Mailbag: Would Eliminating Tax Credits Really Lower Taxes?

Last month, I testified to the House Finance Committee that targeted tax breaks and corporate welfare subsidies prevent across-the-board tax rate reductions that would benefit all Pennsylvanians. As a follow-up question I was asked: If Pennsylvania eliminated its tax credit/grant programs, how much could the Corporate Net Income Tax be lowered?

We identified $381 million in grant and tax credit programs in the 2012-13 Budget to eliminate. This reduction could be used to lower the corporate tax rate by 1.87 percent, dropping the tax rate down to 8.12 percent. And that’s assuming a purely static model, not factoring in new businesses attracted with the lower rate. 

Instead of having the second-highest corporate tax rate in the nation (and the highest flat rate), Pennsylvania would be lower than 13 other states and DC. 

Corporate Welfare Grant & Tax Credit Programs 2012-13 Budget (Thousands)
General Fund
Ben Franklin Tech Development Authority Transfer $14,500
Commonwealth Financing Authority Transfer $85,519
Pennsylvania First $29,500
Partnerships for Regional Economic Performance $11,880
Discovered in PA Developed in PA $9,900
Infrastructure and Facilities Improvement Grants $19,409
Industry Partnerships $1,613
Tax Credits
Film Tax Credit $60,000
Job Creation Tax Credit $10,100
Research and Development Tax Credit $55,000
Keystone Opportunity Zone $24,200
Keystone Innovation Zone $25,000
Alternative Energy Production Tax Credit $7,000
Neighborhood Assistance Programs $18,000
Resource Enhancement and Production Tax Credit $10,000
Total Spending and Credits $381,621

This is the approach Michigan took this year when it eliminated hundreds of millions of dollars in tax credits as part of its transition to a 6 percent flat corporate tax. According to the Tax Foundation’s 2013 State Business Tax Climate Index, this change moved Michigan from having one of the most destructive corporate tax rates to the seventh best

Making Pennsylvania more business-friendly would significantly reduce the need for corporate welfare. Until this happens, Pennsylvania is merely renting jobs with its economic development spending