PENNSYLVANIA BUSINESS TAX REFORM COMMISSION REPORT TABLE OF CONTENTS 1. Chairman’s Letter 2. Table of Contents 3. Executive Order 4. Final Report 5. Interim Report 6. Commission Members 7. Meetings Held 8. List of Testimony Presented 9. Criteria for Pennsylvania Business Tax Reform Commission 10. State Corporate Net Income Tax Issues – National Overview 11. Pennsylvania Corporate Net Income Tax Issues – Overview 12. Existing Department of Community and Economic Development Initiatives - 1 - MAJOR RECOMMENDATIONS OF THE COMMISSION 13. Reduction of Pennsylvania Corporate Net Income Tax Rate A. Current Pennsylvania Law – Tax Rate of 9.99% B. Reasons for Change C. Discussion of the Recommendation 1. Testimony Presented at the Commission Meetings 2. Comments by Commission Members 3. Other State Tax Commission Recommendations D. Evaluation of the Recommendation Under Established Criteria E. Commission Members’ Major Recommendation F. Parameters Associated with the Recommendation 1. Assumptions 2. Contingencies Impacting Fiscal Estimate G. General Economic Impact Considerations in Arriving at Recommendation 1. Business Tax Burden 2. Business Tax Climate H. Distributional Effect of the Proposal by Industry - 2 - MAJOR RECOMMENDATIONS OF THE COMMISSION 14. Modification of Existing Pennsylvania Net Operating Loss Provisions A. Current Pennsylvania Law – Annual $2,000,000 Limit on Use of Net Operating Loss Carryover B. Reasons for Change C. Discussion of the Recommendation 1. Testimony Presented at the Commission Meetings 2. Comments by the Commission Members 3. Other State Tax Commission Recommendations D. Evaluation of the Recommendation Under Established Criteria E. Commission Members’ Major Recommendation F. Parameters Associated with the Recommendation 1. Assumptions 2. Contingencies Impacting Static Revenue Estimate G. General Economic Impact Considerations in Arriving at Recommendation 1. Business Tax Burden 2. Business Tax Climate H. Distributional Effect of the Proposal by Industry - 3 - MAJOR RECOMMENDATIONS OF THE COMMISSION 15. Single Sales Factor Apportionment A. Current Pennsylvania Law – 60 Percent Factor B. Reasons for Change C. Discussion of the Recommendation 1. Testimony Presented at the Commission Meetings 2. Comments by the Commission Members 3. Other State Tax Commission Recommendations D. Evaluation of the Recommendation Under Established Criteria E. Commission Members’ Major Recommendation F. Parameters Associated with the Recommendation 1. Assumptions 2. Contingencies Impacting Fiscal Estimate G. General Economic Impact Considerations in Arriving at Recommendation 1. Business Tax Burden 2. Business Tax Climate H. Distributional Effect of the Proposal by Industry - 4 - MAJOR RECOMMENDATIONS OF THE COMMISSION 16. Market Base Service Apportionment A. Current Pennsylvania Law – Pass-Through Taxation B. Reasons for Change C. Discussion of Alternatives to the Recommendation 1. Testimony Presented at Commission Meetings 2. Comments by Commission Members 3. Other State Tax Commission Recommendations D. Evaluation of the Recommendation Under Established Criteria E. The Commission’s Major Recommendation F. Parameters Associated with the Recommendation G. General Economic Impact Considerations in Arriving at Recommendation 1. Business Tax Burden 2. Business Tax Climate H. Distributional Effect of the Proposal by Industry - 5 - MAJOR RECOMMENDATIONS OF THE COMMISSION 17. Mandatory Combined Reporting A. Current Pennsylvania Law – Separate Company Reporting B. Reasons for Change C. Discussion of the Recommendation 1. Testimony Presented at the Commission Meetings; 2. Comments by the Commission Members; 3. Other State Tax Commission Recommendations on Combined Reporting. D. Evaluation of the Recommendation Under Established Criteria E. Revenue Estimate for Adoption of Mandatory Combined Reporting F. The Commission Member’s Major Recommendation G. Parameters Associated with the Recommendation 1. Assumptions; 2. Contingencies Impacting Revenue Estimate; 3. Recommendations to Consider in Defining a Unitary Group to Avoid Unnecessary Litigation. H. General Economic Impact Considerations in Arriving at Recommendation 1. Business Tax Burden 2. Business Tax Climate I. Distributional Effect of the Proposal by Industry - 6 - MAJOR RECOMMENDATIONS OF THE COMMISSION 18. Adoption of Additional Entity Level Tax on Pass-through Entity Owners A. Current Pennsylvania Law – Pass-Through Taxation B. Reasons for Change 1. Enabling Provision, if needed, to Reduce Pennsylvania Corporate Net Income Tax Rate to 6.99 Percent C. Discussion of Alternatives to the Recommendation 1. Testimony Presented at the Commission Meetings 2. Comments by the Commission Members 3. Other State Tax Commission Recommendations D. Evaluation of the Recommendation Under Established Criteria E. Commission Members’ Major Recommendation F. Parameters Associated with the Recommendation 1. Assumptions; 2. Components of the Proposed Tax 3. Contingencies Impacting Fiscal Estimate; G. General Economic Impact Considerations in Arriving at Recommendation 1. Business Tax Burden H. Distributional Effect of the Proposal by Entity Type - 7 - MAJOR ADMINISTRATIVE RECOMMENDATION 19. Pennsylvania Appeal Process A. Current Pennsylvania Appeals Process B. Reasons for Change C. Discussion of the Recommendation 1. Testimony Presented at the Commission Meeting 2. Comments by the Commission Members 3. Other State Tax Commission Recommendations D. Evaluation of Recommendation Under Established Criteria E. Commission Members Major Recommendation F. Effect on the Business Tax Climate - 8 - 20. Static Revenue Estimate of Integrated Recommendations on the General Fund A. Overview of Pennsylvania Department of Revenue Methodology B. Combined Reporting by Industry – 1999 to 2001 C. Combined Reporting: Comparison to Previous Estimate - Tax Year 2000 D. Combined Reporting by Industry – Baseline Scenario 1999 to 2001 E. Sales Factor Effects by Industry – Tax Year 2000 F. Group NOL Effects by Industry – Tax Year 2000 G. Fiscal Impact with Rate Reduction to 7.22 Percent CNIT Rate H. Fiscal Impact with Rate Reduction to 6.99 Percent CNIT Rate I. Commission Member’s Comments on Recommendations Fiscal Impact - 9 - 21. Global Insight: Review of Pennsylvania Department of Revenue Static Revenue Estimate for 2005 and Dynamic Modeling Analysis of Major Recommendations A. General Comments on Global Insight’s Reports B. Overview of Global Insights’ Methodology C. Review of Pennsylvania Department of Revenue’s Static Revenue Estimate for 2005 D. Dynamic Modeling Analysis of Major Recommendations - 10 - OTHER RECOMMENDATIONS 22. Other Recommendations Coordination and Evaluation of Existing Economic Development Provisions and Incentive Credits with Proposed Rate Reduction in Pennsylvania Corporate Net Income Tax. - 11 - OTHER RECOMMENDATIONS 23. Other Issues Raised During the Commission’s Deliberations but not Included in the Final Report Because They Were Outside of the Parameters of the Commission’s Executive Order - 12 - COMMENTS CONCERNING THE EXECUTIVE ORDER 24. Comments Concerning the Executive Order - 13 - OTHER PROPOSALS CONSIDERED BY THE COMMISSION BUT NOT RECOMMENDED 25. Other Proposals Considered by the Commission but Not Recommended A. Adoption of Throwback or Throw-out Rule B. Equalization of Pass-Through Taxation Rate of 3.07% with a Comparable Reduction in Pennsylvania Corporate Net Income Tax Rate C. Fixed License Fee for all Entities Including C Corporations D. Stand Alone Passive Investment Company Addback Provisions of Interest and Royalties (Addressed in Definition and Adoption of Combined Reporting) E. Stand Alone Section 482 Powers (Intended Incorporation in Definition and Adoption of Combined Reporting) F. Acceleration of Capital Stock Franchise Tax (CSFS) Phase Out G. The Adoption of a Business Benefits Tax (BBT) H. Expand the Sales Tax Base to Include Sales and/or Use Tax on Additional Services I. Increase of PA PIT Tax Rate for all Taxpayers and Provide for Certain Exemption and/or Deduction in Arriving at Pennsylvania Personal Income Taxable Income J. Increase Pennsylvania Research and Development Tax Credit Amount K. Recommend a Study to Consider a New Credit for Maintenance of Targeted Wage Base a. Study Would Address Definitional Issues b. Evaluate Cost Effectiveness – as to Fiscal Policy c. For all Defined "Eligible Pennsylvania Wages" - 14 - 26. Summary A. Reduction in Business Taxes Considered by the Commission B. Base Broadening or Enabling Provisions to Achieve Reduction in Pennsylvania Corporate Net Income Tax Rate C. Major Recommendations D. Other Recommendations Adopted by the Commission 1. Fiscal Policy E. Summary of Other Proposals Not Recommended - 15 - 06/18/04 INTERIM REPORT Overview On March 4, 2004, the Governor of the Commonwealth of Pennsylvania, the Honorable Edward G. Rendell, issued an Executive Order establishing a Business Tax Reform Commission (Commission). The Order states the Governor's desire to improve Pennsylvania's competitive position through a reduction in business tax rates. The Governor directed the Commission to evaluate the Commonwealth’s current business tax structure and recommend changes that would broaden the tax base, thus allowing for a corporate tax rate reduction while protecting the stability of the state budget. The result of these actions would be to ensure greater fairness in business taxation and create a more competitive business climate leading to greater economic growth. The Order also required that the Commission recommendations