Effort to phase out 'franchise' tax began four governors ago
It's been a long good-bye. Pennsylvania's effort to phase out the state Capital Stock and Franchise Tax (CSFT) began four governors ago under Tom Ridge.
This tax on a company's assets is scheduled to be eliminated entirely by 2014 under the $28.4 billion state budget proposed by Gov. Tom Corbett in February.
The CSFT tax rate has been successively reduced by 85 percent over a period of years since the late 1990s as part of a scheduled phase-out. The phaseout has been put on hold before, most notably when Pennsylvania was dealing with massive budget deficits at the depths of the recession in 2009-10.
Now there is talk of another freeze in the CSFT phaseout given tighter projections of state tax revenue growth due to a weakness in consumer spending, and therefore, lower state sales tax collections.
The state Independent Fiscal Office forecasts that a projected $232 million growth in revenue that Corbett based his budget proposal on won't pan out by the end of the fiscal year on June 30.
Senate Democratic Leader Jay Costa, D-43, Pittsburgh, raised the issue of putting the CSFT phase-out on hold again last week at the Pennsylvania Press Club.
The governor and lawmakers can stabilize the fiscal 2013-14 budget by freezing the CSFT at current levels for two years, taking federal money by accepting the expansion of Medicaid under the federal Affordable Care Act and shortening the period under which the state can acquire ownership of unclaimed property, said Costa.
The Pennsylvania Manufacturers Association was quick to label Costa's proposal a "tax hike."
"Laying hands on the CSFT phaseout would be an act of extreme bad faith by state government and would send an unmistakable signal to employers and investors that Pennsylvania is not a reliable place to do business," said PMA executive director David Taylor.
Pennsylvania is one of the few states to have a tax on both business assets and business income, he added.
Delaying the CSFT phase-out would drag Pennsylvania's economy backwards, said the National Federation of Independent Businesses Pennsylvania.
Delaying the phaseout is the fiscally responsible thing to do, said The Pennsylvania Budget and Policy Center, a Harrisburg think tank that's been critical of Corbett's state spending cuts in his first two budgets. It would bring in nearly $400 million in revenue.
The tightening revenue picture raises the specter of new spending cuts for schools, health care and mental health services, said PBPC. This would be especially so if an estimated $175 in savings from proposed cuts in a public pension overhaul proposed by Corbett is not included in the final state budget due to reluctance by lawmakers to approve enabling legislation, added PBPC.
"The Legislature has delayed the phaseout in five of the last 15 years, during times the economy lagged," said PBPC. "It will have little impact on most businesses that will continue to get all the other tax cuts that have been enacted over the past decade."
With the battle lines drawn over this issue, attention will now turn to the release this week of state revenue figures for May to see if present trends continue and to the next IFO revenue forecast in mid-June. The fate of the CSFT may rest on the numbers when lawmakers approve a final budget.
(Robert Swift is Harrisburg bureau chief for Times-Shamrock Communications newspapers. Email: email@example.com.)