State Rep. Frank LaGrotta – 2/14/05

This page was last updated on March 26, 2005.

LaGrotta proposes business tax cut to spur economic growth; State Rep. Frank LaGrotta (D-10); February 14, 2005.

To begin, the title of the news release is a lie. As you will read below, the alleged CNI tax “cut” is really a tax increase.

Beyond the lying, I believe the author of this news release hopes we can’t “connect the dots” by reading letters to the editor and other so-called news releases by other local Democrats and Rendell administration officials. They want us to believe they are “pro-business,” but connecting the dots with other press releases shows the true colors of these folks.

To be fair, it appears there will be true cuts in the Capital Stock & Franchise tax. The CSF tax is currently scheduled to phase out (1 mill/year) by 2011 according to a schedule implemented during the Ridge administration. At least twice, though, once each during the Schweiker and Rendell administrations, the scheduled phase-out was temporarily delayed.

Regarding the Gross Receipts tax, there’s something going on politicians apparently don’t want to discuss. While perusing Mr. Rendell’s 2005-2006 proposed budget, I noticed the estimated collections for the Gross Receipts tax drop by about $68 million but I could find no mention of changes that would account for the drop. Indeed, the last change I found (HB 200 of 2003) referred to a tax increase by imposing the GRT on wireless services. The budget also mentions this increase in a footnote. With no changes to the GRT tax rates and rules for the 2005-2006 budget year, most of us would expect collections to increase, not decrease.

I first asked the Commonwealth Foundation if they knew of any changes to the GRT that would account for the collection drop. They said they did not. I then asked Rep. Vince Biancucci (D-15) about the GRT in an e-mail note of February 23, 2005. It’s over a month later and I’ve received no response from Mr. Biancucci’s office other than an automatic “note was read” notification. I forwarded the same note to Sen. Gerald LaValle (D-47) on March 22, 2005, and as of yet I have received no response. If there were a “good” reason for the drop, I’m sure Messrs. Biancucci and LaValle would have been quick to respond.

I mention the GRT because I’m waiting for a politician to count the projected 5.6% collection drop as a GRT rate cut. With no indication the collection drop is due to GRT code changes, I can only assume the drop is a result of decreased business activity in the areas covered by the GRT. Needless to say, this would not be a good thing for PA’s economy. Assuming I’m correct, how can PA politicians – whether Democrat or Republican – claim they are taking actions to make PA an attractive place to do business?

Below is a critique of the subject news release.

“HARRISBURG, Feb. 14 – State Rep. Frank LaGrotta, D-Lawrence/Beaver/Butler, joined with fellow Democrats in sponsoring legislation to implement Gov. Rendell’s business tax reductions that would improve Pennsylvania’s business tax climate and make the state more business-friendly. The legislation will reduce Pennsylvania’s Corporate Net Income Tax rate from 9.99 percent to 7.99 percent.

“‘Pennsylvania’s Corporate Net Income (CNI) tax is currently the third highest in the nation,’ said LaGrotta. ‘Our high CNI tax rate is a major disincentive for businesses who are considering locating here and an economic development impediment to our current employers.’”

[RWC] How can this be? On a Democrat Party infomercial on PCN during late 2002 or early 2003, commonwealth Rep. Mike Veon (D-14) stated taxes weren’t a big concern for business, alleging taxes were not among the top four or five issues concerning business. Is Mr. LaGrotta claiming Mr. Veon was wrong? This is one “dot” we’re not supposed to connect.

“‘By reducing the CNI tax, we will be able to entice more businesses to open and expand across the Commonwealth. In turn, this will spur job growth, and we will be better equipped to compete with our neighboring states.’”

[RWC] Whether intentionally or not, Mr. LaGrotta attempts to mislead us when he refers to “reducing the CNI tax.” In truth, the proposal reduces only the statutory tax rate, not the amount of tax dollars collected. In Mr. Rendell’s proposed 2005-2006 budget, tax dollars collected via the CNI tax will actually increase by over $131 million dollars over the estimated collections for 2004-2005.¹ That’s an increase of nearly 7%. Does that sound like “reducing the CNI tax?” This is “dot” #2; we’re not supposed to compare this news release with Mr. Rendell’s budget.

Let’s put the 7% CNI tax collection increase into context. It’s about 2.5 times the 2004 inflation rate and about 1.5 times the U.S. 2004 GDP growth. Given that the PA economy lags the overall U.S. economy, the CNI tax increase is even worse when measured vs. PA economic growth.

Here’s another “dot” we’re not supposed to connect. If the idea is to help business “be better equipped to compete with our neighboring states,” why does Mr. LaGrotta support increasing PA’s minimum wage even further above that of next-door neighbor Ohio?

“In December, the Pennsylvania Business Tax Reform Commission, set up by the governor to study Pennsylvania’s business tax structure, recommended lowering the CNI tax to 6.99 percent. However, lowering the rate to that level would have required small businesses to pick up more of the tax burden, LaGrotta said.”

[RWC] Don’t buy the alleged concern for “small businesses.” Are we to believe it never occurred to Mr. LaGrotta and his comrades they could reduce the effective tax rate on all businesses – both large and small – by cutting spending? If spending cuts to reduce tax burdens truly did not occur to Mr. LaGrotta et al, that tells us a lot as well. That’s “dot” #4.

“‘I was not about to see more of the tax burden shifted on to the lifeblood of our communities,’ LaGrotta said. ‘Our small business owners already face too many other obstacles thanks in large part to the President’s out-of-control spending policies and his tax cuts for billionaires.’

[RWC] In this paragraph we have Mr. LaGrotta’s ritual bashing of President Bush. Given my experience with Mr. LaGrotta, it wouldn’t be much of a stretch to expect him to find some way to blame President Bush for the Steelers losses to the Patriots in the AFC championship games after the 2001 and 2004 seasons. <g>

Note that Mr. LaGrotta didn’t list the “obstacles” faced by “small business owners … thanks in large part to the President’s out-of-control spending policies and his tax cuts for billionaires.” I refer to unsubstantiated comments like this as “drive-by” bashing. If you’re going to bash someone, I believe it’s only fair to be explicit and provide credible and verifiable proof of your allegations. Otherwise, it’s equivalent to playground name-calling and diminishes your credibility and cause.

I believe President Bush and Congress haven’t made anywhere enough spending cuts, but it’s incorrect to portray President Bush as a big spender, the prescription drug plan aside. When you look at non-security “discretionary” spending, President Bush cut spending increases every year. In President Bush’s five budgets, this category increased 6%, 5%, 4%, and 1% in the first four years, and decreased 1% in the 2006 budget. In President Clinton’s last year, this category increased 15%, or nearly as much in one year as in President Bush’s five years. Slowing the rate of increase isn’t the goal, but it’s a start. President Bush also needs to go after so-called “mandatory” spending. I won’t get into it here, but “mandatory” spending is a myth.

Regarding the “obstacles” for small business, you’ll note Mr. LaGrotta failed to mention his proposal to increase the PA minimum wage. As I noted above, these folks don’t want us to “connect the dots.” I’m no expert in this area, but since most people work for small businesses, I suspect most people who receive the minimum wage work for small businesses. Assuming this is true, the proposed minimum wage increase targets small business more than those “evil” large corporations.

Did “billionaires” receive income tax cuts? Of course, everyone did, including the “small business owners” about whom Mr. LaGrotta allegedly cares. Even low-income earners who paid no income taxes got larger “rebates.”

Here’s another point the class warfare gang doesn’t want us to know. According to IRS data for tax year 2001, the top 1% of income earners paid 33.9% of federal income taxes while the bottom 50% paid only 3.9%! Does that sound like “billionaires” are getting a break? Further, the non-partisan (according to John Kerry) Congressional Budget Office reported the portion of income taxes paid by “the rich” in some years is larger after the tax cuts than it was before the cuts. In other words, out of every income tax dollar paid to the IRS, those evil rich people paid more after the tax cuts than they did before. Why is Mr. LaGrotta complaining? Isn’t that what Marxists want? In general, though there are year-to-year variations, the proportion of taxes paid by each income group stayed approximately constant.

I really hope socialists keep up the “tax cuts for the rich” mantra. After all, it worked so well for John Kerry, Tom Daschle (D-SD, Senate Minority Leader), and the Democrats who lost seats in the U.S. House and Senate in 2004. Democrats also lost seats in the 2002 election. In general, voters don’t buy into the class warfare tactic.

“State Rep. Mike Gerber, D-Montgomery, who introduced the measure LaGrotta supports, agreed, saying, ‘Now is not the time to burden smaller businesses and that is why my plan doesn’t shift any more of the tax burden on to small business.’”

[RWC] As noted above, the news release was a tad less than forthcoming about the details of the alleged “tax cut.” While it’s true Mr. Rendell’s budget proposes reducing the statutory tax rate, its goal is to retain or increase the effective tax rate by changing how income is counted. Quoting Gregory C. Fajt, Secretary of the PA Department of Revenue, “Gov. Rendell would pay for the corporate tax rate cut by closing corporate tax loopholes.”² It would be like the feds reducing your statutory personal income tax rate from 15% but also eliminating or reducing personal tax loopholes, including exemptions for dependents, the home mortgage interest deduction, et cetera. A recent news release by Mr. Veon said pretty much the same thing as Mr. Fajt’s letter.³ Oops, these are “dots” #5 and #6.

Here are a couple of points about Mr. Fajt’s letter. Regarding the above quote, Gov. Rendell wouldn’t pay for anything; it’s not his money. Oh wait; in the mind of a socialist all money belongs to the government first. My second point refers to the letter’s title, “Corporate tax loopholes create the real nightmare.” Tax deductions, exemptions, et cetera are not the real nightmare, spending is.

Let’s discuss so-called “loopholes.” A loophole is a legal provision of the tax code you don’t like. For example, if you didn’t like the home mortgage interest deduction, you would call it a loophole because the deduction reduces the tax liability of taxpayers who can use it. You would claim the deduction (loophole) allows some taxpayers to escape paying their “fair share” of taxes. That’s what Mr. Rendell and his cohorts are doing with legal provisions of the CNI tax code. To increase collections, they want to eliminate certain legal deductions and/or exemptions. Mr. Rendell et al are trying to garner support by leading us to believe businesses that use these provisions are doing something wrong.

I won’t get into a discussion of the “fairness” of the proposed tax rule changes because I believe so-called “business taxes” are a scam perpetrated by politicians – both Democrats and Republicans – to hide taxes. Ultimately, individuals pay all taxes. Politicians know businesses pass along taxes in their entirety to individuals via higher priced goods and services, lower wages and benefits, lower employment levels, lower dividends, or lower share value. Lower share value affects the value of pension plans, IRAs, and 401(k)’s. Business taxes are simply hidden personal taxes collected by business on behalf of government. In other words, businesses serve as unpaid tax collectors for certain hidden personal taxes.

“‘This tax reduction would advance Pennsylvania businesses, attract new businesses and create jobs. If we do this and continue to focus on other economic stimulus reforms such as phasing out the Capital Stock and Franchise Tax, we can take Pennsylvania to new economic heights,’ said Gerber.”

[RWC] It’s only a tax reduction if the intent and result is to reduce the amount of tax dollars collected. As noted above, Mr. Rendell’s budget actually shows CNI tax revenue increasing in his budget by over $131 million in the first year alone. That’s an increase of nearly 7%. Does that sound like a “tax reduction?”

Depending on how the various rule changes affect CNI taxable income, I’m sure some businesses will benefit. Overall, though, you will pay over $131 million more CNI taxes if your name is “PA Business.”

In summary, Mr. Rendell and his supporters are merely reducing the “list price” of the tax while more than making up for it by reducing the “discount.” They tell us they propose to reduce the CNI tax when in truth they propose to increase it.

1. 2005-06 Governor’s Budget in Brief; February 9, 2005.

2. Corporate tax loopholes create the real nightmare; Gregory C. Fajt, Secretary of the PA Department of Revenue; Pittsburgh Post-Gazette; February 16, 2005.

3. Levdansky, Veon fight for small businesses and tax fairness; want to end tax loopholes for huge corporations; February 1, 2005.