April 11, 12 & 18, 2024

Job-Creating Tax Reform

Taxation stands at the crossroads of economic vitality and stagnation, shaping the landscape of business opportunity and growth. Yet, Pennsylvania finds itself grappling with a tax structure that stifles innovation, burdens businesses, and undermines the state's competitive edge. The "Job-Creating Tax Reform" hearings convened by the Pennsylvania House Republican Policy Committee, led by Representatives Leadbeter, Mako, and Tom Jones, serve as a beacon of hope in the quest for revitalizing the Commonwealth's economic landscape. Spanning three days across April 11th, 12th, and 18th of 2024, these hearings provided a platform for businesses, communities, and experts to voice their concerns, insights, and recommendations on crucial job-creating tax reforms. With each testimony, the hearings offered a glimpse into the challenges faced by Pennsylvanian enterprises and the transformative potential of strategic economic reform.

Accelerating the reduction in Corporate Net Income (CNI) tax emerged as a resounding call, alongside the imperative to end the start-up penalty by uncapping the restrictive 40% limitation on Net Operating Losses (NOL). Throughout the hearings, one resounding demand echoed: businesses and taxpayers want predictability, consistency, and the ability to plan ahead. As the state charts its course towards prosperity, these hearings illuminate the path forward, guided by the voices of those most intimately acquainted with the impacts of taxation on business viability and economic growth.

The testifiers that joined the Policy Committee were as follows:

4/11 Full Hearing: Job-Creating Tax Reform

Neal Lesher - Director of Government Affairs, Pennsylvania Chamber of Business and Industry

Chris Berleth - President, Columbia Montour Chamber of Commerce

Carl Marrara - Executive Director, Pennsylvania Manufacturers’ Association

Steven Hall - State Tax Manager, Arconic

Questions for the Testifiers

4/12 Full Hearing: Job-Creating Tax Reform

Neal Lesher - Director of Government Affairs, Pennsylvania Chamber of Business and Industry

Melissa Wilbur Morgan - Assistant State Director, NFIB

Questions for the Testifiers

4/18 Full Hearing: Job Creating Tax Reform

Neal Lesher - Director of Government Affairs, Pennsylvania Chamber of Business and Industry

Philip Fullerton – President & Owner, John E. Fullerton, Inc.

Eric R. Wenger, CPA, MST – Managing Partner, RKL

Questions for the Testifiers

~ Agenda, Bios, & Testimony ~
4/11 Hearing

4/12 Hearing

4/18 Hearing

Neal Lesher, the Director of Government Affairs at the Pennsylvania Chamber of Business and Industry, brought forth a sobering analysis of Pennsylvania's current economic landscape at each of the three hearings. Mr. Lesher underscored the state's troubling rankings compared to all states, revealing Pennsylvania as the 5th worst state to find a job, with an overall economy ranked at 38th. Additionally, Pennsylvania ranked 37th for small business taxes, 31st in overall business climate, and suffered from the lowest rate of new entrepreneurs. Alarmingly, the state found itself within the top 5 for businesses leaving, painting a bleak picture of Pennsylvania's economic competitiveness.

Proposing tangible solutions to address these challenges, Lesher advocated for decisive action. He emphasized the critical importance of accelerating the phasedown of the Corporate Net Income (CNI) tax to 4.99%. Lesher highlighted that completing this phase-down would elevate Pennsylvania from 31st to 17th for overall business climate competitiveness and transform the state from having the second-highest CNI in the nation to the 8th lowest. Citing compelling correlations, he pointed out that decreasing CNI was associated with increasing populations, higher wages, greater home values, and increased job creation, signaling the transformative potential of this reform.

Furthermore, Mr. Lesher called for the uncapping of Net Operating Loss (NOL) carry-forward deductions, citing Pennsylvania as one of only two states that cap NOL below the federal limit of 80%. Uncapping NOL, he argued, would particularly benefit startup businesses and cyclical businesses such as manufacturers and commodity markets. Mr. Lesher emphasized the detrimental impact of Pennsylvania's capped NOL, highlighting that the state's effective tax rate is 80% higher than uncapped states due to this limitation.

In addition to these reforms, Mr. Lesher advocated for allowing full expensing of eligible equipment and property in the year of investment, commonly known as "bonus depreciation," a policy implemented by the federal government at 80%. Pennsylvania, however, does not implement this at all at the state level, creating a disparity in tax treatment between federal and state regulations. Finally, Lesher urged for the repeal of the accelerated sales tax pre-payment, which currently burdens businesses with estimating and pre-paying taxes in advance. A repeal, he argued, would streamline compliance, simplify paperwork, and alleviate the financial strain on small businesses. Neal Lesher’s testimony, on behalf of the Pennsylvania Chamber of Business and Industry, provided a comprehensive roadmap for tax reform aimed at revitalizing Pennsylvania's economic prospects and fostering a more business-friendly environment.

4/11 WATCH

4/12 WATCH

4/18 WATCH
“Our state has the potential to be an economic powerhouse!”

Neal Lesher
Director of Government Affairs, Pennsylvania Chamber of Business and Industry

Chris Berleth, President of the Columbia Montour Chamber of Commerce, brought a wealth of firsthand experience and insight into the challenges faced by Pennsylvania businesses. Mr. Berleth highlighted the myriad taxes imposed on Pennsylvania businesses, including Personal Income Tax, Corporate Net Income Tax, Sales and Use Tax, Unemployment Compensation Tax, Property Tax, and Capital Stock/Foreign Franchise Taxes, among others. He emphasized the burden placed on businesses, both large and small, to navigate Pennsylvania's complex tax system, often necessitating the hiring of professional assistance to manage these onerous taxes effectively.

Mr. Berleth underscored the importance of positive tax reform initiatives, citing the Educational Improvement Tax Credit (EITC) as a shining example. He noted how businesses and recipients across Pennsylvania utilize this tax credit to uplift their communities and advocated for its expansion as a means of fostering economic growth and community development.

Central to Mr. Berleth's testimony was the comparison of Pennsylvania's Corporate Net Income (CNI) tax rate of 8.99% with those of neighboring states. He highlighted that Pennsylvania's CNI tax rate is higher than all neighboring states, including Ohio (5.1%), West Virginia (6.5%), and New York (6.5%). This discrepancy places Pennsylvania at a competitive disadvantage, discouraging business investment and job creation within the state.

Through his testimony, Mr. Berleth provided a firsthand account of the challenges faced by Pennsylvania businesses due to the state's tax structure. His insights underscored the urgent need for comprehensive tax reform to alleviate the burdens on businesses, enhance economic competitiveness, and foster a more conducive environment for business growth and prosperity in Pennsylvania.

“Get us excited about what we’re investing in. Let’s make it clear what we’re investing in, what we’re paying for.”

Chris Berleth
President, Columbia Montour Chamber of Commerce

Carl A. Marrara, Executive Director of the Pennsylvania Manufacturers' Association (PMA), delivered a compelling testimony addressing critical issues affecting Pennsylvania's economic future. Mr. Marrara emphasized the urgent need for tax policies that incentivize both new businesses and new residents, particularly crucial in light of the state's aging population and the imbalance between retirees and new workforce entrants. To this end, the Pennsylvania Manufacturers’ Association voices support for the "Small Business Tax Package," advocating for measures such as authorizing Net Operating Loss (NOL) for small businesses and repealing accelerated sales tax prepayments to alleviate burdens on businesses.

The Pennsylvania Manufacturers’ Association adamantly opposes any new taxes, including severance tax, carbon tax, excise tax, gross receipt tax, and cap-and-tax programs, emphasizing the detrimental impact such taxes would have on Pennsylvania's economic competitiveness. Specifically, Mr. Marrara highlighted PMA’s opposition to HB1773 (Rabb), which proposed quadrupling the S-corp (small business) tax rate from 3.07% to 12%, a move that would severely burden small businesses. Mr. Marrara underscored the importance of learning from states with lower tax rates, noting that they have often experienced higher tax revenue as businesses are empowered to grow and generate increased income. PMA's testimony underscored the critical importance of implementing tax policies that foster business growth, attract new residents, and ensure Pennsylvania's economic prosperity in the face of demographic and economic challenges.

“Business capital is like water. It flows through the path of least resistance.”

Carl A Marrara
Executive Director, Pennsylvania Manufacturers’ Association

Steven Hall, State Tax Manager at Arconic, shed light on the urgency of tax reforms for Pennsylvania's economic vitality. Mr. Hall highlighted the gradual nature of Corporate Net Income (CNI) reductions outlined in HB1342 of 2022, expressing concern that reaching the 4.99% target by 2031 is too slow. With only a 1% reduction in 2023 and subsequent 0.5% reductions annually, Mr. Hall emphasized the need for a more accelerated approach to CNI reductions to spur economic growth and competitiveness within the state.

Furthermore, Mr. Hall advocated for pursuing Interest Limitation Decoupling, also known as bonus depreciation, in Pennsylvania's tax policies. He underscored the importance of enabling businesses to fully deduct their capital acquisitions and business interest expense, thereby incentivizing investment and fueling business growth. Hall emphasized that diverting business revenue from taxation not only fosters the expansion of businesses but also supports the workforce, particularly small businesses, which play a vital role in Pennsylvania's economic landscape. His testimony underscored the imperative of implementing proactive tax policies to facilitate economic growth, attract investment, and enhance Pennsylvania's competitiveness in the global marketplace.

“We’d like to see an accelerated rate reduction to get us to that 4.99% rate sooner.”

Steven Hall
State Tax Manager, Arconic

Melissa Wilbur Morgan, Assistant State Director at the National Federation of Independent Business (NFIB), presented compelling data underscoring the significant challenges faced by small-business owners. Tax compliance emerged as a particularly burdensome issue, with small-business owners bearing costs that are 67% higher than those for larger companies, diverting valuable resources and time away from core business activities. Alarmingly, 34% of small-business owners dedicate more than 40 hours per year to preparing state and federal taxes, highlighting the administrative burden imposed on these enterprises.

Moreover, small-business owners grapple with broader economic challenges, as evidenced by 25% noting inflation as their single most important problem in the last year. This inflationary pressure compounds existing financial strains, further complicating business operations and decision-making. The labor market presents another hurdle, with 37% of small-business owners unable to fill available job openings in March 2024, reflecting workforce shortages that hinder business expansion and productivity.

Against this backdrop of alarming statistics, small-business owner optimism has plummeted to the lowest levels seen in 50 years, signaling a concerning trend in confidence and outlook. Mrs. Morgan's testimony underscored the urgent need for comprehensive tax reform and supportive policies to alleviate burdens on small businesses, foster economic stability, and reignite optimism and growth within the small-business sector.

“Small businesses are the backbone of your local communities.”

Melissa Wilbur Morgan
Assistant State Director, NFIB

Philip Fullerton, President & Owner of John E. Fullerton, Inc., testified to the challenges faced by manufacturers in Pennsylvania's tax landscape. Mr. Fullerton lamented the exodus of manufacturers from Pennsylvania to states offering more favorable tax structures, highlighting the urgency of reform to retain and attract businesses to the state. As an "S-Corp," John E. Fullerton, Inc. faces limitations, with only a $10,000 deduction allowed for state, local, and real estate taxes on their 1040 forms, exacerbating the tax burden on small businesses.

Mr. Fullerton pointed out disparities between "S-Corps" and "C-Corps" in tax deductions, noting that while "C-Corps" can deduct all state and local taxes, Pennsylvania's high tax rate renders this option less appealing. He proposed enabling "C-Corps" to pay tax at the business level through a pass-through entity, which would ease and lower business tax burdens without diminishing state tax revenue, only affecting federal taxes.

Furthermore, Mr. Fullerton stressed the importance of fiscal responsibility, advocating for government accountability with taxpayer money. He emphasized the necessity for income to exceed expenses, for both individuals and government, highlighting the importance of prudent financial management to ensure economic stability and prosperity. Mr. Fullerton's testimony underscored the imperative of implementing tax reforms that level the playing field for businesses, foster growth and innovation, and uphold fiscal responsibility to benefit Pennsylvania's economy and taxpayers.

“As a matter of practicality, businesses don’t pay taxes, the people do.”

Philip Fullerton
President & Owner, John E. Fullerton, Inc.

Eric R. Wenger, CPA, MST, Managing Partner at RKL, provided insightful testimony, highlighting pressing issues and proposing actionable solutions to enhance Pennsylvania's tax landscape. As a certified public accountant, Mr. Wenger identified enabling pass-through entities for C-Corps as the most urgent concern, noting that Pennsylvania is one of only five states that do not support pass-through entity owners. He emphasized the implementation of a Pass-Through Entity Tax (PTET) as a crucial measure to allow businesses to deduct state taxes on federal returns, thereby reducing the overall tax burden and stimulating local investment, which is essential for fostering economic growth and prosperity.

Moreover, Mr. Wenger addressed the need for reform in the tax appeals process, citing the strict 60-day deadline that often leads to dismissal on procedural grounds rather than on merit. He advocated for reforms that would ensure a fair and accessible appeals process, empowering taxpayers and promoting transparency and accountability in tax administration. Additionally, he proposed integrating local tax reporting into the state's income tax return, a measure that would streamline the process, save money for both taxpayers and government, and enhance efficiency and effectiveness in tax administration.

“Pennsylvania, rightfully, has a blackeye regarding our tax policy.”

Eric R. Wenger, CPA, MST
Managing Partner, RKL

The "Job-Creating Tax Reform" hearings convened by the Pennsylvania House Republican Policy Committee shed crucial light on the urgent need for comprehensive tax reform to bolster Pennsylvania's economic competitiveness and foster prosperity for all.

Throughout the hearings, three main takeaways have emerged:

First, reduce the Corporate Net Income (CNI) tax at a faster rate;

Second, Net Operating Loss (NOL) deductions – greater than 40% - must be allowed to encourage and empower small businesses;

And third, the importance of reforming the tax appeals process to ensure fairness, accessibility, and transparency in tax administration. Businesses want predictability, consistency, and the ability to plan ahead.

With these insights in mind, there is renewed hope that Pennsylvania Republicans are steadfastly advocating to keep money in the pockets of hardworking Pennsylvanians, inspire entrepreneurship, and create family-sustaining jobs. As the state charts its course towards economic growth and revitalization, these hearings serve as a beacon of hope, illuminating the path forward towards a more prosperous and vibrant Pennsylvania for generations to come.