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Pa. tax policy in doubt

"Behind closed doors they are talking... People want to know."

Of all the things Pennsylvania's divided government failed to fix in 2015 -- a budget! multibillion-dollar state, school, police and town pension deficits! liquor sales reform! -- the one that leaves business most bemused is taxes.

Gov. Tom Wolf was elected promising to impose a natural gas extraction tax (you know, like in Texas.) The
General Assembly flirted with killing property taxes (a favorite of post-employed homeowners, a big bloc of Pennsylvania voters). That would have been balanced by higher income taxes, and higher or broader sales taxes.

So far it's none of the above. But Gov. Wolf's partial acceptance of the Republican budget, and his continued demands for more school funds, and Republican insistence new spending be paid for, leave businesses wondering just who will pay what.

Christine Hanhausen and Kenneth Levine, attorneys at the Philadelphia office of Reed Smith, have been watching this so we don't have to. We spoke today. Highlights:

HANHAUSEN: Everything is still in limbo. Yesterday Gov Wolf announced he would do a line-item veto of the approrpaitions bill. All we are left with is approval of funding of education and human services. It was a Republican-drafted appropriations bill, very silmiar to one they presented to him months ago, HB 1192. Which he vetoed. So in the past few weeks they had been working toward a compromise spending bill. And then at the last minute they went back to the Repubilcan spending plan. So there's a lot more work to be done.

(And taxes?) H: Gov. Wolf still wants an increase in spending. The General Assembly will have to do something to generate that revenue.

LEVINE: When there was almost a compromise, they were talking about making some changes in the sales tax. Either increasing the rate. Or broadening the sales tax to cover more transactions that had not been taxed before. For example, digital downloads. New Economy stuff. Wolf proposed taxes on 45 new services. They prepared pages and pages of legislation. And now it's anybody's guess what of that could be in the plan.

The other thing they are still talking about is increasing the personal income tax rate. From a business standpoint, that would affect sole proprietorships and pass-through entities who are not paying the corporate income tax. It would be a tax on those types of small businesses.

Going back earlier in the year, being part of Gov Wolf's proposal was the Natural Gas Severance Tax. Nobody has heard anything about that in a long time.

H: The Governor set a floor for the gas severance tax, which was problematic. His revenue estimates didn't have that much backing. (And with the collapse of gas prices and new drilling,) it does seem that is off the table.

So that leaves us with this $30.3 billion budget, which Wolf is line-item vetoing. The compromise was for a $30.8 billion budget. If you're half a billion off, if you're a few hundred million off, we are back looking at these conditional measures, these tax proposals, which are still out there.

Such as, increase the sales tax, or broaden its base, with the governor's 45 services he wanted to tax, that was supposed to (balance) property tax (cuts). When property tax reform didn't go through, that made it hard (to expand the sales tax.)

(Did property tax failure hurt pension and liquor reform?) L: Pension and liquor were not really budget related. They became things that some of the legislators tied to the budget: 'We're only going to vote for spending bill if we get this done.'

H: So everything started going to the parties' agenda. Gov. Wolf needs the Republicans support to pass a budget: they are the majority. He knows they have been trying to get liquor reform and pension reform for years. So that was part of the compromise. And then we heard the pension reform started failing. And that is why Republicans backed up on the 'compromise' budget.

So now Wolf's agenda items -- like education spending -- are linked to pension and liquor reform. The Republicans can hold out on tax reform. There is no tax bill circulating. That makes it hard for anyone to commit.

(Moody's and Standard and Poor's rate Pennsylvania among the states most likely to default on their bonds; only New Jersey, with its enormous neglected pension deficit, and Illinois, which like Pennsylvania has no budget, are rated worse. Does business care, does this make anyone less willing to locate or employ people here?)

L: I haven't heard about clients talking about the pension situation in Pa as a dragging force in their decision making one way or another as opposed to major tax changes.

There are a lot of other factors that go into why a company does business here. One thing that seems to come up still is taxation of banks. Pa. has a specific tax on bank shares, on the eauity of a bank. In 2013 Pennsylvania reduced the rate of that tax, from 1.25 percent to 0.89 percent, but (broadened the tax to apply more to out-of-state banks.) Gov. Wolf has talked about reverting back to the old (higher) rate. We have a lot of banking clients. They've been very interested.

(Nobody likes paying more taxes...) H: There was a feeling that they made a deal. The bank tax (reform) increased the base but also reduced the rate. Gov. Wolf's proposal would be going back on that agreement they had in that legislation.

(Did Gov. Wolf's outburst against the Republicans the other day, for going back on the budget compromise – did his tone make progress any more or less likely?) L: After Gov Wolf made his statement with strong language, some of the Republican leaders acknowledged they probably need to come back to the table. If they can get past the bickering there might be a road to a final resolution.

(But we still don't know what taxes they will want to raise...) H: Behind closed doors they are talking about all these scenarios. The public hasn't seen a tax bill that will accompany the appropriations. People want to know.