By Melissa Daniels | PA Independent
HARRISBURG — Pennsylvania could have a new pitch for companies looking to relocate: Settle in the Keystone State, and keep the heaping pile of money your employees pay as state income tax.
The proposal, called the Promote Employment Across Pennsylvania Program, or PEP, would let qualifying businesses keep 95 percent of personal income tax that their employees would otherwise pay to the state. The other 5 percent would go to the state.
Typically, those personal income tax dollars go right to the state’s general fund, with all wage-earners chipping in to fund the state services.
“If the goal is to try to make the tax system more transparent and comprehensive to not only businesses but individuals, a program like this could take the system in the opposite direction,” said Pete Sepp, executive vice president at the tax reform advocacy group National Taxpayers Union in Alexandria, Va.
Certainly a portion of state income tax dollars already goes to private businesses through loans or grants offered through the Department of Community and Economic Development. A program like PEP would cut out the incentive middle man, giving tax dollars directly to the company.
“We tend to view tax relief programs not as necessarily costing the state or others. It’s really revenues that the state or local government just won’t see that it would otherwise collect,” Sepp said
Benninghoff said the current system of offering tax breaks keeps governments from collecting revenue at all. With PEP, new companies would still pay local property and state sales taxes, and in some cases, state corporate net income taxes.
And, there’s no direct cost to the state, he added.
“We’re not just handing them something. They’re earning it by coming here, establishing themselves,” he said. “They have to earn it by creating the jobs for the incentive to take place.”
To qualify, businesses must be existing, for-profit entities relocating in Pennsylvania that pay at least 50 percent of health insurance premiums for the employees. Excluded from the program are retail stores, utility companies, food service companies or public administration or education services.
The proposal comes at a time when the state’s unemployment is worsening. More than half a million Pennsylvanians are out of a job and looking for work, according to the state Department of Labor and Industry.
In August, the state’s unemployment rate hit 8.1 percent, the same as the national average.
Benninghoff said fixing the state’s economy means reforming the tax code for existing businesses and figuring out how to attract new ones.
“We all benefit if a new company moves into our area. We see that in growth in the economy. We see that in jobs that are growing our community,” he said.
Nate Benefield, director of policy analysis at the Commonwealth Foundation, a free-market think tank, said that lowering the corporate income tax would be a more meaningful economic development tool. Specialized tax credits only help certain businesses in the short term.
“You’re going to see jobs created and new hires if you enact this, but you’re not going to see what would happen if instead of this you lowered the personal income tax or the corporate income tax for everyone,” Benefield said.
At least one expert said Pennsylvania could stand to sweeten its appeal to out-of-state businesses. During a Monday morning House Finance Committee hearing on the bill, John Lenio, an economist with the commercial real estate firm CB Richard Ellis who testified via conference call, said Pennsylvania’s existing incentives to out-of-state businesses have “a degree of inflexibility.”
Pennsylvania is in “the middle of the road” in its appeal as a place to do business, and could stand to be more aggressive, he said, with fewer administrative hang-ups. Applications that take 30 days to process in some states can take six months in Pennsylvania, he said.
“Avoiding red tape is highly valuable,” Lenio said.
But not all lawmakers were sold on giving away tax dollars as a way to boost local economies or create jobs.
State Rep. Scott Boyd, R-Lancaster, said he was concerned about the consequences of PEP on existing Pennsylvania businesses. Those companies who already provide jobs would be put at a disadvantage, he said.
“My competitor’s going to set up shop next door and he’s going to get to keep his taxes and really is going to trump my wage base and going to raise my existing costs,” he said. “I think you’re slapping some of those that been here 25, 30, 50 years upside the head.”
House Finance Committee Minority Chairwoman state Rep. Phyllis Mundy, D-Luzerne, questioned the fairness of the bill.
“My major concern is new companies move here, take employees from existing businesses, call them new (employees) and then get to keep withholdings from the employees who might’ve just been employed down the street at the exact same company that’s a competitor of the new one,” she said.
Mundy also pointed out that as the bill is written, there’s no requirement to notify employees that the personal income tax dollars would go their employer, rather than the state.
But tax dollars already go to private companies through loans and grant programs, said Vern Squire, CEO at the Chamber of Business and Industry of Centre County.
Squire, who also offered testimony on the bill, had experience with a similar incentive in Kansas where he worked for 25 years. There, the state projects the incentive will create around 6,400 jobs in a five-year period with an average wage of around $57,000.
Squire said a “performance-based system” like PEP has stricter requirements for the type of jobs the business offer.
Under Benninghoff’s proposal, companies would qualify for PEP if they pay salaries equal to or above the county average wage, and hire a minimum of five to 15 employees, based on the size of the county.
“It’s only that feature that really allows them to get into the program,” Squire said.
The legislation would allow most qualifying companies to retain the tax dollars for five to seven years, and up to 10 years for larger businesses.
The state Department of Revenue would review the applications before approving participation.
The House Finance Committee is scheduled to vote on the proposal at 10 a.m. Tuesday.
Contact Melissa Daniels at firstname.lastname@example.org