Issue Summary (Updated January 2009)
Pennsylvania Business Taxes

The Issue:

Pennsylvania business taxes are often cited as a problem for the state in its ability to attract and hold businesses. State officials say we are competitive. What is the true picture in the Commonwealth? .

What We Know:

Surveys of businesses in and out of Pennsylvania find a perception that the state has a poor business tax climate. Most frequently mentioned concerns are, (1) the high Corporate Net Income Tax, (2) the Capital Stock and Franchise Tax, (3) capping net operating loss carry forwards, and (4) the absence of a single sales factor apportionment of corporate income. Meanwhile, Pennsylvania’s Research and Development Tax Credit program has been capped since its inception. Not as prominently featured in most surveys but still important are the real estate taxes that are quite high in many parts of the state. Then too are the nuisance local taxes such as the business privilege tax and the mercantile tax. All this adds up to a general attitude that Pennsylvania has an unfair and unpredictable tax environment for business.

Relying on a flawed ranking of state business tax climates, the Governor and the administration have tried to claim that Pennsylvania’s tax climate is not bad and is in fact pretty good. Our analysis demonstrates the serious shortcomings and lack of usefulness of the Tax Foundation’s state ranking methodology. Surveys and the reality of the high corporate tax rate, the capital stock and franchise tax along with the other negative aspects of the state’s tax structure.

Over the past 50 years research has demonstrated that taxes are important in business location and investment decisions and that lower tax jurisdiction have a competitive advantage over higher tax areas.

Recommendations:

Pennsylvania needs to move quickly to remedy several of the many tax obstacles to business growth in the state. These would include further and more rapid reductions in the net income tax rate, eliminate the capital stock and franchise tax, uncap net operating loss carry forwards and address the state’s hodgepodge property tax system.