This story originally appeared on Spotlight PA.
Amid budget negotiations, Democratic Gov. Tom Wolf and legislative Republicans are weighing a major tax cut on Pennsylvania corporations.
The state levies a 9.99% tax on corporate net income, the second-highest rate in the country.
Cutting that tax has become a rare area of bipartisan agreement between the Republican-controlled General Assembly and Wolf, a former businessman.
But exactly how much to lower the rate and how quickly is the subject of debate. Below we explain Pennsylvania’s corporate net income tax and break down the arguments for and against lowering it:
What is the corporate net income tax rate?
The state’s corporate net income tax is a tax that corporations pay on the profits made within the borders of Pennsylvania.
About 39% of the roughly 92,000 corporate filers in Pennsylvania pay the tax, according to the Pennsylvania Department of Revenue.
Marc Stier — director of the Pennsylvania Budget and Policy Center, a project of the progressive Keystone Research Center think tank — said that so few corporations pay the tax because of a major loophole.
Under the current law, corporations can shift their profits from within the state’s border to another state with a lower tax rate, or no tax at all, a method Stier called “creative accounting.”
Ohio does not have a state-level corporate net income tax, while the rate in Maryland is 8.25%. New York uses a scale based on annual income that maxes out at 7.25% for its wealthiest corporations.
New Jersey also has different rates based on total income, topping out at 11.5% for corporations with a net income of over $1 million a year. Every other category of income below that figure has a 9% tax or less.
State-implemented taxes are paid on top of the federal corporate net income tax, which was lowered to 21% in 2017 by the congressional Tax Cuts and Jobs Act.
What are the arguments for lowering it?
Supporters of lowering the current corporate net income tax rate argue that nearby states offer more appealing tax rates to businesses.
“We think that there’s no more important policy measure that Harrisburg should act on this year than an immediate material reduction of the CNI rate,” said Matt Smith, president of the Greater Pittsburgh Chamber of Commerce. “It puts us at a real disadvantage when we’re trying to attract, particularly large-scale manufacturing [corporations].”
Smith cited a recent decision by tech company Intel to locate a new $20 billion project for a computer chip factory in Columbus, Ohio. He blames the current tax rate for keeping Pennsylvania cities like Pittsburgh out of contention for the facility.
A research paper published by the office of state Sen. Ryan Aument (R., Lancaster) supports Smith’s argument, finding that the “states with the lowest CNI rates experienced 10% higher growth in state revenues from 2000 to 2020 compared to those states with higher CNI rates.”
The same paper also found that lowering the rate by one point could increase Pennsylvania’s population by roughly 18,000 people, while also raising the wages of workers in the state.
Jason Gottesman, a spokesperson for state House Republicans, said that lowering the tax could “strengthen our commonwealth in a natural growth way” and make the state more competitive in attracting new businesses.
“I think everybody’s on the same page, generally, that the current 9.99% rate is a big stop sign,” Gottesman said. “When people want to come look and invest in Pennsylvania, we want to make sure that we’re reducing that in a way that actually makes Pennsylvania competitive.”
How much do lawmakers want to lower it?
Despite the agreement, no one proposal has emerged as the favorite among lawmakers.
In late April, the state House voted 195-8 to pass a bill that would reduce the current rate by one percentage point to 8.99% on Jan. 1, 2023. Ultimately, the bill seeks to lower the tax by two percentage points, to reach 7.99%, by 2025.
The state House bill has yet to advance in the state Senate, where lawmakers have been crafting their own proposals.
On Wednesday, the state Senate voted 31-19 to pass a bill sponsored by state Sen. Michele Brooks (R., Mercer) that would reduce the tax by half a percentage point every year, over the course of six years, until it reaches 6.99%.
A bill from Aument passed by the same margin. It would lower the tax to 6.99% by 2024 and then to 5.99% by 2025 if certain benchmarks are reached.
Wolf has also weighed in with a proposal to gradually lower the rate from 7.99% in 2023 to 5.99% in 2027.
Legislation introduced by Democrats to advance Wolf’s plan includes so-called “add-back provisions” designed to prevent corporations from taking deductions on costs like management fees that lower their overall tax burden.
Smith of the Greater Pittsburgh Chamber of Commerce said that he supports the “aggressive phase-down” featured in many of the proposals on the table, but he does not support the provisions in Wolf’s plan.
Elizabeth Rementer, a spokesperson for Wolf, said that the governor appreciates both chambers’ interest in lowering the tax, and that he is working to reach an agreement that would satisfy everyone involved.
“The governor is serious about lowering the CNIT, which he has proposed throughout his administration, and believes this will help level the playing field and allow Pennsylvania [to] become more competitive with surrounding states and improve its business climate,” she said in an email.
What are the arguments for leaving it alone?
Some lawmakers disagree with the effort to slash the corporate tax.
State Rep. Sara Innamorato (D., Allegheny) was one of the handful of no votes when the state House proposal passed this spring.
“You know, we want to talk about actually impacting people’s lives and having a positive impact on our economies,” Innamorato said to Spotlight PA. “Simultaneously, we need to be focusing on putting money [in] the hands of working-class and middle-class people not, you know, funneling a tax break to the top and expect it to trickle down.”
Innamorato would rather see funds appropriated to small business grants and loan products that would “help our independent businesses and our main streets thrive.” She came to many of these conclusions after consulting with Stier, director of the Pennsylvania Budget and Policy Center.
In a new study, Stier found that the state House proposal to cut the tax would cost Pennsylvania $600 million in revenue per year once the reduction reaches 7.99%, and only generate roughly 23,000 jobs over a course of 10 years — estimating that only 20% of those jobs would go to current Pennsylvania residents.
(An analysis of the bill prepared by the state House Appropriations Committee reported that “each 1% of the CNIT currently generates approximately $400 to $450 million in a full tax year.”)
Stier believes that Pennsylvania should adopt “combined reporting,” a practice that is used in 28 other states. This method would require corporations to combine profits from all of their subsidiaries, including ones that operate outside of Pennsylvania, to determine taxable income.
“So if they do 6% of their sales in Pennsylvania, 6% of the national profits have to be attributed to Pennsylvania,” he explained.
“It would actually be less burdensome for corporations to do than what they do now,” Stier continued. “And the only reason the corporations don’t like it is because it actually would force them to pay something.”
In a news conference Monday, state Rep. Elizabeth Fiedler (D., Philadelphia) backed combined reporting. She said it’s too easy for corporations to avoid paying taxes through multiple loopholes in the system and that action needs to be taken to close them.
“We can make sure that we have a tax system in place that makes sense for people, for working people, for people that go to those one, two, or three jobs a day,” she said at the news conference. “Families are feeling the rising cost of groceries, gas, and baby formula. It’s appalling to me that our state would consider giving a big tax break to megacorporations right now.”
Spotlight PA is an independent, non-partisan newsroom powered by The Philadelphia Inquirer in partnership with PennLive/The Patriot-News, TribLIVE/Pittsburgh Tribune-Review, and WITF Public Media.