The New Pennsylvania Slogan: Pay Me Now and Pay Me Later

Remember the television commercials promoting an automotive oil filter that featured the statement “You can pay me now, or pay me later”? Well, when it comes to business taxes, Pennsylvania may soon have a new slogan of its own—“You can pay me now, and pay me later.”

That’s because Gov. Ed Rendell’s “Plan for a New Pennsylvania” would boost state business taxes and fees by more than $876 million in the coming fiscal year and by an estimated $8.65 billion over the next eight years.

Of course, businesses ultimately don’t pay taxes—they just pass them on to us workers and consumers—but Pennsylvania job creators of all types, from the smallest mom-and-pop shops to the state’s remaining major corporations, will definitely feel the additional financial burden.

No one doubts that Gov. Rendell understands the need for statewide economic rejuvenation. Nevertheless, it is difficult to see how his strategy of draining billions of dollars from the Commonwealth’s economic engine over the next eight years will somehow improve our business climate and stimulate the economy. Indeed, using data from the Rendell Administration’s budget and revenue projections, it’s clear that the tax plan’s net impact on Pennsylvania businesses would be financially devastating.

For example, the Capital Stock and Franchise Tax—a tax that even Gov. Rendell cites as a “job crusher”—will be retroactively increased from its current 6.99 mills to 7.24 mills, again making it the highest in the nation and delaying its scheduled phaseout by one year. This change will cost businesses an additional $1.4 billion over the next eight years.

At the same time, the Rendell plan would also boost the Corporate Net Income Tax (CNI) by $106 million in the coming fiscal year by changing state laws allowing the use of out-of-state holding companies. Over the next eight years, this change will add $870 million to business tax bills, simply making Pennsylvania, which already has the highest effective corporate income tax in the nation, even more unattractive to new businesses.

While most people assume that the Personal Income Tax (PIT) tax only affects individuals, it is estimated that business partnerships, “S”-corporations, limited liability corporations, and other similar business entities currently generate 14 percent of PIT revenues. Therefore, Gov. Rendell’s proposed 34 percent increase in the PIT would take an additional $3.2 billion in pass-through business income over the next eight years.

Further still, Gov. Rendell’s proposed expansion of the gross receipts tax to cover cellular phones and other telecommunications operations would generate an additional $2.5 billion in tax revenues from business over the next eight years, while his proposed one-time assessment on health insurer reserves for nursing home costs is estimated to generate $145 million in the coming fiscal year. Another $432 million would flow into state tax coffers over the next eight years with the proposed tripling of the “Beer Tax,” while an additional $92 million would be generated under a proposal that would require pass-through businesses to withhold state personal and corporate taxes from nonresident owners and shareholders, beginning next January.

Finally, under Gov. Rendell’s proposal, additional miscellaneous business fees will bring in $206 million over the next eight years, and new tax and license applications will mean another $203 million from business during the same period.

To be fair, it isn’t all bad news for Pennsylvania businesses. Nearly 4 percent of these additional taxes and fees would be offset by an expansion of Pennsylvania’s research and development tax credit for certain businesses from the current $15 million per year to $60 million per year, for $360 million in savings over the next eight years. This reduces the 8-year net business tax and fee increase from over $9 billion to just under $8.65 billion, assuming that none of these taxes and fees would be raised again until 2010 or later.

Of course, this massive tax and fee increase is not a fait accompli, but is simply Gov. Rendell’s proposal. Ultimately, it will be the General Assembly that decides whether or not to implement the governor’s Pay-Me-Now-and-Pay-Me-Later “Plan for a New Pennsylvania.”

The irony is that despite the proven effectiveness of tax reductions at stimulating economic growth, Gov. Rendell is arguing that tax increases on businesses will spur investment and job creation in Pennsylvania. However, the historical and economic reality is that the next state to successfully tax itself to prosperity will also be the first.

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Grant R. Gulibon is senior policy analyst at the Commonwealth Foundation, an independent, non-profit public policy research and educational institute based in Harrisburg, Pa.