Time to End Capital Stock and Franchise Tax Nightmare

Have you ever had a nightmare and no matter how many times you try to wake up, it just keeps coming back? Businesses in Pennsylvania that are paying the Capital Stock and Franchise Tax know this problem all too well. Pennsylvania businesses and the commonwealth’s economy have been taxed an extra $6.9 billion thanks to four delays in the past 13 years of the phase-out of the Capital Stock and Franchise Tax (CSFT). Now, some lawmakers are proposing delaying -- yet again -- the elimination of the tax, a proposal that has many in the business community in disbelief.
 
Research by the Pennsylvania Business Council (PBC) shows that from tax years 2000 to 2013, the Department of Revenue collected over $12.89 billion in CSFT revenue when it would have collected $6.9 billion if the original phase-out schedule had been honored. 

“Economic growth has suffered. Jobs that should have been created were not,” said PMA Executive Director David N. Taylor. “We’ve tolerated this redundant, uncompetitive, job-killing tax long enough. The close of 2013 will see this tax reach zero and be wiped off the books, once and for all.”

The CSFT is scheduled for elimination in January 2014 as outlined in Governor Tom Corbett’s February budget proposal. House and Senate Democrats are talking of freezing the tax at the current rate of 0.89 mills, or maybe even increasing the rate as an ongoing revenue source for the 2013-14 spending plan and beyond. Now, much to the dismay of the business community, some Republicans in the General Assembly are joining in this conversation. Lawmakers face a June 30 deadline for enacting a budget.

A 2000 law, signed by Governor Tom Ridge, scheduled a gradual phase-out of the CSFT and complete elimination by tax year 2008. Businesses paid additional taxes not just since 2008, when it was already scheduled for elimination, but from 2000-2008 when the phase-out was twice delayed by Republican Governor Mark S. Schweiker and Democrat Governor Edward G. Rendell, respectively.

The Department of Revenue, the Governor’s Budget Office, and the Independent Fiscal Office made no calculations on the amount of the over-payment of this tax. When told of the amount, one budget official called it “astonishing.”

Taylor said that even the mention of retaining the tax is damaging to Pennsylvania’s economy because of the uncertainty it causes. This shortsighted, counterproductive proposal is coming at the same time that investment in manufacturing and other business is growing partly due to affordable, reliable energy from the Marcellus Shale and commitments to tax reform.

“We’re the only state that assesses and collects both a business assets tax and a Corporate Net Income tax. It’s double taxation on top of the nation’s highest Corporate Net Income tax rate,” he said.  “Worse yet, this (CSFT) is a tax on business investment – disincentivizing growth and expansion that would surely propel our economy forward.”

Businesses of all sizes have been subject to the over-payments. The president of a small accounting firm said that any talk of not completing the elimination is “shocking.” 

“Many small business are a light bill away from staying in or going out of business,” said Warren S. Hudak Jr., of Hudak & Company. “The last time we had a delay, small business paid $2 billion more over five years. I can’t believe they’re even talking about keeping this tax (CSFT) on the books.”

Kevin Shivers, the Executive Director of the National Federation for Independent Business in Pennsylvania, said that lawmakers need to spread the message that business is open in Pennsylvania, to employers both large and small. “Pennsylvania is a tax code mess and this tax is one of the reasons why,” Shivers said.  “It’s vital to send a message that we’re working to get our tax system straightened out.”
 
The good news is that not all lawmakers are calling for a freeze. A source in the House Republican Caucus said that Majority Leader Mike Turzai, R-Allegheny told the Caucus that he is still adamant about eliminating the tax. “Mike believes that businesses have already paid far too much on this and that it’s been hanging around far too long,” the source said.

The phase-out is, however inadvertently, an argument for supply-side economics. Even though the rate was lowered under the phase-out, the year-to-year collections came in nearly the same, or in some years, even higher than the previous year. Think Field of Dreams; if you build it, they will come.

“Eliminating the CSFT shows that if you give people an incentive to invest they will,” Shivers said. “We should eliminate it once and for all and foster even more investment.”

A recent economic study demonstrates in real numbers what another delay will mean. A study by the Beacon Hill Institute shows that the Governor’s plan to reduce the CNI and expand the net operating loss factor would add 1,259 additional private sector jobs. This spurs nearly $460 million in additional disposable income and more than $1 billion in additional investment into the commonwealth’s economy. The centerpiece of this proposal is a long-term reduction in the corporate income tax rate, reducing the rate from 9.99% to 6.99% between 2015 and 2025. However, Michael Head, research economist with Beacon Hill, said the numbers are in jeopardy if the CSFT is not eliminated in 2014.

“We anticipated the elimination of the tax when we conducted our study,” Head said. “If it’s delayed again it will clearly have a negative effect. Businesses are anticipating this elimination. It obviously doesn’t send a good message if you go back on that promise.”

Finally, the President of the Allegheny Institute for Public Policy, Jake Haulk, said that any attempt to halt the phasing out of the CSFT represents a breaking of faith to Pennsylvania’s businesses that have been promised the end of the CSFT. “It sends the wrong signal to out of state companies or investors that might be contemplating the location of an operation in Pennsylvania,” Haulk said. “Little wonder the state has to use big corporate welfare handouts to attract investors and relocations.  Considering the labor climate, the regulatory environment, and the high corporate income tax rate, the CSFT phase-out was important in signaling a willingness to do something positive for business. Not to carry through ought to be unthinkable.”

Businesses in Pennsylvania have been living a nightmare to the tune of more than $6.9 billion. It’s time to wake up from this bad dream once and for all – please let your lawmakers know that you support the elimination of this job-killing tax. Please take a moment and write a letter to your lawmaker explaining how this is important to you and your employer. Click here to be redirected to our Advocacy Toolkit and send a letter today.

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