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Report: Pennsylvania's business climate remains unfriendly

| Wednesday, Oct. 10, 2012, 12:01 a.m.

Pennsylvania is home to the second-highest corporate tax rate in the country, a dubious distinction that saps its ability to lure employers seeking a business-friendly climate to open or grow, according to a report released Tuesday by the Tax Foundation, a Washington-based think tank.

“Even in our global economy, a state's strongest and most immediate competition often comes from other states,” said Scott Drenkard, an economist with the Tax Foundation.

It's not all bad news.

Pennsylvania placed 19th among 50 states and the District of Columbia when the study took into account personal income, excise and business tax rates. It cited Pennsylvania's 3.07 flat personal income tax rate, one of the lowest in the country, and a mid-range base sales tax of 6 percent as points that offset the state's poor showing in the corporate tax category.

Pennsylvania's corporate net income tax of 9.99 percent produced $2.13 billion in the 2010-11 fiscal year, up from $1.79 billion in 2009-10, records show. Only Iowa imposes a higher corporate rate at 12 percent.

“It's why we have to outright bribe businesses to move here,” said Leo Knepper, executive director of Citizens Alliance of Pennsylvania, a nonprofit group that promotes small-government policies. “If we would take the energy that we're putting into these targeted incentives and make the tax climate more competitive, we'd be a lot better off.”

Knepper cited D.G. Yuengling & Sons owner Dick Yuengling's recent comments that he would likely expand beer-making operations next year outside Pennsylvania because other states offer more competitive tax rates and incentives. Yuengling, founded in Pottsville, became the nation's largest American-owned brewery last year.

Michael Wood, a researcher with the Pennsylvania Budget and Policy Center, a liberal think tank, said the tax environment isn't as dire as the Tax Foundation's report suggests. He said few corporations actually pay the full 9.99 percent because of loopholes and exceptions, and recent changes to the tax code are phasing out the capital stock and franchise tax by 2014, which taxes a corporation's capital stock value.

“The share of what they've been paying for in the total budget has been going down for many years,” Wood said. “That revenue was not replaced, and businesses have gotten a pretty good deal with some of the other tax changes that have happened. They haven't gotten to the corporate income tax rate yet, but it's really because (the state) can't afford to do it.”

Each percentage point decrease of the corporate tax rate would cost the state about $250 million in revenue, a tough hurdle since Pennsylvania is required to pass a balanced budget each year, said Sam Denisco, vice president of government affairs with the Pennsylvania Chamber of Business and Industry.

“It's a major deterrent to business attraction and expansion,” Denisco said.

Legislation that would have reduced the rate to 6.99 percent over six years failed to receive approval in the state Senate this year. But other business-friendly tax reforms passed as part of Gov. Tom Corbett's 2013 budget package, said Steve Kratz, a spokesman for the Department of Community and Economic Development.

“Our history of being a high business tax and high regulatory state is going to take some time to overcome,” Kratz said.

Kratz noted legislation Corbett signed that eliminates the inheritance tax and real estate transfer tax on family farms and taxes Pennsylvania companies based solely on sales, rather than also on the number of employees and buildings.

“We have a much better business climate than we did when Corbett took office,” Kratz said.

Jeremy Boren is a staff writer for Trib Total Media. He can be reached at 412-320-7935 or jboren@tribweb.com.

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