Senate Appropriations Committee Report
(all tables and
graphics can be viewed online)
Governor Wolf Announces 2017-18 State Budget
Late last year Governor Wolf announced that he would not
recommend broad-based tax increases to solve a then undisclosed budgetary gap.
At the time, we were projecting the two-year budget gap to be approximately $3
On February 7th, Governor Wolf, in his budget
documentation, affirmed that we were correct in our estimate of the shortfall.
His budget proposal recommends more than $1 billion in tax increases and about
$2.1 billion in cuts, savings initiatives and one-time financial maneuvers to
bring his budget into balance. He proposes total spending of $32.3 billion which
is an increase of $571.5 million or, 1.8%, above the revised available budget.
The Governor’s recommended budget includes $234 million in targeted spending
initiatives, most of which is K-12 education related.
The Governor’s balance sheet shows a budget with a modest
positive ending balance at June 30, 2018.
The budget contains several non-recurring budget-balancing options and is
premised on more than $850 million of revenue that is questionable.
Among the non-recurring options, the Governor proposes to
monetize the Farm Show Complex. In this lease leaseback deal, the Commonwealth
would receive $200 million from a private firm in exchange for a 29-year stream
of payments. In addition, the Governor proposes to bond fund several grant
programs for the next three years. This would free up $110 million each year to
support the General Fund. The Governor’s proposal includes a $165 million loan
from the Worker’s Compensation Security Fund to the General Fund and assumes $95
million of additional revenue collections from increasing the minimum wage to
$12.00 per hour.
The Governor is also proposing a 30-and-out early
retirement incentive for executive branch employees. Savings are pegged at $25
million. Under the retirement window, employees with 30 years of service could
retire before attaining superannuation without penalty. As with all early
retirement windows, this has the potential to increase the SERS unfunded
actuarial liability. It will be necessary for the Independent Fiscal Office
(IFO) to provide an actuarial note for this proposal.
Finally, the Governor is proposing that all tax credit
programs would be block granted in order to save $100 million. The Governor
would issue credits on his own volition, and it is safe to say certain credits
would be reduced or eliminated.
Major Initiatives in the Governor’s Budget Proposal
- The Basic Education Funding allocation is proposed at
$5.995 billion, an increase of $100 million, or 1.7%.
- Includes $212.3 million for Pre-K Counts, a $65
million, or 44.1%, increase.
- Recommends $59.2 million for Head Start Supplemental
Assistance, a $10 million, or 20.3%, increase.
- Proposes $1.122 billion for Special Education Funding,
an increase of $25 million, or 2.3%.
- Provides $453.1 million for PASSHE, an increase of $8.9
million, or 2%.
- Includes funding for the Manufacturing PA Initiative, a
$12 million partnership with the Commonwealth’s research universities and Industrial Resource Centers to
accelerate manufacturing technology advancement and adoption, foster
manufacturing innovation and commercialization, and build a 21st century
- Provides $10 million to expand access to naloxone for
first responders and $3.4 million to implement and expand drug courts and
expedite the accreditation process.
- Recommends $21.2 million to serve 1,470 additional
individuals with physical disabilities in the Services to Persons with Disabilities Waivers.
- Expands services to individuals with disabilities by
providing $8.6 million to create a new program for family caregivers to
ensure 1,000 individuals currently on the waiting list can continue to live
- Recommends $15.4 million to create a new program for
family caregivers to ensure 1,000 individuals currently on the Community
Living Waiver waiting list can continue to live at home.
- In addition, the budget proposes to consolidate the
Departments of Aging, Drug and Alcohol Programs, Health, and Human Services into a Department of Health and Human
Governor Proposes Combined Reporting as part of His Budget Proposal
Governor Wolf’s FY 2017-18 Budget proposes to implement
mandatory combined reporting for the corporate net income tax (CNIT), effective
January 1, 2019. Advocates of combined reporting maintain that the goal is to
level the playing field for all businesses subject to the CNIT. Supporters
believe that combined reporting is the most effective way to combat corporate
tax minimization maneuvers such as the “Delaware Holding Company Strategy.”
Beginning in 2019, the CNIT rate is proposed to be reduced from 9.99% to 8.99%.
The CNIT rate is proposed to be further reduced to 7.99% in 2020; 6.99% in 2021;
and 6.49% in 2022 and thereafter.
The Pennsylvania corporate net income tax is an annual
excise tax measured by net income that is imposed on domestic and
non-Pennsylvania corporations doing business in state. The tax is imposed at the
rate of 9.99%, which is the second-highest rate in the nation. The CNIT tax base
is federal taxable income as calculated pursuant to the Internal Revenue Code
and reported on the corporation’s federal tax return, before net operating loss
and special deductions and modified by certain additions and subtractions.
Allocation and Apportionment
For corporations whose entire business is not transacted in Pennsylvania,
the income base may be allocated and apportioned to determine income subject to
taxation in Pennsylvania. Most taxpayers having income from business activities
taxed both within and without Pennsylvania apportion their income based on the
value of sales sourced to Pennsylvania.
Separate Company Reporting (Current Law)
Pennsylvania requires corporations to file tax reports on a separate company
basis. Corporations that are part of an affiliated group (e.g. parent and
subsidiaries) for federal purposes are required to file separate company
Pennsylvania CNIT returns even though their income may have been reported to the
federal government in a consolidated report of affiliated corporations. The
taxable income is computed on a stand-alone basis even though the corporation
participates in a consolidated filing for federal income tax purposes.
Combined Reporting (Governor Wolf’s Proposal)
A combined report is an accounting document used to prepare a tax return for
a group of corporations engaged in a unitary business. In combined reporting,
the unitary group is treated as a single entity. The business income and
apportionment factors of each member of the group are combined, intercompany
transactions are eliminated and the resulting income is apportioned using the
combined apportionment factors, as modified by the elimination of intercompany
transactions. Even members of the group that are not taxable by the state may be
included in the combined report if they are part of the same unitary business.
Previously introduced legislation in Pennsylvania defined a
unitary business as consisting of two or more affiliated corporations with at
least one corporation not doing all of its business in Pennsylvania. A unitary
business is a single economic enterprise made up of: (1) separate parts of a
single corporation; or (2) a commonly controlled group of corporations that are
sufficiently related by their activities and that mutually benefits all members
through a sharing of a significant flow of value among the separate entities.
Despite the uncertainty surrounding combined reporting,
Governor Wolf has proposed combined reporting legislation as part of his FY
2017-18 Budget. Combined reporting does not increase taxes on all businesses
that are affected by its adoption. Although the overall revenue impact is
presumed to be a gain (i.e. tax increase), there are many corporations whose tax
liabilities would be decreased. Corporations that have profitable businesses
paying corporate net income tax in Pennsylvania could see a tax reduction by
bringing less profitable affiliates into the combined group. Furthermore,
including corporations from other states in the combined group has a diluting
effect on the Pennsylvania apportionment percentage, which is used to measure
the amount of income that is taxable in Pennsylvania.
On March 4, 2013, the Independent Fiscal Office (IFO)
issued a report entitled Corporate Tax Base Erosion: Analysis of Policy Options.
The IFO concluded in its analysis that combined reporting could increase
|corporate net income tax revenues by nine-to-thirteen percent.
Winners and Losers
A change from separate company reporting to combined reporting would result
in an unknown number of winners and losers. Those corporations whose tax
liabilities would be reduced (i.e. “winners”) are likely to immediately take
advantage of the change and file their CNIT returns under combined reporting
without contest. However, the “losers” would be less inclined to accept
increased tax liabilities without appeal, resulting in costly litigation and
potential delay in tax payments. Because of this, any revenue gain, especially
in the early years of the change, may not materialize to the extent
Like many tax policy decisions, the issue of separate
company reporting versus combined reporting for state corporate income tax is
not without controversy. Proponents of combined reporting argue that it levels
the playing field by closing tax “loopholes.” Critics suggest that combined
reporting unfairly taxes profits not earned within a given state and increases
the cost of doing business, thereby making the state less attractive for growth
Contact Senator Browne:
On the Web:
702 W. Hamilton Street
Allentown, PA 18101
9 AM to 5 PM
9 AM to 4 PM
281 Main Capitol
Harrisburg, PA 17120
9 AM to 4:30 PM
Western Lehigh County
Upper Macungie Township Building
8330 Schantz Road
Breinigsville, PA 18031
By Appointment Only
Northern Lehigh County
North Whitehall Township Building
3256 Levans Road
Coplay, PA 18037
By Appointment Only