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Why PA Corporations Don’t Pay Taxes
Gov. Rendell and his allies and shills that call on higher taxes for businesses like to claim that 70% of Pennsylvania corporations don’t pay any taxes. This statistic is true (applying to the Corporate Net Income Tax, not property taxes, sales taxes, payroll taxes, gross receipts taxes, and the rest that businesses pay) but ignores two major factors. First, many corporations are on the books, but aren’t actually functional. Second, the corporate income tax is a tax on profits, and many business lose money.
The most recent PA Department of Revenue data on Corporate Income Taxes (from 2003) shows some interesting trends:
- While 71% of CNI returns had no tax liability, over half of corporations filing returns didn’t make a profit.
- Very few get out of paying PA taxes based on apportionment, and about 12% eliminate their burden via the Net Operating Loss carry forward and other credits.
- More striking, PA corporations lost $19 billion dollars in 2003. Yet the state still collected $1.3 billion in corporate income taxes.
- Among corporations that owed some CNI tax, the effective tax rate is 9.3%.
| 2003 PA Corporate Net Income Tax Data | ||
| Number of Returns | Percent of Returns | |
| Total Returns | 130,118 | 100.0% |
| With Tax Liability <=0 | 92,479 | 71.1% |
| With Total Net Income <=0 | 69,086 | 53.1% |
| With Income Apportioned to PA <=0 | 6,969 | 5.4% |
| NOL and Other Credits/Deductions Eliminate Tax Liability | 16,424 | 12.6% |
| Amount with CNI Liability | 37,639 | 28.9% |
| Amount (thousands) | ||
| CNI Collected | $1,342,682 | |
| Total Income of PA Corps | -$18,984,099 | |
| Total Income of PA Corps – PA Portion | -$4,233,721 | |
| Total Income of Those with Liability | $171,862,616 | |
| Total Income of Those with Liability – PA Portion | $14,382,008 | |
| Effective Tax Rate | 9.3% | |
| http://www.portal.state.pa.us/portal/server.pt/community/reports_and_statistics/17303/corporation_tax_statistics/602444 | ||
Rather than suggest corporations should pay more in taxes, it is more rational to suggest they pay less. Corporate taxes are passed on to shareholders, to consumers in higher prices, and to workers in the form of lower wages. Indeed higher state corporate income tax rates result in lower wages.
Pennsylvania’s corporate income tax rate makes it among the least competitive places to do business in the world. A recent report puts Harrisburg and Philadelphia as two of the five international cities with the highest corporate income tax rates. Contrast that with the case of Ireland, which cut its corporate income tax rate to the lowest of the OECD nations, and saw its economy boom.
Indeed, a good case could be made that the best corporate income tax rate is zero. A proposal to do exactly that has been floated in Virginia.
Pennsylvania wouldn’t really lose much tax revenue from such a proposal – corporate income taxes ($183 per person) generate only about 2.4% of state and local government revenues ($7,465 per person) in the state – while the economic benefit would be great. And to “pay for it” – the state could repeal all its “economic development” spending and tax breaks, which at $750 million per year, rank second highest among the 50 states.