For FY 2013–2014, Governor Corbett is proposing his largest budget increase yet—$679 million—taking Pennsylvania’s general fund expenditure to $28.4 billion. The governor’s budget proposal includes several changes to the tax code. Here are some of the potential changes to watch for:

  • Capital Stock / Franchise Tax Elimination. The governor remains committed to the complete phase-out of the capital stock / franchise tax, which is set to take effect for tax years beginning on or after January 1, 2014.
  • CNI Rate Reduction. The governor’s proposal includes a gradual phase-down of the corporate net income tax rate from 9.99 percent to 6.99 percent by 2025.
  • Increase Cap on Net Loss Deductions. The governor’s proposal also includes an increase in the annual cap on net loss deductions from $3 million to $5 million.
  • Tax Appeals Commission. The governor’s proposal allots funds for the creation of a new, independent, Tax Appeals Commission. This Commission would replace the existing Board of Finance and Revenue, which is currently the final administrative level of review in a tax appeal before going to Commonwealth Court.
  • Remove Oil Franchise Tax Cap. The governor’s proposal includes a gradual uncapping of the average wholesale price used to calculate the oil company franchise tax. This is expected to bring in more than $5.3 billion of new revenue in the first five years; it would be the biggest tax increase of his tenure.

In addition to Governor Corbett’s tax proposals, here are some other pieces of tax legislation that we are tracking:

  • Related-Party Addback. Two addback bills have been reintroduced into the House. One bill covers related-party intangible expenses and all related-party interest expenses. The other bill covers related-party intangible expenses and interest expenses, but only if the interest is directly related to the related-party intangible expenses. A bill identical to the latter bill passed the House last year but stalled in the Senate. Yesterday, the latter bill was amended by the House Finance Committee to include a number of Gov. Corbett’s tax proposals (including a CNI rate reduction and an increased cap on net loss deductions) as well as market-based sourcing of services (see below). We expect to see more movement on this bill in the House soon.
  • Market-Based Sourcing of Services. Department of Revenue officials, industry groups, and others have been working on draft legislation to switch the sales-factor sourcing rule for receipts from services from a cost-of-performance rule to a market-based rule. As noted above, yesterday, the House Finance Committee amended one of the pending addback bills to include this sales-factor sourcing change. That bill would source receipts from sales of services based on where the service is delivered; and if that cannot be determined, the receipts would be sourced based on the address of the customer. (Receipts from sales of intangibles would continue to be sourced using the cost-of-performance test in the current statute.) Now that Pennsylvania’s apportionment formula is based entirely on the sales factor, this would be a significant change and would result in a tax increase on out-of-state taxpayers who sell services to customers in Pennsylvania.