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PA Chamber Leads Statewide Coalition Calling for Elimination of Pennsylvania’s Start-Up Tax

HARRISBURG – Today, the Pennsylvania Chamber of Business and Industry led a coalition of more than 70 chambers of commerce across the Commonwealth in calling on Governor Josh Shapiro and members of the General Assembly to improve Pennsylvania’s economic competitiveness by eliminating the state’s tax penalty on start-up businesses.

In a letter addressed to the governor and legislative leaders, the coalition highlighted the urgency of improving Pennsylvania’s tax treatment of Net Operating Losses (NOLs).

The coalition cited the negative impact of Pennsylvania’s current business tax and regulatory climate, noting that the state ranks among the worst in the nation for job seekers and key economic indicators. The Kauffman Foundation recently identified Pennsylvania as having the lowest rate of new entrepreneurs in the entire country.

“Governor Shapiro and leaders in the House and Senate have each acknowledged the need to improve Pennsylvania’s economic competitiveness,” the letter reads. “Improving the treatment of Net Operating Losses is a major step towards this goal. Pennsylvania’s 40 percent cap on NOLs is one of the most restrictive in the nation, hindering start-ups and cyclical businesses.”

The coalition emphasized the importance of increasing the cap on NOL deductions, which allow businesses to offset their tax liabilities with previous losses, as a means to attract more employers and reduce hurdles to entrepreneurship and business growth.

Net operating loss reform has emerged as a bipartisan priority in both the state House and Senate. The letter points out that 24 states have no cap on NOLs, while Pennsylvania is one of just two states that caps NOL deductions below the federal limit of 80 percent of taxable income.

“We appreciate the many proposals that policymakers and advocates have put forth to spur Pennsylvania’s economy and urge lawmakers to focus on competitiveness,” the letter continues. “We urge you to prioritize correcting Pennsylvania’s treatment of start-up businesses so the Commonwealth can compete on an equal playing field to attract entrepreneurs, new employers, and the jobs, economic development, and prosperity they bring to communities.”

Full text of the letter is available here.

3 immediate changes Pa. needs to fix its economy

by STATE REPS. ZACH MAKO, ROBERT LEADBETER, and TOM JONES

To be frank, Pennsylvania’s economic outlook is grim, with recent rankings placing our home among the worst states in the nation for job prospects and key economic indicators.

A recent WalletHub assessment pegged Pennsylvania as the fifth worst state to find employment, while analyses from U.S. News and World Report, SimplifyLLC and the Tax Foundation consistently place our state in the bottom third nationwide for economic performance. Alarmingly, the Kauffman Foundation in 2021 revealed Pennsylvania has the lowest rate of new entrepreneurs among all states.

This dire situation is driving a significant exodus of both businesses and individuals from our communities, as highlighted in reports from Axios and the Bureau of Labor Statistics documenting high rates of outbound migration. Amidst these challenges, business optimism in Pennsylvania has plummeted to its lowest levels since 2012, underscoring the urgency for corrective action.

In response to this pressing need for reform, we hosted the House Republican Policy Committee in our legislative districts — specifically Columbia, Northampton and Lancaster counties — to solicit direct feedback from our business community. Testimony across various industries uniformly depicted Pennsylvania’s tax structure as burdensome and punitive, necessitating immediate reforms to retain businesses and residents, and enhance our competitiveness. Key areas for reform that could drastically improve our economy and present opportunities for family-sustaining jobs — including corporate net income tax, net operating losses and the accelerated sales tax — emerged as consistent themes demanding our urgent attention.

During the latest legislative session, Pennsylvania’s General Assembly advanced substantial tax reform aimed at tackling the state’s excessive corporate net income tax rate, then the nation’s second highest at 9.99%. It gradually reduces the corporate net income tax by 0.5 percentage points annually until it hits 4.99% in 2031. We cannot afford to wait until 2031.

Research highlights numerous benefits of reducing this tax rate, including increased investment, gross domestic product growth, higher wages, enhanced property values and expanded job opportunities. Comparisons between states with high and low corporate income tax rates from 2000 to 2020 show a 10% higher growth in state revenues in low-tax states, along with positive correlations with population growth and worker wages.

The transformation of North Carolina through corporate net income tax reform serves as a notable example, with its efforts propelling it from 44th to ninth place in the Tax Foundation’s Business Tax Climate ranking.

Accelerating Pennsylvania’s reduction would significantly enhance our state’s competitiveness, stimulating investment, job creation and economic growth. House Bill 1447, introduced by Rep. Dallas Kephart, R-Clearfield/Cambria, would achieve this.

Pennsylvania’s treatment of net operating losses stands out as an extreme outlier among states’ tax provisions and is another consistent area of concern for our business community.

Net operating loss deductions, a tax provision allowing businesses to carry losses forward and deduct them from future profits, particularly affects two vital business types in our economy: start-up firms and those in cyclical industries like manufacturing.

Currently, Pennsylvania and only one other state cap these deductions below the federal limit of 80% of taxable income. Conversely, 20 states align with federal rules, while 24 states have no deduction cap at all.

Moreover, although corporations can apply a portion of net operating losses against corporate net income, small businesses subject to personal income tax lack this capability, resulting in the “Pennsylvania startup penalty.” Since smaller businesses and entrepreneurs typically lack the capital of larger corporations, the ability to use net operating losses would afford them greater financial control, facilitating business initiation or expansion.

This penalty acts as a barrier to business growth and entrepreneurship, underscoring the pressing need for legislative intervention to sanction this vital tax strategy and eradicate the Pennsylvania startup penalty. House Bill 701, introduced by Rep. Thomas Kutz, R-Cumberland, would achieve this.

Another reform that would greatly impact our business community would be repealing the accelerated sales tax requirement. This requirement mandates that businesses collecting over $25,000 in sales tax in the third quarter of the previous year make monthly prepayments equivalent to 50% of their projected sales tax collections.

To streamline compliance and alleviate paperwork burdens on small businesses, repealing this requirement is essential. Doing so would enable small businesses to remit collected sales tax revenues in line with their filing period without additional complexities. House Bill 1404, introduced by Rep. Jesse Topper, R-Bedford/Fulton, would achieve this.

Our state’s economic challenges are profound, as evidenced by dismal rankings in job prospects and economic indicators. Urgent action is needed to reverse the tide of outbound migration and revitalize our economy. We cannot afford to wait while our businesses struggle to stay afloat amid an unforgiving tax landscape or flee the commonwealth for more prosperous opportunities in other states.

It’s imperative that we prioritize the needs of our business community and enact meaningful tax reform that fosters opportunities for family-sustaining jobs, an environment conducive to entrepreneurship and prosperity for all Pennsylvanians.

Note: This column originally appeared in the Allentown Morning Call.

PA Chamber Statement on Gov. Shapiro’s New Energy Proposals

HARRISBURG – Today, Pennsylvania Chamber of Business and Industry President and CEO Luke Bernstein released the following statement in response to Gov. Josh Shapiro’s announcement of two new energy programs for Pennsylvania, the Pennsylvania Climate Emissions Reduction Act (PACER) and the Pennsylvania Reliable Energy Sustainability Standard (PRESS):

“We all share the goals of protecting our environment and growing our economy – and, one does not have to come at the expense of the other. Pennsylvania is a global leader in energy production and reducing emissions, and policies going forward should build on this progress. We await details on the governor’s proposals, which raise significant questions and concerns about the impacts on our residents, businesses, the environment, and our economy. We encourage the governor to work in a collaborative way with additional stakeholders and the legislature to address important questions pertaining to the short- and long-term impacts of these policies and develop the best plan for Pennsylvania.

PA Chamber Opposes Plan to Raise Taxes on Small Businesses

HARRISBURG – Today, Pennsylvania Chamber of Business and Industry Director of Public Affairs Michael Plummer issued the below statement on a planned hearing of the House Finance Subcommittee on Tax Modernization and Reform to discuss raising small business taxes from 3.07 percent to 12 percent:

“The proposal that House Democrats are scheduled to consider tomorrow would destroy small businesses across the Commonwealth by quadrupling their taxes overnight. House Bill 1773 would sabotage our economic competitiveness and undermine bipartisan efforts to attract and retain businesses in Pennsylvania.

“This bill would raise taxes by nearly 300 percent on almost 180,000 small businesses, which collectively employ more than 2.2 million people. Even holding a hearing on this bill sends a chilling message to anyone looking to grow or start a business here.

“Employers are moving out of our state in droves, and they are taking good-paying jobs with them. Last year, Pennsylvania had the fourth-highest number of residents leaving for other states, and we hold the unfortunate distinction of having the lowest rate of new entrepreneurs in the country. Economic factors are a big reason why, and proposals like this to raise taxes on hardworking Pennsylvanians will only worsen these trends.

“Imposing a four-fold tax increase on small businesses would accelerate this mass exodus of businesses and workers from our state. Especially at a time when employers are still struggling with inflation, workforce shortages, and supply chain disruptions, this proposal is tragically shortsighted.

“Instead of entertaining proposals that would lead us to economic ruin, lawmakers should prioritize policies that support small business growth and foster a more competitive business environment.”

Chamber Chats: Fall Session Priorities

Lawmakers return to Harrisburg later this month, and the PA Chamber is excited to continue promoting bipartisan, pro-business solutions we are championing to make Pennsylvania a more competitive state for business.

For the latest edition of Chamber Chats, the PA Chamber’s Lindsay Andrews caught up with our Vice President of Government Affairs, Alex Halper, to discuss the organization’s top policy priorities as his team gears up for start of the fall session. A minimally revised transcript of their conversation is below.

(Click to view video)

 

We have had a good start to 2023 and some of the things that got done in the budget. Can you talk to us a little bit about what was achieved on behalf of business and what we would like to see coming up in the fall?

AH: Yeah, we have made some real progress on getting some of the top Chamber priorities as part of the legislative agenda – the priorities that lawmakers, that the governor are talking about.

Things like improving Pennsylvania’s tax code. We had tremendous progress last session to make Pennsylvania more competitive as it relates to business taxes, but a lot more work to do and we have a real opportunity this year, this session, and this fall to make more progress.

What can you tell us about the specifics of that progress? What would you like to see get done?

AH: Last year, for the first time in decades, Pennsylvania reduced its corporate net income tax rate. And we needed to because we had the second-highest rate in the country.

The problem is, while we did that, other states are making pro-business, pro-growth tax reform as well, and Pennsylvania is just not keeping up. Governor Shapiro, when he was running for office, talked about reducing those tax rates more quickly, and expediting those reductions.

We thought that was a great idea; we supported the governor’s call for expediting the reduction of the corporate tax rate. There is legislation in both the House and Senate to do that, and we are going to keep pushing to get that done.

What about the treatment of net operating losses? What can you tell us about that? I know that has been a long-term goal for the business community.

AH: Pennsylvania unfortunately puts itself at a great disadvantage as it relates to net operating losses. That basically means that for businesses that experience losses – they lose money in a year – they are often able to use those losses to offset profits in a future year. Of course, our goal for all businesses is to make a profit but a lot of times, you might have a startup company where they are investing in capital, into people, and they are losing a lot of money.

The tax code, both at the federal and the state level, allows companies to offset those losses and reinvest in their company. Pennsylvania, though, does not treat those losses nearly as favorably as practically every other state in the country.

We basically impose a tax on startup companies, which is the last thing we want to be doing if our goal is to make Pennsylvania the most competitive state in the country and attract new, innovative businesses.

There is legislation, again, in both the Senate and the House, that would make Pennsylvania at least on par with other states for how it treats these losses. This bill passed unanimously out of the Senate Finance Committee earlier this session, and we are working with lawmakers on both sides of the aisle – with the House and Senate and the Governor’s Office – to keep that legislation advancing and hopefully get it done.

Moving on to workforce development because I know that is huge for us. A good, strong, bipartisan issue and I know that we took the lead in the first-of-its-kind Clean Slate legislation, what is next for that? What is next for workforce development in the fall?

AH: It is a challenging issue. Employers continue to struggle finding people to fill open positions. There are many, many reasons why the labor market is so tight, and that means we need to have many, many solutions to address this challenge.

You mentioned Clean Slate, which is about helping to encourage Pennsylvanians who have a criminal record or are recently incarcerated, trying to encourage them back into the workforce. That needs to continue to be a priority. We are supporting legislation that would build on Clean Slate, which provides for  automatic expungement of certain lower-level, non-violent offenses.

Similar to Clean Slate, there are efforts to reform Pennsylvania’s probation systems, and we have advocated for some employment-specific reforms to probation.

Things like that—there are no silver bullets to solving Pennsylvania’s and the nation’s workforce crisis. But these are some specific solutions that we think will help a lot of Pennsylvanians but also a lot of Pennsylvania employers.

I also know that permitting reform is critical and an important issue for employers wanting to come to the state. What can you tell us about what is being done to streamline our permitting process and attract business and jobs to Pennsylvania?

AH: It simply takes too long, it is too complicated, and there is not enough transparency in the system of applying for and receiving state permits for projects—if you are looking to expand your facility, for example.

Legislation passed the state Senate earlier this year with bipartisan support to improve those systems, create more efficiency and more transparency. Employers want to know how long it is going to take and how and when to make key investments. This is not about cutting corners as it relates to environmental regulations, this is about understanding and having uniformity with the process and transparency.

This legislation is now pending in the state House, we think it would go a long way toward improving permitting in Pennsylvania and again something we are hoping will continue to advance this fall session.

This is something that has the support of business and lawmakers on both sides of the aisle as well as the Shapiro administration.

AH: That is true. One of the first actions that Gov. Shapiro took upon taking office was issuing an executive order to improve permitting in Pennsylvania. Part of this legislation would codify Gov. Shapiro’s executive order so that it exists in Pennsylvania law long after his tenure as governor is completed. We think there are some very good ideas in there and we look forward to continuing to work with a broad coalition to make this happen.

 

For more information on these issues, please visit the On the Hill section of our website.