Rep. Wheatley: Tax policy changes are urgently needed to help our local businesses.
Photo courtesy of Wikimedia Commons
In more than half a decade as the Democratic chairman of the House Finance Committee, I’ve grown to fully appreciate and understand the committee’s significance and vital role in how Pennsylvania generates revenue. I will admit that tax policy rarely excites a conversation, but the truth is, it affects each one of us.
We are embarking on a harrowing journey as we attempt to bridge a potential $2 billion budget deficit left in the wake of the COVID-19 pandemic. We may agree to disagree over how the last six months were handled, but the reality remains that we must pass a budget by the end of November to fund government operations through June of next year.
Our committee recently considered a bill that would remove the 20-year cap on carrying over net operating losses. That amounts to a significant long-term tax break for out-of-state corporations operating in Pennsylvania. A recent estimate by the state Department of Revenue showed that out of more than 112,000 of these corporations operating in Pennsylvania, approximately 60% pay zero in taxes!
Corporations headquartered in other states can shift profits from store to store and in and out of the state to create gains and losses on paper, despite significant overall income. Pennsylvania-based corporations can’t hide their income outside the state, so it’s no shock that they make up the bulk of the 40% of corporate taxpayers that do pay their fair share.
The corporate net income tax is the third largest source of revenue in the state, but that makes it even more important that we don’t lose track of the personal income tax, by far our largest source of revenue. Among the handful of states with a flat rate income tax, Pennsylvania is nearly the lowest at 3.07%. Unlike the federal government and many states using the federal return, where the tax rate reflects your income level, PA’s regressive flat rate means the more income you make, the less it impacts you.
The U.S. Small Business Administration estimates that there are nearly one million small businesses in Pennsylvania. They’re the lifeblood of our state economy, signifying most of our employees and employers. Sadly, these statistics are exactly why I was so troubled by our last committee meeting, where we moved partisan tax subsidies that provide advantages to corporations headquartered in other states. It does absolutely nothing for our small businesses, whose owners employ our workforce and pay the personal income tax on their profits.
I have long advocated for legislation to adjust our tax rates so that “passive incomes,” making money off of money, pay a higher rate than those who earn a paycheck or run a local business. This is referred to as the “Fair Share Plan.” This plan would provide the working class with a small reduction in taxes, offset by increases from passive incomes, and still generate additional revenue. It would mean that we can lower taxes on those who work for a living or run their own business by increasing the rates on money made off of money. Keep in mind, the state constitution’s uniformity clause requires a uniform tax rate among the same class of subjects – but there are eight classes of income, and it doesn’t say they have to be the same rate of tax.
It’s imperative that we consider bills to provide workers and small businesses the relief they so desperately need. A recent survey by Main Street America found that 60% of Pennsylvania small businesses are likely to close permanently due to COVID-19, with over 80% reporting more than 50% revenue losses over the last six months. That doesn’t include the enormous increase in the number of Pennsylvanians who have applied for unemployment compensation.
Our communities cannot survive if our residents can’t work and local businesses close. The House Finance Committee should be leading the conversation on tax policy, not offering more corporate subsidies and ignoring the working class.