By Todd Brysiak
With yesterday’s budget overview of expected big ticket items, we will now dive into a few additional budget categories of note:
Business Tax Reforms
Pennsylvania’s near-10 percent Corporate Net Income Tax (CNIT) rate has been a thorn in everyone’s side for decades. It’s ridiculously high – third highest in the country – and it has been long perceived as a hinderance to job creation and development.
But how to fix it has far less agreement among lawmakers. Historically, the Wolf Administration has suggested trading a lower CNIT rate for combined reporting – a corporate tax reporting method. This has been DOA with the legislature for years. So, in an interesting change of course, the governor this year proposed to phase down the CNIT to 5.99 percent by 2027 in exchange for strengthening the state’s existing expense-addback provisions and changing nexus rulings.
Without getting into the complex nuances of tax policies, this move would change the way businesses in Pennsylvania are taxed on intangible assets. For some businesses, it would increase tax liabilities.
While cutting the CNIT is appealing to many, tax policy changes of this magnitude are extremely difficult to navigate. I have seen this firsthand, having been a part of the last major tax code overhaul back in 2013 when the state instituted its current addback provision.
With almost $3 billion in the Rainy Day Fund and tax revenues coming in far above estimate this year, some are going to argue there is no need for changing the state’s addback policies and the state is finally in a position to simply cut the CNIT. That will undoubtedly be countered with the old-school “Delaware Loophole” argument from the other side of the debate.
Those in the business community who have been paying close attention to the CNIT proposals over the years should keep a close ear-to-the-door on budget discussions this year. Because although this issue is about as complex as they come, real opportunities to cut the CNIT are also not easy to come by.
Although I would have to dig a little deeper to confirm this, I believe this budget marks eight-for-eight with Governor Wolf and a proposed minimum wage hike. Once again, the governor is asking lawmakers to agree to an increase to $12 an hour by July 2022 with an increase to $15 in the future.
Of course, this idea was once again slammed by those who argue it will impact small businesses at a time when they can least afford to pay increased wages. And regardless of how people feel about this counterpoint, it has carried notable weight during recent years’ debates.
Eventually, this issue will come to a head and a compromise will be reached. The fact that Pennsylvania hasn’t increased this rate since 2006 while many other states have moved far beyond our $7.25 wage continues to build pressure on the issue. But can this issue close out in the existing political environment? That’s very debatable.
In today’s labor market, many businesses are paying well above the mandated rate. That statistic alone creates two drastically different arguments. Opponents argue the market is driving wages and there is no need for a rate increase. But in contrast, those supporting the wage increase counter that if most businesses are paying above $7.25, then there should be no harm in raising the wage.
It’s a standard battle of talking points, and both sides have a case to some extent. It reminds me of an old quote attributed to British Economist Ronald Coase: “if you torture the data long enough, it will confess to anything.” And with this in mind, I’ll refrain on offering odds on this proposed policy change. There are simply too many variables to consider.
Criminal Justice and Gun Violence
When it comes to bipartisan issues, the General Assembly and the Wolf Administration should be applauded for their work to revamp Pennsylvania’s criminal justice system. The state’s Clean Slate Law is a prime example of how differing opinions and perspectives can lead to impactful public policy.
The governor appears to be looking to build on the previous cooperation in this year’s budget through some new funding and proposed policy changes.
This budget proposes $35 million be dedicated to community efforts designed to combat gun violence. Given what we’ve seen over the last year across the state, it’s hard to argue against the need for more support here. Gun violence is growing at a record pace, and it is a tier-one issue for many in the General Assembly. It seems a fair bet that something will come to fruition on this issue.
Although more policy-centered, also included in the governor’s presentation was a new focus on pretrial reforms with specific attention given to bail. The Wolf Administration contends the existing bail system is inconsistent, citing major disparities among counties for similar offenses. This results in extensive pretrial jail time for those unable to pay high bail levied at an inconsistent rate. Also noted by the governor was the disproportionate impact on minorities.
When defendants are jailed long in advance of trial dates, it drives up costs for counties. The governor asserts reforms to this system will reduce local costs “without negatively impacting public safety.” That latter point is key here.
While a complex discussion, there is certainly a lot of good that could come from addressing these issues and debating their merits. Plus, when real opportunities arise for bipartisan work, lawmakers are often inclined to jump at them. And this may be one of those cases.
Our Final Take
State budget negotiations are tough. There’s nothing quite like them. Every issue under the sun comes up at some point, and there are always a handful of meetings where things erupt, and progress comes to a screeching halt.
To be fair to the Wolf Administration and the General Assembly, the budget challenges of the last 7-plus years have been uniquely difficult. From the multi-billion-dollar deficit in 2015 that prompted the longest impasse in state history to the crippling effects of a global pandemic, these parties have taken some real lumps when trying to lock down spending plans.
When looking at the available revenue for the coming year and the projected surplus, I can see why some might think this process should be far easier than those in the past. And in most scenarios, they would be right.
But with so many other issues complicating matters and a political environment that gets more contentious with each day, my gut tells me negotiations are again going to be uniquely challenging. Those at the budget table are going to be faced with a host of tough decisions and getting the parties to agree won’t be easy.
A friend once told me that managing expectations and closing budget deals may be tough when the state’s running a deficit, but they are far more complicated and difficult when there’s a big surplus. As someone who negotiated three state budgets while state finances were in the red, I never bought into this theory.
I guess we’re all about to find out if he was right.