News for Immediate Release

Feb. 9, 2010

Governor Rendell Proposes Plan to Address End of $2.3 Billion in Stimulus Funds by Calling for Lower Sales Tax Rate, Business Tax Reforms

Closing Loopholes Would Enhance Fairness, Increase Future Revenues

Harrisburg - To address future budget gaps due to the end of the federal stimulus program, Governor Edward G. Rendell today proposed for Pennsylvania to join the ranks of states that tax natural gas extraction and tobacco products, and also to lower the state's sales tax rate from 6 percent to 4 percent starting in September.

In communities with a local sales tax on top of the state's tax, the total sales tax rate will be cut by one third as well. He also continued his call for a package of business tax reforms that would lower the state's Corporate Net Income Tax rate to 8.99 percent.

The Governor said all the revenues would be put into a special Stimulus Transition Reserve Fund that could not be touched until July 2011 - after Governor Rendell's term of office has ended -- to help cover the estimated $2.3 billion budget gap that will result from the loss in federal stimulus dollars. By acting now, legislators can avoid huge tax increases that would be inevitable in the coming years.

Fairer, Simpler Sales Tax

When Pennsylvania's sales tax was adopted in 1953, the levy applied to nearly all tangible goods. Since that time, 74 categories of goods and services have been exempted through frequent amendments pushed through the General Assembly by special interests.

By closing these loopholes, the Governor's proposal would generate an additional $2.3 billion that could be used to offset the end of stimulus funding in 2011. By law, the Stimulus Transition Reserve Fund could not be tapped until July 2011, nearly six months after Governor Rendell leaves office.

"For the average Pennsylvania family, the elimination of sales tax loopholes does not impact them one way or the other. But for retail and related businesses, a lower sales tax rate will give them a stronger competitive edge," Governor Rendell said. "And businesses that have gotten a pass on sales taxes will now have to pay their fair share."

The proposal would make taxable 74 goods and services that are currently exempt. Some examples include wrapping and packing supplies, coal, rail transport equipment, fish feed, firewood, personal hygiene products, candy and gum, airline catering, investment metal bullion, and helicopters. Many other states already tax these goods and services.

Reducing the sales tax will mean Pennsylvania's sales tax rate will be the same as New York's, and lower than the rates of Ohio, Maryland, West Virginia, and New Jersey.

In addition to exempting food, clothing, and prescription medications, the Governor's proposal would leave in place the original exemptions for manufacturers that cover processing, agriculture, and machinery and equipment.

The revised sales tax would also apply broadly to services, a growing sector of the economy that is now mostly exempt. The Governor's plan would add nearly all services to the tax base, except for health care services and educational tuition.

The Governor also asked the General Assembly to direct the proceeds of other tax changes toward a Stimulus Transition Reserve Fund. He called for lowering the Corporate Net Income (CNI) Tax rate from 9.99 percent to 8.99 percent while closing the so-called "Delaware loophole." The Governor's business tax reform package will also adopt a single sales factor plan that will help manufacturers expand and remove the cap on net operating losses which will encourage more start up and technology firms to locate their businesses in Pennsylvania.

He also called for a new tax on the extraction of natural gas, and extending the tobacco tax to cigars and smokeless tobacco.

"For the millions of our citizens who don't have political action committees and lobbyists, this approach will lower their taxes and buffer against hefty tax increases in the future. It is fair, it is relatively pain-free, and it allows us to prepare responsibly for the challenges to come," Governor Rendell said.

Lower Corporate Tax Rate Will Improve Competitiveness Pennsylvania business tax rates are higher than they need to be because too many firms do not pay their fair share. Today, 71 percent of Pennsylvania companies subject to the tax pay no Corporate Net Income taxes in Pennsylvania. This is because the "Delaware loophole" allows businesses to shift income and profits to no- or low-tax states and avoid paying Pennsylvania taxes. For example, a company might set up a headquarters office in locations like Delaware or Nevada and shift income to that affiliate, even though most of its day-to-day operations are located in Pennsylvania.

The Governor's plan will put an end to tax avoidance strategies and will make Pennsylvania the 24th state to adopt a process called combined reporting.

"I propose that we extend the same principle of fairness to our corporate tax system by closing the loopholes that allow companies located outside the state, yet have a substantial Pennsylvania presence, a significant tax advantage over those that have all of their operations within our borders. The goal, again, is for all companies to pay their fair share," Governor Rendell said.

Combined reporting will allow Pennsylvania to lower its corporate net income tax rate from 9.99 percent to 8.99 percent.

Under the single sales factor system, Pennsylvania will calculate taxes based on the share of a company's sales that take place in Pennsylvania. The tax change is good for employers including manufacturers that already have a significant presence in Pennsylvania, but sell most of their goods and services in other markets. It also creates new incentives for employers to add jobs or build a new plant in the commonwealth. Ten other states already use the single sales factor model.

By lifting the cap on net operating loss deductions, Pennsylvania will become a more attractive place for entrepreneurs to start new business and create new jobs. Many young companies, including technology and biotech firms, do not record profits for the first few years of operation. The Governor's plan will help create more jobs in these industries as well as support new job growth by alternative energy, clean transportation, and environmental cleanup companies. Pennsylvania will join 44 other states that do not have a dollar limit on net operating loss carry forwards.

Updating Other Taxes

In asking the General Assembly to approve taxes on natural gas extraction, cigars and smokeless tobacco, and to eliminate the on-time payment discount for vendors, Governor Rendell renewed requests that he made to the legislature last year.

* Natural gas - Pennsylvania has immense natural gas reserves in a geologic formation known as the Marcellus Shale, yet it is one of just six states that do not tax natural gas. The industry is growing rapidly and in a recent Marcellus Shale land lease sale, the commonwealth received more than twice the revenue it expected. These results show that the industry can bear a modest tax - 5 percent of value, plus 4.7 cents per 1,000 cubic feet of gas produced - without hurting growth. Ten percent of the revenues will be distributed to local governments where drilling is taking place.

* Cigars and smokeless tobacco - Pennsylvania remains the only state in the nation that does not tax smokeless tobacco and one of only two states that do not tax cigars. Under the Governor's plan, these products would be taxed at 30 percent of their wholesale value.

* Vendor Discount - A one-percent discount currently offered to vendors that pay sales taxes on time is a relic of the pre-computer era, when many companies had to manually calculate the sales taxes owed to the state. The incentive is no longer needed because 90 percent of filers submit sales tax records electronically. More than half of all companies receive a discount of less than $9 per year and two-thirds receive less than $100 annually.

Act Now or Face Unacceptably Large Tax Hikes Pennsylvania must begin preparing now for the end of federal stimulus funding in 2011. By enacting the measures Governor Rendell called for today, Pennsylvania would accumulate $2.3 billion for the 2011-12 fiscal year to prepare itself for the loss of federal stimulus money, and to help the next governor and General Assembly deal with the fiscal challenges that will remain in the slowly recovering national economy.

"If we don't act now, the next administration will be backed into a corner that will result in unacceptably large tax hikes for Pennsylvania businesses and families," Governor Rendell said.

Over the past seven years, the Rendell administration has enacted tax cut policies that have saved individual citizens and businesses billion of dollars. Since 2006, property tax relief has provided $1.7 billion in savings for Pennsylvania homeowners, mostly notably seniors, many of whom have had their school property taxes completely eliminated. State homeowners will receive a projected $700 million in additional real estate tax savings next year.

Since 2003, Pennsylvania businesses have saved $5.7 billion in state taxes through reductions in the Capital Stock and Franchise Tax, targeted tax credits, and an expansion of the net operating loss deduction.

For more information, visit www.pa.gov<http://www.pa.gov>.

Media Contact: Gary Tuma; 717-783-1116

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Editor's Note: Attached is a partial list of the items that are currently exempt from sales tax, followed by the year it was exempted:

Wrapping and Packing Supplies - 1956

Coal - 1957

Commercial Vessels (Equipment, Maintenance) - 1957 Dry-Cleaning & Laundry Services -1959 Magazines - 1963 Flags - 1963 Rail Transportation Equipment - 1963 Catalogs and Direct Mail Advertising - 1963 Fish Feed -1980 Trout - 1982 School Buses - 1982 Firewood - 1983 Personal Hygiene Products - 1991 Candy/Gum - 1997 Airline Catering - 2001 Investment Metal Bullion & Investment Coins - 2006 Helicopter