The Truth About Business Taxes in Pennsylvania, Part 2: Business Tax Burden is Highly Unevenly Distributed

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Authors: 
David Bradley
Publication Date: 
February 1, 2003

A previous Keystone Research Center paper found that, contrary to conventional wisdom, the amount in taxes that Pennsylvania businesses pay, on average, to state and local governments is not high when compared with other states.

This paper highlights a second truth about business taxes in Pennsylvania – the uneven distribution of corporate tax burdens. Under the two major Pennsylvania business taxes, a small number of companies pay heavily, while many businesses contribute little or nothing. This uneven distribution raises questions about the equity of the current corporate tax structure in Pennsylvania.

Using data published in December 2002 by the Pennsylvania Department of Revenue, we find:

  • Fewer than one in five corporations doing business in Pennsylvania pay anything under Pennsylvania’s major corporate profits tax -- the Corporate Net Income (CNI) tax;
    only one in 17 corporations obligated to file a return for the CNI tax pay more than $10,000;
  • 170 corporations doing business in Pennsylvania – an estimated one out of every 1,265 – contribute half of the total CNI tax revenue and 0.8 percent of companies pay 81 percent of the total CNI tax revenue;
  • Turning to Pennsylvania’s second major corporation tax, the Capital Stock and Franchise (CSF) tax, which is imposed on a combination of the value of a corporation’s net worth and average net income, only one in 12 corporations obligated to file a return pays more than $5,000;
  • Ninety-seven corporations account for nearly a third of CSF tax revenue and 0.6 percent of companies filing returns pay 59 percent of the total revenue.

Reflecting a drop in the number of corporations that pay significant amounts under the CNI and the CSF taxes, Commonwealth of Pennsylvania tax revenue collected from all taxes that fall on business alone has declined over time.

  • Revenue from all corporation taxes fell from 29.9 percent of General Fund revenue in fiscal year 1971-72 to 25.1 percent in fiscal year 1994-95 to a projected 18 percent in fiscal year 2002-03;
  • The steepest decline in revenue is from Pennsylvania’s CNI tax, which dropped from 14.2 percent of General Fund revenue in fiscal year 1971-72 to 11.7 percent in fiscal year 1994-95 to a projected 7.3 percent in fiscal year 2002-03;
  • Tax revenue from the CSF tax went from 6.3 percent of General Fund revenue in fiscal year 1971-72 to 5.5 percent in fiscal year 1994-95 to a projected 4.4 percent in fiscal year 2002-03.

Today, the fall in revenues from corporation taxes exacerbates the state’s fiscal crisis. Over the longer haul, Pennsylvania’s unevenly distributed business taxes are unfair to those businesses that pay most heavily and perpetuate the myth that business taxes are high overall.

The end of the paper outlines four options for distributing the Pennsylvania business tax burden more evenly. We also recommend that the Pennsylvania Department of Revenue produce a public report that would provide basic information on corporations that pay different amounts in CNI and CSF taxes.

This document is an on-line summary of a Keystone Research Center report. The entire report is available for download as a PDF file at the KRC Web site www.keystoneresearch.org © 2001 Keystone Research Center