After nearly 20 years of maintaining the second-highest corporate net income tax (CNIT) rate in the United States, Pennsylvania seems poised to reduce that rate from 9.99% to 8.99% beginning in January 2023. This change is part of several efforts in the Pennsylvania General Assembly to help bring jobs back to the state and promote growth as the economy continues to recover from the pandemic. Final enactment is expected in coming months.
Legislation approving the CNIT reduction (House Bill 1960) recently passed through the Pennsylvania House of Representatives with very little resistance (approved 195-8), demonstrating that politicians in both parties felt this change was essential. Additional legislation (Senate Bill 1077 and House Bill 2510) related to CNIT reductions and tax code reform have also been recently been moving through the House and Senate in support of Governor Tom Wolf’s plan to modernize the tax structure and encourage business growth in the Commonwealth. Governor Wolf, a former business owner, issued a press release outlining his plan earlier this month.
The release notes, “In Pennsylvania, our Corporate Net Income Tax is one of the highest in the nation, and it’s holding our Commonwealth back. Businesses are asked to pay more than their fair share, it’s a barrier to new business growth… My plan to lower this tax is an opportunity to support Pennsylvania’s businesses and families, to ensure that students can find good jobs, and to remove barriers to new business and innovation in the Commonwealth.”
These efforts to reduce corporate taxes in Pennsylvania are supported by the fact that the State has been able to dig out of a budget deficit over the last seven years and turn it into a very significant surplus. This budgetary windfall has given legislators some wiggle room, allowing them to propose a CNIT reduction without fear of drastically impacting State revenues in the short term as new business slowly emerge over the next year and beyond. If all goes according to plan and the tax cut proves effective for the state, Governor Wolf would like to see the CNIT rate get as low as 4.99% over the next few years. This target may seem aggressive, but can be achieved as long as economic growth follows the predicted trajectory.
Despite the optimism that this bill has garnered, it is important to note that House Republicans projected that state tax revenues will drop by $400-$450 million annually beginning in 2023. Legislators hope that this reduction in revenue will be offset and exceeded by the additional revenue brought in by new and existing businesses within the state resulting from the prosed business-friendly tax changes.
Under the recently-passed legislation, further reductions to the CNIT rate are slated for future years, as long as a budget surplus of more than $500 million can be maintained. If State revenues stay at a comfortable level, this rate will continue to fall to below 8% by 2025. The proposed legislation also would extend net operating loss (NOL) deductions from 40% to 45% at the beginning of 2023. This figure has the potential to reach as high as 50%, contingent on a budget surplus of at least $750 million in the next two fiscal years.
The primary objective of this corporate tax cut, the first reduction to the CNIT since 1995, is to create a more attractive and forgiving financial environment. State legislators hope to encourage existing businesses to expand and new businesses to stake claim in Pennsylvania to promote job creation, to help the many citizens who are still looking for work. Making the State’s CNIT more competitive with the rate in other states is intended to discourage businesses from incorporating in or relocating to another state and help keep essential jobs within the Commonwealth. If successful, these efforts should not only improve economic prosperity for the State as a whole, but also help all Pennsylvania businesses and individuals continue to recover from hardships caused by the COVID-19 pandemic.
Only time will tell how effective this change will be in practice, but on paper, this is a major step in the economic growth of the state. It will be important to monitor the effects over the next year and beyond. The tax professionals at Grossman Yanak & Ford LLP will continue to post updates on this and other relevant issues. If you need assistance with your corporate or individual tax planning or compliance, please reach out to us at 412-338-9300.