bottom for corporate headquarters, distribution centers, call centers, research and development facilities, and large retail stores.
To address the sticker shock problem, a reduction in the 9.99 percent corporate income tax rate is a reasonable goal. However, the state cannot afford the 30 percent cut advocated by the governor.
The governor’s corporate income tax proposal is by far the most expensive part of a package of business tax cuts intended to create jobs. To pay for the package, the governor has proposed to phase-in the tax cuts and to raise additional revenues by
closing business tax loopholes.
The overall impact of the governor’s package on the state budget would be negligible for the first few years. However, the Pennsylvania Budget and Policy Center has estimated that, when fully implemented, the package would cost the state more than $750 million per year.
Pennsylvania’s constitution requires the commonwealth to balance its budget each year. Balancing the budget with $750 million less in revenue would likely require cuts in state spending, an increase in other taxes, or a combination of spending cuts and tax increases.
In short, a $750 million annual revenue loss could well mean fewer teachers and larger classes in the public schools, higher tuition and more debt for college students, and increased local taxes on residential and business property.
The Corbett administration has estimated that its tax-cut package would produce at least 18,000 new jobs over 10 years. Although any increase in jobs would be welcome, the governor’s proposal would cost the state more than $40,000 per year for each job created.
That’s too much to pay, especially when there is no guarantee that the jobs would actually materialize.
Despite the governor’s intent, corporations would be free to use the tax savings to increase stockholder dividends or CEO compensation or to build corporate facilities in other states.
The Legislature should not commit now to 10 years of automatic cuts in the corporate income tax rate. Instead, the Legislature should adopt a fiscally prudent alternative offered by the Budget and Policy Center.
Specifically, the Legislature should enact a new law each year if it wants to reduce the corporate income tax rate for the following year.
That approach would force the Legislature to weigh the benefit of each additional cut in the corporate income tax against the impact of any spending cuts or increases in other taxes needed to pay for that additional cut.
It is correct that an automatic phase-in of the proposed corporate income tax cut would provide corporations with greater predictability, which is important to business planning.
Unfortunately, it would also mean less predictability for school districts, institutions of higher education, and counties regarding the amount of state funding available for them in future years. That is not a reasonable trade-off, especially in view of the
modest increase in jobs expected.
The governor’s proposed corporate income tax cut is similar to the adjustable-rate mortgages that enticed too many people to buy houses they could not afford.
What looks like an acceptable cost to Pennsylvania in the short run could put the state under water in the long run.
William Lloyd of Somerset represented Somerset County in the state House of Representatives (1981-1998) and served as the state’s small business advocate (November 2003-October 2011). He writes a monthly column for The