Pennsylvania House of Representatives Passes Suspension of Tax Credits

June 26, 2014

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:

  1. Property and Casualty Insurance Guarantee Association Credit
  2. Research and Development Tax Credit
  3. Resource Enhancement and Protection Tax Credit
  4. Historic Preservation Incentive Tax Credit
  5. Community-Based Services Tax Credit
  6. Job Creation Tax Credit
  7. Mobile Telecommunications Broadband Investment Tax Credit
  8. Innovate in PA Tax Credit
  9. Neighborhood Assistance Tax Credit
  10. Keystone Special Development Zone Tax Credit
  11. Keystone Innovation Zone Tax Credit
  12. KOZ, KOEZ and KOIZ tax credits
  13. Promoting Employment Across PA.

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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