A Hispanic entrepreneur recently considered relocating his marketing company from Washington, D.C., to Pittsburgh until he found out about Pennsylvania’s corporate net income tax rate and chose Las Vegas instead.
“For him, the tax rate was the number one determining factor,” said Melanie Marie Malloy, executive director at Pittsburgh Metropolitan Area Hispanic Chamber of Commerce who had tried to recruit the company here.
It’s a conversation Ms. Malloy said she’s had several times with tech startup founders and other out-of-town business people — the dilemma they face when deciding to move their operations to Pittsburgh.
“They say Pittsburgh is a great place to raise a family, and it’s very livable,” she said. “But I can put my business in Pittsburgh and have this tax rate — or I can go to Ohio and have a zero percent tax rate.”
The state’s corporate net income tax rate, or CNI rate, which stands at 9.99%, has for decades been the highest flat rate tax in the country. But that’s likely to be changing soon.
The Pennsylvania Legislature on Thursday passed a tax reform package that will overhaul the business tax structure and include some relief for corporations that are subject to the CNI tax, which critics say is responsible for hampering economic growth in the state.
Gov. Tom Wolf, a Democrat, has supported the tax reduction and is expected to sign the legislation promptly.
The state corporate net income tax is a tax that corporations pay on profits made within the borders of Pennsylvania.
Not all companies are subject to the CNI tax. Limited liability corporations, sole proprietorships and partnerships are among those exempt. About 39% of the roughly 92,000 corporate filers in Pennsylvania pay the tax, according to the Pennsylvania Department of Revenue.
Supporters of lowering the rate have argued that nearby states offer more appealing tax rates to businesses.
The legislation calls for Pennsylvania’s CNI rate to be cut in half over the course of the next nine years.
The reduction will start with a full 1% cut in 2023 to 8.99%. Then, the tax rate will phase down each year by 0.5% until reaching 4.99% in 2031.
“Based on current state corporate tax rates, the full reduction takes Pennsylvania from the highest CNI tax rate in the country to the sixth lowest by 2031, said a statement released by the Pennsylvania Chamber of Business and Industry.
A House Republican analysis estimated the legislation would cut general fund revenues by $127.7 million in fiscal year 2022-23, which represents a partial year cost. Each 1% of the rate now generates approximately $400 million to $450 million in a full tax year, the estimate said.
The bipartisan vote in the state House and Senate to reduce the tax rate is a milestone triumph for organizations that have been taking this fight to Harrisburg for nearly three decades.
Matt Smith, president of the Greater Pittsburgh Chamber of Commerce, said businesses are discouraged from investing here where they will pay the highest tax rate when there are opportunities in other states with more favorable tax conditions.
“Pennsylvania is not only not competitive on the playing field for business investment, we’re frequently not even in the same stadium because of our CNI rates,” Mr. Smith said.
“So, we’re not even able to compete with Ohio and Indiana and states with whom we’re competing for these large projects because the site selectors frequently knock us off the list because of the 9.99% CNI rate.”
Not only will a lower rate attract new business, but also it makes the state more attractive for businesses that already operate here and need to expand, he said.
“What this does is if you’re thinking about expanding your operations — we believe for existing companies — this puts Pennsylvania on the map to be competitive,” Mr. Smith said.
Bryan Iams, vice president of corporate and government affairs at PPG, said as a Pittsburgh-based company that employs thousands of Pennsylvanians, the coatings giant supports lowering the CNI rate.
“We have long supported state tax policies that help foster a better economic growth environment,” he said.
“Reducing the corporate net income tax, which was the highest flat rate in the country, is an essential step toward making Pennsylvania more competitive.”
Tim Grant: tgrant@post-gazette.com
First Published: July 8, 2022, 9:48 p.m.
