No Tax Increases in Governor Wolf’s Proposed Budget

Governor Wolf recently presented his proposed 2019-2020 Pennsylvania budget. In prior years, the governor has proposed extensive changes to taxes in Pennsylvania such as lowering of the corporate tax rate, mandatory combined reporting for certain entities, increases in the personal tax rate, and expansions of the sales tax base to name just a few. Many of these changes in past years were not passed in the final budget, and it appears this year the governor is focusing on a few tax changes in particular.

Here is what we are seeing this year:

• No increases in personal income tax rates or sales tax rates.
• Mandatory combined reporting for certain affiliated entities – this is the third year the Governor is proposing this change.
• Along with combined reporting, the governor is proposing a lowering of the corporate tax rate from 9.99% down to 8.99% in 2020 and potentially down to 5.99% by 2024.

And a few other changes of interest:

• Not a tax – but a fee for municipalities that rely solely on state police for protection. The proposed fee is on a sliding scale between $8 and $166 per capita (based on number of residents) rather than a $25 per capita fee across the board, which he had previously considered.
• An increase in the state minimum wage from $7.25 to $12 per hour starting July 1^st, then increasing up to $15 per hour by 2025.
• Although not part of the proposed budget, Governor Wolf is once again seeking a severance tax on natural gas, which he has attempted without success in several previous years.

So if there are no tax increases, how is the budget being funded? In the current budget year there are projected gains in tax revenues. In fact, since the start of the 2018-19 fiscal year, overall tax revenue is $957.1 million, or 5.7 percent, more than was collected in the same period of the last fiscal year. The administration is also projecting an increase in tax revenue for the next fiscal year.

McKonly & Asbury’s take:

Keep in mind that, while the Governor’s budget proposal may sound official, it’s essentially his wish list for what he’d like to see the legislature do. Recent history has shown that the tax changes the Governor would like to see rarely materialize (e.g. combined filing). What has been consistent in all of this is the administration’s (and past administrations’) desire to make PA a more fair (and presumably friendly) tax state.

While the corporate income tax rate is very high when compared to other states, the fact that there is no combined reporting and (relatively) no enforcement of related party intangible and interest expense addbacks makes PA a tax friendly state for large C corporations (who also happen to employ a lot of people). Any mandated combined reporting would have to be coupled with a rate decrease as the governor has done here, which would accomplish the ultimate tax goal of lower rates and a broad base.

On the flip side, PA has among the lowest individual income tax rates, on which most income in the Commonwealth is taxed whether it be wages or income from flow-through businesses.

As always, we’re happy to discuss. Feel free to contact us with your thoughts!