Cut State Business Taxes to Create More Jobs

As described in a previous post, job growth in the Pittsburgh region has been among the worst in the nation over the past three years. The malaise has infected most sectors of our economy.

What’s the explanation? The most likely one is an uncompetitive business climate, and you need look no further than the state’s business taxes to see why.

The state’s Corporate Net Income (CNI) Tax rate is 9.99%, the highest flat tax rate in the country. (Iowa has a higher rate – 12% – on net income over $250,000, but businesses with less than $100,000 in net income pay only 8%.) Pennsylvania is also one of only two states to limit the ability of companies to deduct prior-year losses from their current year’s income. That makes Pennsylvania’s high CNI tax even more uncompetitive for entrepreneurial startup firms and for businesses in cyclical industries like steel and chemicals.

As if that wasn’t bad enough, Pennsylvania also imposes a Capital Stock and Franchise Tax (CSFT) on non-manufacturing businesses. Fewer than half of the states even have such a tax. Although Pennsylvania is phasing out the CSFT, it won’t be gone until 2011, and even after seven years of reducing the rate, Pennsylvania’s current 0.389% CSFT rate is still the fourth highest among the states that do have such a tax.

The bottom line is that Pennsylvania has the most uncompetitive state business taxes in the country. While there are many factors affecting a state’s business climate, the most visible measure is the state’s CNI tax rate. Pennsylvania’s worst-in-the-nation ranking sends a “take your business elsewhere” message that undercuts all of the other valuable economic development initiatives the state has undertaken. And not only is the Pittsburgh Region suffering, the entire state is: Pennsylvania’s job growth has been only half the U.S. rate for the past three years.

It hasn’t always been so. Twenty years ago, the state’s CNI tax rate was reduced to 8.5%, improving the state’s ranking to 16th. Job creation in the state soared. In fact, the only time in the past 30 years that Pennsylvania’s job growth matched the U.S. rate was in 1987, after the CNI tax rate was reduced.

But the success was short-lived, because the state increased the rate dramatically in 1991, making it the highest in the country, and the state’s job growth rate plummeted.

Can the state afford to cut the Corporate Net Income Tax rate? Cutting the tax rate to 8.92%, which would take Pennsylvania out of the top ten, would reduce CNI tax revenues by $265 million, less than 1% of the state budget. But if that results in even a small increase in business investment and job creation, revenues from the personal income tax and the sales tax as well as the CNI tax would increase by more than enough to pay for the tax cut, resulting in more money for state programs, not less.

The truth is, the state can’t afford not to cut the CNI tax rate. If customers are telling you they’re not buying your product because the price is too high, you cut the price to a more competitive level. But instead of figuring out how to cut the CNI tax, the Governor and state legislators are debating raising the sales tax to 7% – the highest rate in the country – which would make us even more uncompetitive.

For economic success, we need more people and more jobs. You can’t have one without the other.

As the Most Livable City in America, the Pittsburgh Region has all of the credentials it needs to attract and retain workers.

But with the Worst State Business Taxes in America, we can’t expect to create the jobs that those workers need to stay here.

What can you do? Call or email your state legislators and urge them to ensure the new state budget includes a significant cut in the CNI tax rate.