Carl A. Marrara, Executive Director
Testimony before the:
House Republican Policy Committee
Columbia Montour Chamber of Commerce
Read PMA’s Full Tax Climate Report
Chairman Kail and esteemed members of the PA House Republican Policy Committee – thank you for allowing me to join you today. I am Carl A. Marrara, Executive Director of the Pennsylvania Manufacturers’ Association – the statewide nonprofit organization that represents the people to make things here in our commonwealth. It’s good to be here at the Columbia- Montour Chamber of commerce, as I am originally from Danville, the seat of Montour County.
The premise of my testimony can be boiled down to this: Business capital is like water – it will flow to the path of least resistance.
High tax rates, uncertain financial stability, a cumbersome and punitive regulatory environment, and much more – all of these act as barriers to investment.
Pennsylvania has too many of these barriers, and the results show it.
Pennsylvania’s Gross State Product growth is slow. And, Pennsylvania’s share of the total U.S. economy has declined from 3.8 percent in 2018 to 3.53 percent in quarter 3 of 2023 meaning the rest of the U.S. economy is growing faster than Pennsylvania’s. This has been true for at least the past decade.
Pennsylvania’s workforce is shrinking. PA’s labor force participation is 60.8 percent, which ranks 33rd in the nation. Basic population statistics show a lack of incoming residents and add to this the fact that Pennsylvania is the 8th oldest state by population median age, meaning we have more residents closer to retirement than starting their careers.
Pennsylvania’s population is decreasing. Pennsylvania saw population growth in 2020, likely due to the pandemic and increasing remote work allowing workers in New York, New Jersey, and Maryland to move into the areas across our state border. We’ve seen this to be true with significant growth in the Poconos, Lehigh Valley, and Cumberland Valley. Immigration has also led to population increases in Philadelphia. However, before and since 2020, Pennsylvania has seen overall population decline. Though it’s unofficial, the moving company Atlas Van Lines tracks inbound and outbound moving trucks. 2023 was an especially bad year with 37 percent of the trucks being inbound while 63 percent were outbound. There has not been a single year since available data in 2012 where the inbound was a higher percentage than the outbound.
Not surprisingly, there is clear causation between low tax states and population growth.
As the Tax Foundation noted in a 2024 study: “This population shift paints a clear picture: Americans are leaving high-tax, high-cost-of-living states in favor of lower-tax, lower-cost
alternatives. Of the 32 states whose overall state and local tax burdens per capita were below the national average in 2022, 24 experienced net inbound migration in FY 2023. Meanwhile, of the 18 states and D.C. with tax burdens per capita at or above the national average, 14 of those jurisdictions experienced net outbound migration.”
But this isn’t just true of population migration – but also business investment. Tax changes at the federal level, mainly due to the Tax Cuts and Jobs Act of 2017, make it the smart business decision for American corporations to repatriate their overseas operations and invest in American headquarters and operations. However, in Pennsylvania, with the highest flat-rate Corporate Net Income Tax of 8.99 percent, that investment is often directed to our competitor states. Business investment peaked in quarter two of 2019 – when our rate was even higher at 9.99 percent. And, given the ongoing uncertainty of business taxes at the federal level, some repatriation has tapered. States do continue to compete for the investment that is occurring, and thus, tax reform at the state level is as important as it’s ever been.
Proof of this can be seen in recent returns. The growth percentage of business taxes paid in Pennsylvania increased by 7.8 percent from FY 21-22, however, the national average was 13.7 percent, indicating sluggish growth compared to other states. Only 7 other states and the District of Columbia saw less growth in the past year. This proves that lower rates can result in higher total amounts of revenue. Remember, business tax reform in Pennsylvania doesn’t happen in a vacuum – as we adjust our competitiveness, others will, too.
And, gone are the days when being just slightly more competitive than New York, New Jersey, or other Northeast/Mid-Atlantic states was acceptable. Pennsylvania is competing for corporate investment with high-performing states such as Florida, North Carolina, Indiana, and Utah.
It’s important to benchmark and understand where Pennsylvania stands compared to our competitor states.
According to the study Total State and Local Taxes FY2019 by the Council on State Taxation, Pennsylvania’s businesses accounted for 38.8 percent of state tax revenue, 47 percent of local tax revenue, combining for 41.9 percent of total state and local tax revenue. While this does put Pennsylvania almost at the average in all three measures, there are major disparities on which sectors of the business community shoulder the burden of these percentages and thus, could be cause for concern when attempting to attract or retain certain types of economic development within our commonwealth.
In the recently released 2024 State Business Tax Climate Index, published by the Tax Foundation, Pennsylvania ranked just behind the national average of overall rankings at 31st. Alarmingly, however, PA received the ranking of 41st regarding corporate taxes, causing major concerns – more details on this are included in the document we provided.
In a 2021 study by the Tax Foundation titled Location Matters 2021: The State Tax Costs of Doing Business, it was found that Pennsylvania ranked highly in the average actual state/local tax burden in some industries, but ranked far behind the curse in others. Most disappointing was the ranking of 47th for both new and mature corporate headquarters.
So, what does all this mean?
Especially on paper, published tax rates matter and greatly influence site selectors when the next major plant, warehouse, office or headquarters is being considered. Overall, we have one of the least competitive corporate tax environments in the country. The Commonwealth was ranked 41st out of 50 states in the recently released Tax Foundation’s Corporate Tax Rank; only nine states were listed as having a worse corporate tax environment. The two most glaring shortcomings in regard to Pennsylvania’s corporate taxes are: the highest flat-rate in the nation 8.99 percent (to be reduced to 4.99 percent in 2031) corporate net Income tax rate; and, a 40 percent cap on net operating loss.
Here are our recommendations:
- Let’s accelerate the lowering of the Corporate Net Income tax (CNI). We strongly believe that a reduction of this highly uncompetitive rate will result in greatly enhanced economic growth, which will generate an increase in state tax revenue.
- Next and perhaps most importantly, the cap on the usage of Net Operating Losses (NOLs) should be fully lifted. Pennsylvania is one of only two states that caps the amount of NOLs a company can offset against its current corporate net income. Additionally, remove the time limitation a business may carry forward a net operating loss. This is an area where Pennsylvania is a complete outlier. Only us and New Hampshire place a cap on NOL’s – ours at 40 percent, New Hampshire at $10million. While we do allow 20 years of carryforward, 20 states have no limitations. Every state other than Pennsylvania and New Hampshire allow for full 100 percent carryforwards or conform with the federal standard of 80 percent. This puts start-up companies that are highly capital intensive – like manufacturing, technology centers, life sciences, robotics, at a major disadvantage.
- You should oppose any proposal including Mandatory Unitary Combined Reporting (MUCR), as the policy will make Pennsylvania less competitive and have a broad range of negative consequences on the commonwealth’s economic climate. MUCR has proven to be litigious in other states and creates much uncertainty for businesses.
- We urge you to support the Small Business Tax package to allow for NOLS at the personal income tax level, repeal accelerated sales tax prepayments, reduce the personal income tax, and more listed in your packet.
- We ask that you oppose new, additional taxes on business inputs, such as on energy or other essential inputs and commodities, resulting in tax pyramiding. Examples of this include but are not limited to severance taxes, carbon taxes, excise taxes, gross receipts taxes, cap-and-tax programs.
- Please do not even entertain House Bill 1773, which would quadruple the small business tax rate from 3.07 percent to 12 percent. This would be the most devastating blow to business development in Pennsylvania in the last 30 years.
- We ask that you support the Taxpayer Protection Act to control state government spending and ensure that government does not grow at a rate higher than the private sector. When government spending grows faster than the private sector, it stifles private sector growth because it creates uncertainty when it comes to tax rates to make up for that deficit spending.
Ultimately, our commonwealth’s government cannot tax-and-spend the way to good fortune for all; but we can remove the barriers – letting that water flow – and grow the private sector by attracting new business investments and expanding the tax base, then prosperity will surely follow.