Pennsylvania Gov. Tom Wolf presented his budget address February 7, 2017. The proposed budget seeks $1 billion in new revenue from several tax proposals, such as a severance tax on natural gas drilling, corporate net income tax changes (including combined reporting), sales tax base broadening, and expansion of the insurance premiums tax.

On February 7, Gov. Tom Wolf (D) presented his third budget address as Pennsylvania’s governor, proposing a $32.3 billion spending plan. Facing yet again a multi-billion-dollar budget deficit, Gov. Wolf lauded his plan as one focused on “reforming our state government” and “closing corporate loopholes,” while containing “no broad-based tax increases” and “avoid[ing] any new taxes on Pennsylvania families.”

This may be an appeal to the legislative Republicans, who have a significant majority in both the House and Senate. The budget proposal, however, is not actually silent on taxes—rather, it depends on $1 billion in new tax revenue.

Here is more detail on tax changes included in the proposed 2017-2018 budget:

• Impose Severance Tax on Natural Gas Drilling. Proposes to impose a 6.5% severance tax on the value of the natural gas extracted at the wellhead. The existing unconventional gas well impact fees would remain intact, but taxpayers could take a credit against the severance tax for any impact fees paid. The severance tax is estimated to generate an additional $330.3 million in revenue.
• Corporate Net Income Tax Reform. Proposes a trio of corporate income tax reforms, which are estimated to result in an overall revenue increase of $81.2 million.
  • Mandatory Combined Reporting
  • Reduce Corporate Net Income Tax Rate. Reduces the corporate net income tax rate from 9.99% to 6.49% by 2022.
  • NOL Cap. Noting Reed Smith’s recent win in Commonwealth Court finding Pennsylvania’s current cap on the net loss deduction nonuniform and unconstitutional,1 the budget proposal remedies that by imposing a strictly percentage-based cap on net loss deductions. Under this plan, the cap would be 30% of taxable income for all taxpayers.
• Eliminate Sales and Use Tax Exemptions. Proposes to eliminate a number of exemptions currently in place. The additional revenue is estimated at $489.8 million by removing the following exemptions:
  • Custom computer and software programming
  • Design services
  • Data processing
  • Commercial storage (excluding farm product and warehousing storage, and transportation services)
  • Airline food purchases and non-alcoholic beverages
  • Aircraft sales, use and repairs
• Expand Insurance Premiums Tax. Proposes to expand the insurance premiums tax to apply to previously exempt entities. The revenue estimate for this change is a $141.5 million increase.

Additionally, as an expenditure reduction, the budget proposal includes a reduction in the amount of tax credits available by $100 million. There is no detail at this time on the credit programs specifically impacted under the proposal.

It remains to be seen what, if any, tax proposals will garner enough support from the Republican-dominated legislature this time around. However, the tone of Gov. Wolf’s budget address, coupled with that of recent Republican legislators’ press releases, indicate there will be a more cordial budget negotiation environment that could lead to significant tax reform.

1. For more detail on this decision, click here.

Client Alert 2017-048