Only two states, Pennsylvania and New Hampshire, cap the net operating losses (NOL) business can carry over against their Corporate Net Income (CNI) taxes. Here’s why the other 48 don’t. The cap penalizes start-up and cyclical companies by significantly increasing their effective tax rate. Allowing for the deduction in net operating losses improves a business’s tax liability. Not allowing for uncapped NOL deductions puts Pennsylvania at a direct disadvantage in attracting or retaining jobs in these innovative industries.
Governor Corbett is asking to raise the cap on net operating losses (NOL) businesses can offset against their future Corporate Net Income (CNI) liabilities. The current cap is set at $3 million, or 20 percent of income - whichever is greater. The Governor’s proposal would raise the cap to $5 million or 30 percent of income.
On another front, the Governor is asking to continue and complete the phase-out of the Capital Stock and Franchise Tax, which taxes business even in years they make no profits. By January 2014 the tax is scheduled to be reduced to 0.00. Additional legislation will be needed to completely remove the tax from the books. He also is asking for a gradual reduction in the state’s CNI; currently collected at 9.99 percent - the second highest in the nation.
CompetePA, a coalition of businesses working to get our tax structure competitive with other states says, Pennsylvania would have nearly 700,000 more jobs today if the economy had grown at the national average since 1990. Instead, the commonwealth ranks 43rd in job growth over that span. Employers consistently cite the corporate net income (CNI) tax as a major contributor to the poor business climate and a red flag that warns away companies that might otherwise consider locating or expanding in the commonwealth.
As tax rates are reduced and more business flocks to Pennsylvania, state revenues will surely increase allowing for the funding of essential government programs such as education, transportation infrastructure, and public safety. Without these reforms, more money will be taken from Peter to pay Paul - until Peter decides to move to Alabama.