Recently, we have seen states begin to move forward with tax reform in an effort to refill their coffers that have been depleted over the past year while also trying to help individuals and businesses that continue to be negatively impacted by the pandemic. Reform comes in many different packages, including fiscal budgets and direct legislative enactments.
PA Governor Wolf Rolls Out Proposed Budget
Pennsylvania Governor Wolf introduced his 2021-2022 budget proposal on February 2. Among the revenue-raising items within the budget, he proposed an increase to the state’s personal income tax rate from 3.07 percent to 4.49 percent – a 50 percent increase. Pennsylvania’s personal income tax is imposed on gross income, so this increase may have a significantly adverse effect on Pennsylvania resident business owners.
In addition to the personal income tax rate increase, Governor Wolf’s proposal also intends to close the Delaware “loophole,” referring to the benefit corporate taxpayers receive by putting their intangible assets in a holding company located in Delaware.
The Governor also proposed a corporate net income tax decrease over the next several years. Pennsylvania’s corporate net income tax is currently 9.99 percent. Under the proposed budget, the rate would be reduced to 8.99 percent beginning in 2022, with incremental reductions through 2026.
PA and NJ Aim to Exempt PPP Loan Forgiveness from State Taxes
Pennsylvania and New Jersey have introduced legislation that would benefit business owners who receive loan forgiveness under the Payroll Protection Program (PPP). Pennsylvania currently decouples from the Internal Revenue Code for purposes of the personal income tax, meaning that loan forgiveness is treated as taxable income for purposes of the Pennsylvania personal income tax. The only way for the income to be excluded from state taxation would be through a legislative remedy.
To that end, Pennsylvania legislators introduced House Bill 385 which would exclude PPP loan forgiveness from Pennsylvania personal income tax. Unfortunately, the passage of such legislation is questionable given that similar legislation introduced during the Pennsylvania legislature’s last session failed to advance.
While House Bill 385 is still in play, a more expedited way was found to resolve the issue. Senate Bill 109 was amended to include the loan forgiveness language contained in House Bill 385. Senate Bill 109 also provides relief for schools, restaurants, employers, and tenants affected by the pandemic. Senate Bill 109 was unanimously approved by both the House and Senate and signed by Governor Wolf.
New Jersey has also introduced legislation to exclude PPP loan forgiveness from the New Jersey gross income tax. A bill currently in front of the New Jersey Assembly Appropriations Committee would not only exclude loan forgiveness from gross income tax, but it would also allow expenses related to PPP loan forgiveness to be deducted. New Jersey also decouples from the Internal Revenue Code, and the taxability of loan forgiveness and deductibility of expenses are dependent on the passage of this legislation.
Actions to Tax Out-of-State Businesses Can Also Impact In-State Businesses
Unfortunately, states have limited options for raising revenue to fund all of their programs. Thanks to limited financial resources, states have to resort to cutting programs that would benefit those affected by the pandemic, raising current tax rates, and/or expanding the taxable base subject to income and/or indirect taxes such as sales tax.
Many states will look to tax reform that places a greater burden on out-of-state businesses as a means to raise revenue. Most recently we saw this with the state enactment of an economic nexus standard that pulls remote businesses into the state for sales tax purposes. The unintended consequence of these actions is that they also indirectly or directly impact businesses operating within the state. Care should be taken to understand how these proposed changes could impact you or your business.
We will continue to monitor these tax reform initiatives and provide updates as they become available. If you have any questions about these or any other state and local tax matters, please contact Thomas M. Frascella, head of Kreischer Miller’s State and Local Tax Strategies practice, or you can contact your Kreischer Miller relationship professional here.
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