BCT Editorial – 12/5/04

This page was last updated on December 5, 2004.

Looking forward; Editorial; Beaver County Times; December 5, 2004.

Starting point; Editorial; Beaver County Times; December 5, 2004.

These are two more examples of when the Times talks about “tax modernization,” it really means tax shifting or a tax shell game.

“The initial reaction last week to a proposal to make Pennsylvania’s business taxes fairer shows why tax modernization is so hard to achieve: the matter is so complex and creates new winners and losers that it is a political hard sell.”

[RWC] Below are two of the conditions of the executive order issued by Gov. Rendell when he formed the Pennsylvania Business Tax Reform Commission.

First, it was “to recommend changes to Pennsylvania’s business tax structure that would broaden the tax base.” Translation: “Broaden the tax base” means “find more businesses to tax.”

Second, the proposal had to be revenue neutral. Translation: Total business taxes would remain the same; they just would be different taxes and rates on different businesses.

It’s true there would be winners and losers. Pennsylvania would be among the losers because the proposal can do nothing about the overall business tax environment. This thing was a joke before the first commission member was appointed.

“This doesn’t mean the present system is copasetic. It, too, has its winners and losers.

“The real business tax villain is the commonwealth’s 9.99 percent corporate net income tax, which is the third highest in the nation. The Pennsylvania Business Tax Reform Commission, which was appointed by Gov. Ed Rendell, wants to drop the rate to 6.99 percent. That would place the state’s rate at 26th in the nation. It also would be lower than that of neighboring states, The Associated Press reports.”

[RWC] Remember the two conditions mentioned above. The CNI rank may improve, but the overall business tax situation would not change because PA would continue to collect the same total amount of business taxes as it does now.

“Other commission recommendations include:

“* Eliminating the existing $2 million annual cap on net operating losses, which it said discourages economic development and is at odds with other state policy and funding initiatives that encourage technology-based and biotech company start-ups.

“* Changing the weighting of the sales factor of the CNI tax apportionment formula from the present 60 percent to 100 percent, which the commission said would encourage employers to locate or expand in Pennsylvania.

“* Shifting to market-based sourcing in the CNI tax apportionment formula for the sale of services, which the commission said would encourage growth in service-related industries.

“* Continuing the phase-out of the capital stock and franchise tax on its current schedule, or accelerate the phase-out if possible.

“* Reforming Pennsylvania’s tax appeals process and related administrative procedures, which the commission said are inefficient and confusing to businesses and detrimental to Pennsylvania’s business climate.

“The AP reports that to help offset the revenue losses, the state would raise the personal income tax more than 30 percent from 3.07 percent to 4.07 percent on ‘pass-through’ businesses, or small businesses such as partnerships that do not pay the corporate net income tax.

“While corporate reaction was generally favorable, the proposals didn’t go down so well with representatives of the National Federation of Independent Business and the Pennsylvania Chamber of Business and Industry. These organizations are formidable lobbyists.

“Given the politics of Harrisburg and the timidity of lawmakers, the commission’s plan might be dead on arrival in the Legislature. But while the fate of this plan is uncertain, the tax modernization that it represents must not be allowed to die.

“The Tax Foundation’s ‘State Business Tax Climate Index’ is a good starting point to put the need for modernization into context. The index rewards tax codes that are neutral, have low and flat rates, are simple and transparent, avoid double taxation and have statutory or constitutional restraints that keep tax burdens low over time.”

[RWC] It’s useful to remember the Tax Foundation index rankings are relative, the same as “grading on the curve.” That is, a low numerical ranking doesn’t guarantee you have a good business tax climate; it only means you aren’t as bad as another state. For example, every state could have a lousy tax climate relative to what’s needed to compete in the world, but one state will still be ranked #1. Using a sports analogy, it would be like thinking the average Class A Minor League champ was on a par with most Major League teams.

“In 2004, Pennsylvania had the 22nd best business climate in the nation, with the only real category killer being the CNI tax. (See the following editorial.) Our leaders in Harrisburg must not allow politics to stall tax modernization. It won’t be easy, but it is achievable if they put their minds to it - and put politics as usual aside.”

[RWC] Let me get this straight. If we change the CNI tax rate but continue to place the same – and eventually growing – total tax burden on business, businesses will be fooled into thinking the PA business tax environment actually improved? With apologies to William Shakespeare, a skunk by any other name still stinks.

“For once, let’s look ahead.”

[RWC] “Look ahead?” How exactly is maintaining the same overall business tax system looking ahead?

If we truly want to look ahead, we should get a spine and eliminate business taxes completely. You may ask, “Don’t businesses need to pay their fair share?” Anyone who learned anything in their high school economics class learned that businesses never pay taxes. Businesses pass all taxes to consumers, including income taxes. Businesses never have and never will pay taxes because they are only legal constructs; they exist only on paper. Ultimately, only people pay taxes. So-called business taxes are no more than hidden taxes on people, and politicians of every stripe – Democrats and Republicans – like hidden taxes.

Liberals should vigorously oppose business taxes because they contribute to the cost of products and services we all buy and/or reduce worker compensation. Therefore, business taxes are “regressive” using liberals’ definition of the term.