Life of capital stock, franchise tax may be extended
Gladys Knox, head of a local freight-hauling company, has not given her 45 drivers a raise in three years. Not that she wouldn't like to pay more.
To a large extent, she blames Pennsylvania's capital stock and franchise tax — an odd hybrid tax that's levied on a company's earnings and its capital assets. Once due to be eliminated in 2009, the tax would not be phased out until 2010 under the state budget recently proposed by Gov. Mark Schweiker.
"I paid over $23,000 for that tax last year," said Knox, president of Wright Motor Lines, Armagh, Indiana County. "That's enough to pay for a new piece of equipment or to have all my drivers get a raise."
Roughly 68,000 companies — or about 85 percent of the businesses in Pennsylvania — are subject to the tax each year. If Schweiker's proposal is adopted, those companies will pay an extra $91 million in taxes this year, according to an estimate released Tuesday by the Pennsylvania Manufacturers Association.
Over the next eight years, those companies will pay more than $1.03 billion in additional capital stock and franchise taxes, the Harrisburg-based lobby group claims. The larger levy comes from stretching out the tax's life one additional year. (Please see related chart.)
"I assume the governor is trying to find ways to plug an $800 million hole in the budget," said Jim Panyard, executive director of the Manufacturers Association. "Obviously, we don't feel that's the way to fill the hole."
Schweiker proposes to change the current mill rate to 6.99, from 6.49, retroactive to Jan. 1. The plan would cut the rate to 6.49 next fiscal year, when it otherwise would have been lowered to 5.49 mills.
Steve Aaron, the governor's press secretary, said Schweiker, too, views the levy as "an onerous tax" and one that "perpetuates the idea that Pennsylvania is unfriendly to jobs." But state law requires the governor to submit a budget proposal that balances, which meant either cutting back or taxing more.
"Unfortunately this year, we're facing a revenue short-fall that's in excess of $700 million," said Aaron, regarding tax coffers that have suffered from the mild recession. "And we think this is a perfectly reasonable approach to dealing with this tax."
By contrast, Aaron notes, New Jersey's governor yesterday proposed to increase state corporate taxes by some $1.9 billion. So, Pennsylvania's slower phase-out of the capital stock and franchise tax, he submits, is a less draconian measure than in other states.
Still, Pennsylvania is an odd-ball for having the tax at all, say opponents. Only three others — Alabama, Kentucky and Rhode Island — assess a capital stock and franchise tax.
"It's difficult to explain to legislators how important this is to the economic climate in Pennsylvania," said Panyard.
Knox notes that many of her freight-hauling competitors — such as US Express, based in Tennessee — don't pay a capital stock and franchise tax.
By Pennsylvania law, legislators must pass a state budget for the next fiscal year before they recess June 30. Schweiker submitted his proposal Feb. 5.
Republican gubernatorial candidate and state attorney general Mike Fisher urged law makers Monday to maintain the schedule of phasing out the tax by one mill per year until it is eliminated in 2009. That plan became law under former Gov. Tom Ridge in 2000.
The state exempts certain businesses from paying the capital stock and franchise tax. A research and development firm does not pay the tax at all. A manufacturer is assessed only on the income and capital assets not directly associated with manufacturing activities, such as administrative or maintenance operations.
In Pennsylvania, the levy adds about 6 percent to the average company's tax bill, the National Federation of Independent Business estimated in 1998.
Wright Motor Lines normally increases its drivers pay every couple of years, said Knox. They haul general freight, such as tires or windows or tooling equipment from corporate neighbor Kennametal Inc. of Latrobe.
"If they'd get rid of that tax, I'd give that money right to my drivers as a raise," said Knox, who also blames the rising cost of health care for today's tight profit margins.
"Then, they'd go out and spend it and help stimulate the economy," she added. "Now, what's wrong with that?"