Senate Appropriations Committee Report
(all tables and
graphics can be viewed online)
Wolf Administration Releases 2017-18 Mid-Year Budget Update
Budget Secretary Randy Albright presented the 2017-18
Mid-Year Budget Update on December 14, 2017. The briefing contained no big
developments or surprises, and the overall financial picture presented was
essentially the same as what came out of the budget process during late
October. Secretary Albright went so far as to say that the Administration does
not foresee any need for net supplemental appropriations for the remainder of FY
Secretary Albright struck a positive tone as the
Administration believes the Commonwealth is in the best financial shape since
the Great Recession, but there is additional work to be done to improve its
overall fiscal health. With continued
constraint of spending increases, the Administration does
not expect to need any new revenues to close next year’s budget, with one
notable exception that it will push for – a severance tax. The Administration
is considering repeating several of its initiatives that did not make it into
this year's budget, such as the early retirement incentive program.
Secretary Albright was adamant that the statutorily
mandated transfer to the Rainy Day Fund be completed this year. The potential
amount is in the $10 million range based on current estimates, but where
year-end revenues ultimately land depends largely on what happens with the
proposed $200 million transfer of funds from the Pennsylvania Professional
Liability Joint Underwriting Association (JUA).
Ideally, the Senate Appropriations Committee believes that
Pennsylvania should begin to transfer money to the Rainy Day Fund as it is one
of the least prepared states to handle the next recession. Currently, the
balance of the Rainy Day Fund is only $475,000. The range of reserves that
ratings agencies recommend is 5% to 15% of spending – which would be $1.6
Billion to $4.8 Billion for Pennsylvania. If Pennsylvania were at the median
percentage reserve levels of all states, the Commonwealth would have about $2
Billion in its Rainy Day Fund.
The 2017-18 Mid-Year Budget Briefing is available
Revenue Collections on Target through First Half of Fiscal Year
General Fund revenue collections for the month ended
December 2017 totaled $2.8 billion, which was $30.1 million, or 1.1%, below
estimate for the month. Fiscal year-to-date collections total $14.23 billion,
which is $4.1 million below estimate for the year. Fiscal year-to-date 2017-18
total General Fund revenue collections are $775.9 million, or 5.8%, ahead of
last year. Because of differences in one-time revenue sources between fiscal
years, it can be helpful to compare tax revenue growth instead of total revenue
growth. General Fund tax revenue collections are 5.1% ahead of last year
through December. The FY 2017-18 Official General Fund Revenue Estimate calls
for annual tax revenue growth of 4.5%, so with one-half of the fiscal year
behind us, tax revenue collections are beating expectations ahead of the
upcoming and important Spring tax collection months.
December’s corporation tax collections missed the estimate
by $64.6 million, or 11.7%. The final corporate net income tax (CNIT) quarterly
estimated payment for the 2017 tax year was due in December. The corporate net
income tax was under estimate by $81.3 million, or 15.3%, for the month.
December’s CNIT revenue estimate was optimistic, due to the recent changes to
the net operating loss rules resulting from the Nextel decision. For the fiscal
year-to-date, corporation taxes are running $55.8 million, or 4.1%, short of
Sales and use tax (SUT) collections were above estimate for
the month by $15.8 million, or 1.8%. Non-motor SUT beat the estimate by $15.9
million, or 2.1%, for the month, but SUT on motor vehicles was just below
estimate by $166,000, or 0.2%. General SUT collections (i.e. non-motor) were
6.7% above last year’s collections, which could signal a strong holiday shopping
season. Total sales and use tax collections for FY 2017-18 are 4.5% ahead of
last year at this time, and the Official General Fund Revenue Estimate calls for
3.4% year-over-year growth.
Personal income tax (PIT) collections were above estimate
by $70 million, or 6.8%, for December. Estimated PIT payments were $76.3
million, or 46.4%, above estimate for the month, but annual tax payments were
$10.8 million, or 37.8%, below estimate. The very strong PIT estimated
payments were likely a response to the recently enacted Federal Tax Cuts Act.
Taxpayers most likely erred on the side of overpayment of their 2017 state
income taxes to qualify for a full deduction for state income taxes on their
2017 federal tax returns. Beginning in 2018, the federal tax changes limit the
deduction for state and local taxes to $10,000 per year. Total PIT collections
are now $321.5 million, or 5.9%, ahead of estimate through the first half of the
current fiscal year.
Non-tax revenues were $45.4 million short of estimate for
the month, and they are now $66.6 million below estimate for the fiscal year.
The December monthly distribution of the revenue estimate had anticipated the
receipt of the $24.75 million table game license fee for the second Philadelphia
casino. However, the license fee was not paid. The remainder was attributable
to a net $23.7 million monthly shortfall in Treasury escheats (i.e. unclaimed
Motor License Fund collections were $17.7 million, or 8.3%,
above estimate for the month of December. The Motor License Fund is now $41.6
million, or 2.9%, above estimate for the year.
Federal Tax Reform Impact on Pennsylvania’s Personal Income Tax and
Corporate Net Income Tax
The recently enacted Federal Tax Cuts and Jobs Act makes
major changes to federal individual and corporate income taxes. With regard to
individual income taxes, the federal changes will have a limited, if any, impact
on Pennsylvania’s personal income tax (PIT).
Unlike in some other states, Pennsylvania’s PIT does not
piggyback on the federal tax system. The PIT is levied against the taxable
income of resident and nonresident individuals, estates and trusts,
partnerships, S corporations, business trusts and limited liability companies
that are not taxed as corporations for federal income tax purposes.
Pennsylvania taxes the following eight classes of income at the rate of 3.07%:
- Net profits from the operation of a business,
profession or farm;
- Net gains or income from the disposition of property;
- Net gains or income from rents, royalties, patents and copyrights;
- Income derived through estates or trusts; and
- Gambling and lottery winnings.
Unlike federal individual income taxes, the PIT does not
provide for a standard deduction, itemized deductions, or personal exemptions.
However, there are allowable deductions, credits and exclusions that are
generally more limited in scope than those at the federal level. The Federal
Tax Cuts and Jobs Act makes a number of changes to the individual income tax
rate structure, as well as to deductions and credits. The federal tax rates for
capital gains and dividends are left unchanged. The federal Act also provides
owners of pass-through businesses, such as S corporations and partnerships, with
the ability to deduct 20% of their qualified business income. Despite all of
these changes, Pennsylvania’s PIT is, at this time, believed to be mostly
unaffected by the new federal law. Any significant impacts that become known
will be highlighted in future editions of the Monthly Report as further analysis
of the federal legislation becomes available.
The Pennsylvania corporate net income tax (CNIT) is an
annual excise tax measured by net income that is imposed on domestic and foreign
corporations doing business in Pennsylvania. The CNIT tax base is federal
taxable income as calculated under 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.
Pennsylvania S corporations are excluded from the tax.
Instead, the shareholders of S corporations are subject to the personal income
tax on their distributive share of income from the S corporation. In addition,
the CNIT does not apply to banks, trust companies, title insurance companies,
insurance companies, and mutual thrift institutions. These entities are subject
to bank and trust company shares tax, title insurance company shares tax,
insurance premiums tax, or mutual thrift institutions tax.
One of the most significant federal changes is the
reduction in the corporate income tax rate from 35% to 21%. This change will
not affect the Commonwealth’s CNIT rate of 9.99%. The full list of other
changes for the federal corporate income tax is extensive, but one of the most
consequential changes is that corporations will be immediately able to deduct
100% of the cost of their new and used capital investments (i.e. plant and
equipment) for the next five years. The “100% bonus depreciation” rule applies
through 2022 and then will be phased down over the succeeding five years.
In response to the new federal bonus depreciation rules,
the Pennsylvania Department of Revenue recently issued Corporation Tax Bulletin
2017-02. The bulletin interprets certain sections of Pennsylvania tax law as
requiring the amount of a 100% deduction under federal rules to be added back to
Pennsylvania taxable income and provides no additional mechanism for cost
recovery with respect to the qualified property. This change essentially
“decouples” Pennsylvania from the federal rules, thereby disallowing the 100%
bonus depreciation for CNIT, and is effective for property placed in service
after September 27, 2017. The Department of Revenue will continue to allow
depreciation deductions under Corporation Tax Bulletin 2011-01 for property
placed in service prior to this date.
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