“Babe, I Got You Babe”-Will the Expiration of the Capital Stock and Franchise Tax Be Delayed Again?

Sound the 6:00 a.m. alarm and cue Sonny and Cher! “Groundhog Day” is previewing in Harrisburg with rumblings that the General Assembly may yet again delay the expiration of the Capital Stock and Franchise Tax (CSFT). One business tax expert sarcastically characterized CSFT as the go-to tax if your aim is to stunt business growth.

Extending the life of CSFT would mark the sixth time over the past ten years that lawmakers have balked at honoring the tax’s scheduled demise from the tax code. Just a year ago, the tax was granted a two-year stay beyond December 31, 2013, one of the many dates promised for elimination.

Now some lawmakers are said to be eyeballing the tax again as they scramble to find the revenues needed to approve a balanced budget by the June 30 deadline. General Fund tax revenues over the current fiscal year have come in lower than anticipated due to changes in federal tax policy, but much of the fiscal pressure is attributable to the cost of funding a run-away public pension system.

“Tom Ridge was correct in 2000 when he called the CSFT a stupid, job-killing tax and set it on a path to extinction,” said PMA Executive Director David N. Taylor. “Under the original Ridge phase-out plan, the Commonwealth would have stopped collecting CSFT on December 31, 2008. We are five years and billions of dollars in uncompetitive higher taxes beyond that point. The time has come for Harrisburg to hand in this overdue assignment.”

The tax, even at its current reduced rate of 0.89 mills for tax years beginning 2013 and 0.67 mills for 2014, is a drag on Pennsylvania’s ability to compete with other states for attracting business investment. Pennsylvania is one of the very few states to tax both a company’s assets and income. Furthermore, we compound the damage with a 9.99 percent corporate income tax rate, the highest flat tax in the nation.

The most recent state competitiveness study “Rich States, Poor States” from the American Legislative Exchange Council (ALEC) ranks Pennsylvania 33rd. One of the publication’s authors, Jonathan Williams, Director of the Tax and Fiscal Policy Task Force at ALEC, describes the publication as a forward-looking measure of how each state can expect to perform economically based on 15 policy areas that have proven, over time, to be the best determinants of economic success.

The CSFT is a big part of a bad tax policy. “Pennsylvania’s capital stock and franchise tax is a job killer, plain and simple,” Williams said. “As other states have eliminated this type of burdensome tax, Pennsylvania is still adding this unnecessary cost to operate a business within the state.”

But the burden of the tax extends beyond the cost compliance, according to Stewart M. Weintraub, who has chaired or co-chaired the state and local tax committee for the Greater Philadelphia Chamber of Commerce since 1983. He said the tax makes it difficult for businesses to plan for the future. “It’s definitely an economic deterrent. If they freeze it at the current rate it sends a negative message,” Weintraub said. “If they increase the rate the message gets even worse.”

Voting for an extension of the CSFT is a clear, if unintended, message to business investors to take a pass on Pennsylvania. Choosing this path would also sidestep the real problem: chronic overspending. From the beginning of his first campaign for governor, Tom Corbett has correctly identified Pennsylvania’s predicament as a spending problem, not a revenue problem. The budget the governor proposed in February predicts increased revenues of $900 million. But the Commonwealth’s employer share of teacher and state employee pension costs will claim $700 million before any other new spending can occur. What’s more, the Department of Revenue estimates the Commonwealth’s total pension costs will more than double to be $4.7 billion by 2017-18 if changes aren’t made in the pension system.
By extending the CSFT, businesses are being asked to fund a cost that can’t be blamed on inflation or the year-to-year growth of government programs. The rising pension costs are purely a product of poor management at the state level. The $50 billion unfunded liability in the state employee system (SERS) and the public teachers system (PSERS) stems from the Commonwealth’s underfunding for more than 14 years. Additionally, in 2001, costs in the system shot up with a vote to increase the multiplier used in the formula to calculate the pensions.
Proposed solutions do exist. One from State Rep. Glen Grell (R-Cumberland) attacks the problem on three levels: it establishes a cash balance plan, which accumulates value like a defined contribution plan, through employee and employer contributions; it includes a strategic borrowing plan against the General Fund, which, Grell says, would incur no new debt since the Commonwealth already owes SERS and PSERS $45 billion; it asks current employees for minor modifications in their plans, including a change that would make lump sum withdrawals from the pension system actuarially neutral. Grell estimates the plan would save up to $40 billion over 30 years.

The General Assembly still has time yet this fiscal year to fix the real problem instead of making an already bad situation worse by extending the life of the CSFT.

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Nothing contained here should be considered as an attempt to aid or hinder the passage of any legislation before the General Assembly.

The views presented here are those of the author and not necessarily those of the Susquehanna Valley Center.