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Expert: Pennsylvania corporate tax rate may deter growth

| Saturday, March 3, 2018, 7:30 p.m.

On paper, Pennsylvania has the second-highest corporate net income tax rate in the country, according to a report by the state's Independent Fiscal Office.

When companies look around for a place to build, they see the rate — 9.99 percent — without necessarily knowing that they're unlikely to pay that amount, said Ed Jenkins, an accounting instructor at Penn State.

“That's not a good thing from a development perspective,” he said. “What company in its right mind would come here?”

Pennsylvania could lower the rate without losing revenue if it followed a practice adopted by several other states of using “combined reporting” for the corporate net income tax, he said.

About three-quarters of the 113,400 businesses in Pennsylvania that are theoretically liable for paying the tax didn't pay anything in 2015, figures from the state Revenue Department show.

While some didn't owe taxes because their losses exceeded revenues, others used what is known as the “Delaware Loophole” to shift revenues to out-of-state subsidiaries.

An “addback” provision intended to cure the problem took effect in 2014 and recaptured about $32 million in taxes, according to the agency.

Gov. Tom Wolf has proposed eliminating the loophole entirely by changing how companies would calculate their net incomes while reducing the tax rate. His proposal would bring in more than $300 million in extra taxes in 2022 even after reducing the rate to 7.99 percent, the agency estimates.

The tax generates about $3 billion a year, or about 4.5 percent of the $66 billion in total taxes collected by the state and local governments, according to the Independent Fiscal Office report.

That $3 billion equaled about 0.48 percent — 10th in the nation — of the total personal income residents made in 2015, according to the report.

“That's not a smart calculation,” said Robert Strauss, professor of economics and public policy at Carnegie Mellon University.

The figure is somewhat misleading because corporate net income tax collections are based on corporate profits rather than personal income.

The report calculates “effective” tax rates using each state's total personal income because it allows for comparisons, said Matthew Knittel, director of the Independent Fiscal Office.

Since no one publishes the corporate profits in each state, there's no way for the office to make the calculation using them, he said. Using personal income provides “a standardized, though limited, way to compare tax systems across states,” he said.

The report has several limitations, Jenkins said, but it's a good effort given the office's limited resources.

While he has doubts about the corporate net calculation, Strauss had the same conclusion as Jenkins about what the state should do with the tax.

“The rate should be lower. The apportionment formula should be broadened,” he said.

Overall, the report shows that Pennsylvania's total tax burden is higher than average but near the middle of the pack. The state ranked 20th out of the 50 states with its $66 billion in taxes, equating to about 10.45 percent of total personal income. The national average was 10.12 percent. New York was highest at 15.53 percent; Alaska was lowest at 7.17 percent.

That may be a surprise to people who think of Pennsylvania as a “high-tax” state, but “we've never been near the top,” said Chris Briem, a University of Pittsburgh economist.

With the state borrowing $1.5 billion in an attempt to balance its budget, the question of how Pennsylvania compares to other states takes on a political angle, Jenkins said.

“We have some gargantuan problems in the commonwealth in terms of making ends meet,” he said.

There are plenty of strong opinions about how to handle them but no consensus other than not wanting to move up the comparison list, he said.

“You don't want to do anything to make us higher,” Jenkins said. “We already are above average for the 50 states.”

While state lawmakers focus on tax collections as the solution, that's only half the story, Strauss said.

“You have to look at what people are getting for their money,” he said. “There's a lot of corruption and a lot of inefficiency.”

The public's perception that it is not getting good value for its money feeds the anger over the amount of the taxes, but lawmakers are “uncomfortable talking about service quality because they don't pay attention to it,” Strauss said.

Brian Bowling is a Tribune-Review staff writer. Reach him at 724-850-1218, or via Twitter @TribBrian.

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