On Monday, the House wasted no time dismissing, on a 0-193 vote, Governor Tom Wolf’s entire budget proposal, including his massive tax increase scheme.
Afterwards, the governor called the vote “gamesmanship,” a curious remark since lawmakers were only playing his game. He presented his budget plan on March 3 as one that should be considered as a whole; take it or leave it. House members accepted his challenge and all of them, even his fellow Democrats, walked away from it. Now, with a less than a month before the budget deadline, lawmakers at the very least know where they’re not going.
The Wolf budget proposal manages to combine bad policy with stale ideas. His take it or leave it budget, for example, includes a proposal that corporations report income from all states to the state Department of Revenue, a tax system called Mandatory Unitary Combined Reporting (MUCR). Ed Rendell likewise proposed MUCR back in 2004.
As Senior Tax & Legislative Counsel for the Council On State Taxation (COST), Ferdinand Hogroian explains that MUCR was bad policy under Rendell and nothing has changed to make it good policy now. “Apportionment of where taxes apply is already very arbitrary,” Hogroian said. “When you bring a business’s entire income from all states under one tax regime (as with MUCR) it gets even more arbitrary. Businesses prefer a predictable tax climate. It’s anti-competitive tax policy all the way around.”
Mr. Hogroian joined PMA President David Taylor for an exclusive interview after his testimony before the House Finance Committee. In the interview, he references a study conducted by COST and Ernst & Young LLP – click here.
To advance MUCR, Governor Wolf is relying on the same specious argument used by Rendell. Basically, a leprechaun-like pot of gold exists in the dark depths of the business community and that money should be used for state government pet projects. To give the argument an emotional charge, they include the old Delaware holding company claim that suggests business are evading millions in PA taxes by claiming their income was earned in other states, chiefly Delaware since it has no corporate income tax.
Even the Delaware holding argument is entirely misapplied by the Wolf Administration. The Department of Revenue already has all the authority it needs – and given even more in 2013 under a bipartisan “add-back” bill – to pursue business that improperly shift PA income to Delaware or other places. In fact, Mr. Hogroian testified to this fact saying, “there is no windfall for states that adopt MUCR that already have add-back provisions.”
Citing numerous instances where corporations file returns showing no profit is another ruse.
“There are many reasons why businesses might show no profit,” said PMA President David N. Taylor. “One of the reasons is they apply deductions and credits provided by the General Assembly the same way an individual taxpayers does. Businesses don’t operate in neat 12 month cycles. Capital investments can bring losses, especially in manufacturing, before companies become profitable again.” He added, “Additionally, there are countless businesses registered with the Commonwealth that are defunct – no one spends the time or expense to disincorporate them and so those defunct entities simply do not file taxes moving forward.”
Bringing a business’s total income under one regime means bringing it under the state’s total tax policy. This includes not just tax rates but in PA’s case its woeful Net Operating Loss (NOL) provision. We are one of only two states that places a cap on losses businesses can carry forward under its NOL. Hogroian says that the carry forward provision is an enormously valuable tool especially for start-up businesses. Applying the PA NOL to losses in other states would mean the deductions would fall under the same crushing cap. It could easily happen given that it’s unclear what the “unified” in MUCR means – what constitutes a truly unified presence in Pennsylvania?
Testifying recently before the House Finance Committee Tom Bowen, Esq., CPA Shareholder, Stevens and Lee, and Chair of the PA Chamber’s Tax Committee, said that the concept of a ‘unitary business’ is usually poorly defined, and therefore prone to appeal and litigation.
“California and other states that have had combined reporting in place for years still have unresolved taxpayer disputes centering on determination of unitary groups,” Bowen said. “This all brings significant volatility to PA tax revenues and is a dangerous proposition to balance a General Fund budget based on unstable revenue estimates.”
The bottom line, Taylor says, is that there is no bottom line. “Under this regime, an employer loses all predictability with tax compliance. All 50 states are sovereign and each one has its own set of taxes, each tax having its own rate, definitions, and test of applicability. There is not and can never be a true apples-to-apples comparison. Every year it will be a negotiation with the Department as to how it will choose to assess your operations in other states. In light of the Department’s mission to maximize revenue to the Commonwealth, the taxpayer will likely have to appeal through the courts,” Taylor said. “Meanwhile, the money in dispute is left in escrow. It can’t be collected by the state as tax revenue and businesses can’t use it to reinvest in production. Reduced competitiveness, years of costly litigation, more red tape -- This is the very definition of a bad idea.”
As with Rendell, Tom Wolf, in what should be viewed as the cheese in the mousetrap, is promising a reduction in the Corporate Net Income (CNI) rate over time. The proposal, if implemented, promises to reduce the CNI tax rate from 9.99 percent to 5.99 percent for 2016, 5.49 percent in 2017 and 4.99 percent in 2018. Business leaders cite the multiple delays in phasing out the Capital Stock and Franchise Tax (CSFT) as why they are wary of the CNI offer. The final phase-out stage of CSFT has been delayed so often it’s starting to take on the aura of an aging rock band on its fifth farewell tour.
No pot of gold awaits us at the end of the combined reporting rainbow. Anyone but a leprechaun will tell you that.