Pennsylvania's Business Taxes Are Not High Compared With Other States

New KRC Review Takes Issue with Conclusions of Recent Business-Sponsored Studies

Harrisburg, June 19 -- The taxes that Pennsylvania's state and local governments impose on businesses are not high when compared with other states according to a new review of recent research by the Keystone Research Center.

The KRC examined recent studies of business taxes in Pennsylvania and found that they failed to consider property and sales taxes when making comparisons of tax rates in various states.

"When we examined Pennsylvania's taxes with methods widely accepted by business economists, methods that consider all taxes paid by business, we found that the state's business tax burden is similar to that of other states," said Stephen Herzenberg, economist and executive director of the Keystone Research Center.

• Even before the most recent spate of tax cutting, in only 23 states did business pay a smaller share of all taxes than in Pennsylvania.

• Based on 1995 data, Pennsylvania businesses paid $940 per capita in state and local taxes, 17th highest out of the 50 states but less than the $962 average for all states.

• A 1999 study found that, for typical manufacturing firms, Pennsylvania had the second lowest business taxes in a group of 10 mid-Atlantic and southeastern states.

• In 1995, again before additional cuts in business taxes, Pennsylvania already had lower per capita business taxes than seven out of a group of 10 states identified by the Pennsylvania Economy League (PEL) as "competitor" states.

• Even looking only at a group of business taxes that had been high in Pennsylvania (and that includes the Corporate Net Income tax and the Capital Stock and Franchise Tax), 2001 Census Bureau data show Pennsylvania dropping from having the 5th highest taxes to the 15th highest.

Recent studies by PEL on behalf of a number of business organizations have claimed that Pennsylvania has among the highest business taxes in the nation and Mid-Atlantic region. These studies have been widely cited in calls for cuts in Pennsylvania business taxes.

Supporters of continued business tax cuts claim the cuts will help spur job growth. A poll conducted by IssuesPA in February suggested that 41 percent of Pennsylvanians believe businesses won't locate in Pennsylvania because of high business taxes.

Given Pennsylvania's lack-luster performance in job creation, and considering recent business tax cuts, it's time to consider the possibility that factors other than taxes are important to economic development, says Eileen McNulty, former Pennsylvania Department of Revenue Secretary and a co-author of the KRC paper.

McNulty points to a large body of research showing low business taxes are not the key to rapid job growth. "Businesses are sophisticated in their expansion and location decisions," she says, "and carefully consider the service side of taxes, including the quality of education, workforce skills, and infrastructure."

"Tax cuts may be the junk food of economic development: politically palatable, but not, in the long run, nutritious for growing a healthy economy. Cut taxes and services too far, and we risk cutting into the muscle businesses and communities depend on to grow and prosper" Herzenberg says.

In light of its research review and the state’s budget shortfall, KRC recommended putting on hold the scheduled phase-out of one of Pennsylvania’s current business taxes (the Capital Stock and Franchise Tax) that currently brings in $1 billion per year. KRC also proposed that the state establish a 21st Century Tax Commission to define comprehensive tax reforms that are business friendly but also expand economic opportunity, ensure good schools, and promote quality of life. In a comprehensive reform, Herzenberg concluded, business taxes should be made more equitable and it may be possible to lower overall business taxes.

The KRC review Are Business Taxes High in Pennsylvania? is available from the Keystone Research Center Web site: www.keystoneresearch.org. The paper is the first is a series of KRC papers to be released over the next eight months that will examine various issues related to Pennsylvania's economic development policies.