Gary Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
A seminal thinker and world-renowned expert on international trade, commerce, and taxation, for the past...
The Pennsylvania House of Representatives has passed a measure (HB 2188) to suspend 13 different tax credits for two years, thereby reducing the state’s deficit by $48 million. According to the associated fiscal note, the tax credits suspended would be:
Most of these credits amount to narrow carve-outs for favored industries and firms, and thus their elimination would generally be good tax policy as a way to make the tax code more neutral. Furthermore, Pennsylvania has recently been considering a few good adjustments for the tax code that would partially relieve the increased tax burden once these credits are suspended. HB 2400, HB 2401, and HB 2402 would raise the depreciation deduction cap for S Corporations, permit small businesses to use the net operating losses deduction, and conform Pennsylvania to federal standards allowing a business to swap like assets without paying taxes. No fiscal note has been provided to determine how large a revenue impact these provisions may have.
If Pennsylvania both suspends (or, better yet, eliminates) many of these distortionary tax credits and adopts the positive changes in HB 2400, HB 2401, and HB 2402, it would be a meaningful improvement in Pennsylvania’s business tax climate (the Keystone State currently ranks 24th in our State Business Tax Climate Index).
However, aside from these incremental changes in tax credits and deductions, there is a bigger problem in Pennsylvania’s tax climate: its second-highest-in-the-nation state corporate income tax. At 9.99 percent, Pennsylvania’s burdensome corporate rate makes it uniquely profitable for firms to pursue special credits and carve-outs. With at least some of those credits suspended, more Pennsylvania firms will foot the full freight of the corporate tax rate. In fact, shortfalls like the one Pennsylvania is currently experiencing are particularly likely in states highly dependent on corporate taxes, the most volatile of all major taxes. By relying more on taxes with broader bases and lower rates, Pennsylvania could meet its financial needs with less volatile revenue streams, and enjoy the benefits of a more pro-growth tax climate.
Read more on Pennsylvania here.
Read more on tax credits and deductions here.
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