Tax Items in Governor Wolf’s Proposed FY 2017-2018 Budget

The 2016-2017 Pennsylvania state budget was passed last July with relatively few hurdles.  It was a welcomed changed from the 2015-2016 budget debate that had dragged on deep into that fiscal year.  As we approach a very significant budget shortfall this time around, how will this budget season turn out? Stay tuned!

The tax changes that ultimately made it into the FY ’17 enacted budget were for the most part narrow in scope.  Among the tax highlights were the expansion of sales tax to digital goods, capping the sales tax vendor discount, significantly raising the tax rates of cigarettes and other tobacco products, and enacting a tax amnesty program.  The Governor presented a $32.3 billion budget this afternoon.  Unlike his two previous budgets, there may be more attention given to his proposed cuts this time around opposed to the revenue side.  However, there were still certainly a number of tax items within his proposal.  The Governor addressed the following tax items in his proposal today:

• Mandatory combined corporate tax reporting for certain affiliated entities.
• A gradual reduction of the corporate income tax rate from 9.99% (one of the highest in the nation) to 6.49% by 2022.
• Capping net operating losses (NOL) for all C Corporations to 30% of taxable income.  Current law caps NOL’s to the greater of 30% of taxable income or $5 million.  Therefore, most businesses in Pennsylvania are currently able to use 100% of their NOL’s each year.  This is no doubt in response to the Commonwealth Court’s taxpayer-friendly decision in Nextel back in 2015.  The Pennsylvania State Supreme Court is set to hear arguments on this appeal later this year.
• Elimination of a number of current sales and use tax exemptions and exclusions, including: custom computer programming services, data processing services, certain storage services, aircraft sales and repairs, among others.
• Natural gas severance tax of 6.5%.  This was on his proposal last year, but did not make it into the enacted budget.
• Expansion of the insurance premiums tax to some currently exempt insurance entities.
• $100 million cut in state-funded tax credits, but there are not specifics on which credits will be cut at this point.

As additional information on these tax items included in the Governor’s budget becomes available, we will continue to provide those updates.

Michael Eby, CPA is a Senior Manager and leader of the firm’s state and local tax consulting practice.  If you have any questions regarding this article or would like to speak to someone about our services, please email Michael at meby@macpas.com.