Corbett tries to sneak through $833 million corporate tax giveaway

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(HARRISBURG, PA)—While Pennsylvania is facing a $4 billion deficit, Gov. Tom Corbett approved a corporate tax break of $833 million last week.

Governor Corbett announced Pennsylvania corporations will be allowed to take advantage of federal accelerated bonus depreciation rules adopted as part of the tax cut compromise in December. The rules allow companies to write off or “expense” 100% of equipment purchases made in the last quarter of 2010 and all of Tax Year 2011. The law doubles the size of the bonus depreciation provisions of the Recovery Act, which would have expired in 2010.

The Department of Revenue estimates the provision will cost $200 million for 2010. However, the Center on Budget and Policy Priorities estimates that the total cost of this provision for Pennsylvania will be more than $833 million.¹

“It is unconscionable that Corbett is kicking the working poor off of AdultBasic, while giving hundreds of millions of dollars to mostly out of state corporations,” said Michael Morrill of Keystone Progress. “Corbett has his priorities upside down.”

Governor Corbett announced that Pennsylvania’s corporate tax will allow corporations to follow federal accelerated bonus depreciation rules adopted as part of the tax cut compromise in December. The rules allow companies to write off or “expense” 100% of equipment purchases made in the last quarter of 2010 and all of Tax Year 2011.

The corporate income tax in many states is, by state law, “coupled” to the federal corporate income tax. Changes in the federal automatically lead to changes in the state tax. In Pennsylvania, however, the law allows state Department of Revenue to determine whether the corporate income tax should follow the federal provisions for depreciation.

Pennsylvania should decouple from the federal rules as it has done with previous federal tax provisions

Bonus depreciation is costly. The Department of Revenue estimates the provision will cost $200 million for 2010. The Center on Budget and Policy Priorities estimates that the total cost of this provision for Pennsylvania will be more than $833 million.

Pennsylvania has decoupled before. In 2002 under Governor Mark Schweiker, PA decoupled from federal bonus depreciation provisions enacted as part of the Bush tax cuts in 2001. Philadelphia also decoupled from the 2001 bonus depreciation.

Other states are moving to decouple from the federal tax now. Pennsylvania should not move in the opposite direction. Because the recession has produced revenue shortfalls in most states, many of those that couple their state corporate tax to the federal tax are moving legislatively to decouple this year.

Bonus depreciation goes to investment in other states not just Pennsylvania. Companies do not have to purchase equipment in the state to take advantage of the provision. Thus the bonus may lead to no new invest ment in the state.

Bonus Depreciation is not an efficient tool to stimulate the economy. The Tax Policy Center rates it a C, arguing that businesses that do not have positive income can’t use the provision. It may lead businesses to reduce capital expenditures in the future, blunting any positive economic impact. According to economist Mark Zandi, accelerated depreciation returned just 27 cents for every dollar spent.

Bonus depreciation will lead directly to spending cuts, which will reduce jobs in Pennsylvania. The federal government can run a deficit, so bonus depreciation at the federal level need not lead to spending cuts. Pennsylvania cannot run a deficit. So bonus depreciation here will require a $200 million reduction in state spending. Keystone Research Center has estimated that a $200 million reduction in state spending will lead to a loss of 5,000 jobs statewide, including 2,000 in the private sector. (http://www.pennbpc.org/legislature-should-enact-budget-saves-jobs-keeps-recovery-track)

Companies can already use federal tax provision to create jobs, a Pennsylvania version is unnecessary. The break on federal taxes will be much greater, providing sufficient incentive to create jobs.

Bonus depreciation undermines state revenues when we need them most. The Corbett administration claims that revenue loss from bonus depreciation will be recouped in later years. But the ongoing effects of the recession have left the state is in a terrible fiscal crisis this year. Tax revenues are needed now more than they will be three years from now.

The revenue loss due to bonus depreciation may never be recovered. The Corbett administration has said that it hopes to reduce business taxes when the economy recovers. If this occurs, the reduction in corporate taxes this year will never be recovered.