82 Percent of PA Corporations Pay No Corporate Net Income Tax, Keystone Research Finds

New DOR Data Showing Uneven Tax Burden Suggest Need for New Business Tax Strategy

Harrisburg, February 25, 2003 – 82 percent of corporations doing business in Pennsylvania pay nothing under the state’s Corporate Net Income Tax (CNI) according to a review of new Pennsylvania Department of Revenue data by the Keystone Research Center (KRC).

According to the KRC study, Department of Revenue (DOR) data, published in December of 2002, also show that 63 percent of corporations doing business in Pennsylvania pay a combined $300 or less under the CNI plus the much-maligned Capital Stock and Franchise Tax (CSF). Just 170 corporations contribute over 50 percent of the total revenues collected under the CNI.

“We think these numbers will come as a shock to many,” said David Bradley, KRC policy analyst and author of the study, “especially given continued calls for lowering business taxes.” Overall, corporation taxes are projected to contribute 18 percent of the state’s General Fund in 2002-03. Consumption and personal income taxes contribute 39 and 34 percent of Pennsylvania’s general fund, respectively.

Asked why revenue from corporation taxes is dwindling, Bradley pointed to several factors, including actions by the General Assembly to lower the CNI rate and begin phasing out the CSF. “Another likely significant factor,” Bradley said, “has been corporation’s increasingly sophisticated manipulation of the tax code -- ‘creative accounting’ to move income across states in ways that cuts taxes. ”

Bradley noted that the executive director of the Multistate Tax Commission, an organization of state governments promoting fairness and efficiency in state tax systems, has suggested that as much as 80 percent of the decline in corporate tax revenue in recent years has been due to “tax planning” and “weakened standards of income accountability.”

“One of the conclusions of our review,” said Stephen Herzenberg, an economist and executive director of the KRC, “is that the corporate tax burden is distributed not only unevenly but probably quite unfairly. When over 50 percent of CNI revenues come from just 170 companies something is amiss. Some of those may be homegrown companies we don’t want to hammer with high taxes. It’s hard to know because there is no disclosure of what individual companies pay in state taxes. To make good policies, policymakers need a better picture of who is paying and who is avoiding corporate taxes.”

The KRC calls on the Department of Revenue to make a public report of the characteristics of corporations that pay different levels of CNI and CSF taxes. KRC also outlines policy options that would make it more difficult for corporations doing business in Pennsylvania to artificially slash their paper profits and thus taxes.

“With the state facing revenue shortfalls, now is a good time for Pennsylvania policymakers to close loopholes that lead to many companies paying little or nothing under either the CNI or CSF,” Herzenberg said. “Over the longer haul, this could be accompanied by further cuts in the CNI and the CSF, but only as part of a reform package that is equitable in terms of the total tax burden on corporations vs. individuals and that raises revenues adequate to the state’s education, economic development and other needs.”

The KRC paper is available on-line, free of charge, at the KRC Web site http://www.keystoneresearch.org. The Keystone research Center is the leading source of independent analysis of Pennsylvanian’s economy and public policy.