Sunday, January 10, 2016

Pennsylvania Completes the Elimination of Its Tax on Corporate Assets

           Pennsylvania’s onerous Capital Stock and Franchise Tax, a tax on the assets of all types of corporations based in or operating in the state, was finally eliminated by the first of this year, after a 15-year phase-out. 

Many small businesses incorporate in order to be limit liability from lawsuits only to corporate assets, yet limited liability companies were among the corporations subject to the Pennsylvania’s Capital Stock and Franchise Tax.  Even those incorporated businesses that were not profitable were liable for the tax on the value of their stock, based on their corporate net worth.  The Commonwealth had been one of only two states in the American Union that taxed both corporate profits, as well as assets.  The Keystone State’s corporate income tax rate is the second highest among the 50 States. 

The process to eliminate the Capital Stock and Franchise Tax began in 2000 under Pennsylvania Governor Tom Ridge, a Republican, who signed a bill approved by the General Assembly to phase out the tax over the next several years.  The phase-out of the tax was delayed by successive Republican and Democratic Governors and state legislatures until it was finally completed under legislation approved by the GOP-majority Assembly and Governor Tom Corbett, also a Republican. 

Liberal Pennsylvania Democratic Governor Tom Wolf recently announced the completion of the phase-out of the tax in a statement that gave the impression that he was responsible for the completion of its elimination, which had been scheduled under the law; he simply did not propose to delay the phase-out further, a proposal the legislature would likely have opposed.  The former businessman observed how burdensome the corporate assets tax was to businesses, as the tax on capital was a disincentive for them to increase growth and hiring, for which the accumulation of capital is usually a prerequisite. 

Corporations are still liable to pay the Capital Stock and Franchise Tax for tax year 2015.  

Although the delays of the phasing out of the Capital Stock and Franchise Tax cost Pennsylvania’s businesses billions of dollars, thereby harming the economy unnecessarily and thus reducing state tax revenue, it is hoped that the elimination of the tax will encourage businesses to continue to operate in the Keystone State or to expand there.  Pennsylvania would be even more attractive to businesses if it lowered its corporate income tax to a more average level.  

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