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Is state tax reform finally beginning to take shape?

The month of April is upon us, which means two things: rain and tax season. Todd brysiak

The former is barely a blip on the radar. We’re all just hoping it’s not more snow. The latter, as we know, is vexing at best — a necessary evil. But as accountants finally clear through mounds of tax returns, those of us who monitor the bills moving through the General Assembly are noticing an interesting trend. These days, there sure is a lot of focus on the tax-reform front.
It’s not unusual for taxes to be a prime discussion point in Harrisburg. Debates over the state’s finances swirl every spring as lawmakers prep for the annual budget haul. Nonetheless, as anyone with a finger on the pulse of the Capitol will tell you, major tax changes are very unlikely in election years — especially gubernatorial election years. That’s not likely to change in 2018.
This, however, shouldn’t downplay the tax reform issue. In fact, given what we are seeing, it’s likely a primer for what may be around the corner.
A review of bills in the House and Senate shows a wide array of tax-reform ideas on the table. Considering the changes presented in Gov. Tom Wolf’s budget address and the calls for notable tax reforms from all three Republican gubernatorial hopefuls, there’s solid evidence the issue is gaining steam. But what’s really at the core of this recent attention?
With the economy improving, states are essentially in bidding wars with one another to enhance their job markets. Just ask the folks at Amazon and Apple. And when employers are looking for new places to call home, taxes and the cost of doing business matter. That’s not so great for Pennsylvania.

Practically every major assessment of our state shows it to be average, at best, when it comes to business taxes. Keystone State employers face a fractured and convoluted system muddled with high corporate rates, complicated exemptions and credits, and limited deductions. This glut of complexities, coupled with a seemingly never-ending budget fight and the desire to attract new jobs, may be creating the momentum needed for comprehensive change.

But therein lies the problem. What type of change?

The tax-reform legislation filed by lawmakers this session is as diverse as the problem is complex. From cutting the corporate tax from its near-10 percent rate, to completely restructuring the personal income tax, just about everything under the sun is out there for discussion.

Lowering the corporate rate has been a priority for years, and nearly everyone in Harrisburg agrees it needs to occur. But the fight over combined reporting and the so-called “Delaware loophole” has hampered efforts to make the change.

The idea of exchanging one for the other has been pondered for years, but it has never gained traction. Many still question the validity of the loophole argument altogether, adding another complicated wrinkle to the mix.

Even as one of the bright spots on Pennsylvania’s tax spectrum, the personal income tax hasn’t been off limits. Some argue that messing with a good thing is a fool’s errand. Others believe the low rate provides room for movement. One idea being floated would reduce the income tax on wages, but then increase it significantly on other forms of personal income.

There’s no doubt that giving workers a boost in their paychecks has significant appeal, but the rub with this new idea will come from small businesses that would almost certainly see taxes increase. Lawmakers have been notably averse to the latter.

If all of this seems dizzying, it’s because it is. Few issues are as politically charged and nuanced as tax reform. And truthfully, this only skims the surface. It doesn’t even consider property taxes or a natural gas severance tax — two massively contentious issues on their own.

Calling change imminent might be a stretch. But looking at the puzzle pieces, it’s hard not to see a picture starting to come together. More importantly, there’s just too much talk from lawmakers on the issue to simply pass it off as chatter.

Exactly what does tax reform look like in the end, and when does that end come? Nobody knows. But one thing is for sure: If you’re a business owner or a corporate executive, it would be best to pay very close attention to any tax-related issues for the foreseeable future. Because where there’s smoke, there’s usually fire.

Originally submitted to CPBJ


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