Some taxes are so bad, and do so much damage to the economy, that tinkering with them year after year does little good. Among the list of job-killing business taxes, Pennsylvania’s Capital Stock and Franchise (CS&F) tax has earned the title of Public Enemy Number One. A top task for 2000 is to place this damaging tax in the state’s gunsights and put it out of our misery.
The CS&F tax takes a heavy toll on the state’s economy, since it is owed even if a business loses money and makes it harder for an employer to accumulate the capital needed to create family-sustaining jobs. Pennsylvania is one of just 13 states that has both a corporate net income tax and a CS&F tax. Even worse, among those 13, Pennsylvania has the dubious distinction of being the state with the highest CS&F rate.
The economic facts show that merely reducing the CS&F rate is insufficient to ensure that Pennsylvania can compete aggressively and effectively with other states that are not burdened with such excessive business taxation. Between 1993 and 1998, during a period of strong nationwide economic growth, Pennsylvania’s economy managed to create jobs at barely half the national rate. The lack of job growth also manifested itself in a meager population growth of 0.2 percent between 1992 and 1998 – a fraction of the national growth rate of 6 percent.
The renewed focus on the CS&F tax grew out of important recent legislative action that was sparked by a strong coalition of business groups to restore the so-called “manufacturers’ exemption” for the tax. A state court had tossed out the exemption, and this action threatened to impose a $700 million tax increase on Pennsylvania employers. However, this legislative repair will expire next fall, which creates a very real opportunity for business and labor to work together to phase out a tax that hurts employers, shareholders and workers alike. Gov. Ridge and key legislative leaders have signaled that they are ready to focus on dramatically cutting the CS&F tax – or finishing it off altogether.
This will not be an easy task, but the benefits from eliminating the tax will far outweigh the budgetary challenges of wiping it off the books. In 1997-98, the CS&F fax poured $1 billion into the state treasury, and this year’s take has been estimated to be as high as $1.2 billion. This comes at a time when the state is collecting record amounts of tax revenue – and the Administration recently predicted a $412 million budget surplus for this fiscal year. While the perennial existence of budget surpluses has helped to stabilize the state’s fiscal position and provided insurance against future tax increases, the simple fact remains that taxpayers are being consistently overcharged. Over the past five years, Pennsylvania’s General Fund surpluses have been estimated at more than $2 billion, and while some of that money has been returned to taxpayers via tax cuts, it has also fueled ever-greater state spending increases. From 1995 to 1998, in real terms, Pennsylvania’s actual tax revenues were $1.045 billion higher than projected—and actual state spending was $623 million greater than originally proposed in Gov. Ridge’s budgets.
Here is how the state could remedy this situation: by returning more of these dollars to taxpayers and helping to jump-start job creation. By cutting the CS&F tax by $200 million in next year’s budget and then creating a firm, immovable schedule to phase out the tax over the following five years, Pennsylvania would send an unmistakable signal to the rest of the country that it is thoroughly committed to taking the tough steps to shed its reputation as a high-tax state. The key to this is not only the use of future surplus dollars, but far greater restraint in state spending. For example, if state officials had merely kept General Fund spending increases in line with the rate of inflation in its last two budgets, Pennsylvania would have spent approximately $1.1 billion less than it actually did—enough to have cut the CS&F tax by more than half during that time period.
This tax is a cancer on Pennsylvania’s economy. The prescription to stop it from further sapping the life out of job creation in the state is radical surgery that removes it from the books, never to return.
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Grant Gulibon is Senior Policy Analyst at the Commonwealth Foundation, a non-partisan, non-profit public policy research and educational institute based in Harrisburg, Pa.