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Pennsylvania Governor Wolf Proposes Aggressive Shift in Tax Policy

In March 3, Governor Wolf made his first budget address, and his $30 billion budget proposal has a lot of moving parts. The various proposed changes to the tax code are driven by Governor Wolf’s initiative to better and more fairly fund the educational system, as well as address the significant pension and infrastructure issues facing Pennsylvania. A summary of the key proposed changes is as follows:

  • Personal Income Tax
    • Increase the personal income tax rate to 3.7% from 3.1%
    • Provide a threshold exemption level of income for low income taxpayers
     
  • Sales Tax
    • Increase the sales tax rate to 6.6% from 6.0% (the rate in Philadelphia will stay at 8.0%)
    • Broaden the scope of enumerated taxable services to include professional services (such as legal and accounting fees) and reduce exemptions
     
  • Corporate Tax
    • Institute a mandatory combined filing regime for corporate tax purposes
    • Incrementally reduce the corporate tax rate to 4.99% from 9.99% by the 2018 tax year
    • Reduce the NOL Cap to the greater of $3M or 12.5% of taxable income from $5M or 30% of taxable income (this goes against recent increases in the cap to be more taxpayer-friendly)
    • Terminate the capital stock/foreign franchise tax (once and for all)
     
  • Credits and Incentives
    • Restore and increase funding for a variety of credits and incentives to boast investment in manufacturing and employment in the commonwealth
     
  • Severance Tax
    • Institute an extraction tax of 5% on natural gas and  an additional tax on gas reserves
     

Approximately $1B of the tax increases are targeted to reduce local property taxes, and level the educational funding playing field by providing greater subsidies to the school districts that have a challenged tax base. Another significant chunk will be sent to Philadelphia to help expedite reductions in business, wage, sales, and property taxes. This is interesting as Philadelphia Mayor Nutter just proposed an almost 10% increase in the Philadelphia property tax rate to help plug the school district’s budget.  (This is on top of the 10% surcharge that was supposed to be temporary.)

The Governor’s proposals were instantly hit with skepticism by the Republican-controlled legislature. Which of these tax proposals will survive and be enacted in June/July/August is anyone’s bet, but what is certain is that there will be change starting with the 2016 tax year. 

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