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Legislative Update

Week Ending February 3, 2006

• Week in Review
• Political News & Notes
• Revenue Update
• Budget Preview: No New Taxes
• Graduated Income Tax Proposed
• Tax Bill Veto Upheld
• Graham Fix in the Works
• House Approves Non-Bid Maximums
• Lawmakers OK Sovereign Bill
• PICPA Advocacy Efforts Continue

Week in Review

Gov. Ed Rendell said this week that his 2006-07 budget-which he will formally unveil to a joint session of the General Assembly on Feb. 8 not Feb. 7 because of the Super Bowl-will not propose an increase in any taxes. In fact, he said the budget will include some business tax cuts. Oddly, the business cuts Rendell proposed this week were also included in House Bill 515, which he vetoed in December. The House sustained his veto on Monday.

State Tax dollars are coming in to the State Treasury fast and furiously. In December, the Rendell Administration predicted that the state would have a $145-million surplus at the end of the Fiscal Year on June 30, 2006. Now, the pending surplus is more than double that number-$307 million ahead of forecast. Corporate taxes are $145-million more than had been projected and personal income tax is $118-million ahead.

Political News & Notes

Sen. Thompson Dies. Chester County Republican Sen. Robert Thompson died Jan. 28 at the University of Pennsylvania Hospital as a result of complications from pulmonary fibrosis. He was 68. Sen. Thompson was the Chairman of the Senate Appropriations Committee. Gov. Rendell has ordered U.S. and State flags flown at half-staff. Thompson had served in the Senate since elected in 1995. A true gentleman, he will be sorely missed by his wife, Nancy, their two daughters, their families and a long list of friends at home and in Harrisburg.

Feese Announces Retirement. Republican state Rep. Brett Feese of Lycoming County will not stand for re-election this year. The six-term Republican from Muncy is serving as Majority Appropriations Committee Chairman. Feese is the 20^th member of the House to voluntarily retire.

A Mixed-Bag Political Weekend... Bill Scranton won two State GOP caucus votes last weekend for the Party endorsement for the GOP gubernatorial nomination. Scranton won the Northeast caucus vote Saturday morning by an 18 to 2 margin over his primary opponent Lynn Swann. Scranton also won the Northeast Central caucus vote that afternoon by a 17-14 vote. Swann, however, still leads in the straw votes and recently he picked up the important endorsement of the Montgomery County Republican Chairman. The Republican State Committee endorsement meeting is Feb. 11.

Revenue Update

In 2006, Pennsylvania businesses will no longer need paper coupons to file Employer Withholding Tax returns and payments. The Department of Revenue anticipates that the transition to electronic filing will be just as successful for Employer Withholding taxes as it was for Sales Tax in 2005.

In addition, the Department has moved to the enforcement phase of its Use Tax Voluntary Compliance Program, while the education and outreach phase of this program continues. The Department has added Use Tax information, specific to businesses, to its Web site including a new brochure, Use Tax for Businesses (REV-935).

Budget Preview: No New Taxes

Gov. Ed Rendell on Tuesday proposed business tax cuts totaling $202 million that will be included in his 2006-07 state budget. The Governor's announcement came one day after the House blocked a move to override his veto of business tax reform legislation that would have cut taxes by more than $1 billion over a five-year period. Rendell will present his budget and tax plans to the legislature Feb. 8.

Commenting on the state of Pennsylvania's tax rates, Rendell said, "I remain convinced that Pennsylvania's Corporate Net Income Tax rate is still far too high. And that is why I remain committed to the business tax reform package that was proposed by the bi-partisan Business Tax Reform Commission, which would dramatically lower the CNI tax rate, close business tax loopholes and make other tax changes to encourage job creation."

"When responsible business tax reductions can be implemented that can bolster and reinforce the other significant investments we are making in economic stimulus, we will do so," the Governor said. "Since our revenues are rebounding as a result of the success of our economic growth agenda, we believe we can now reduce business taxes by more than $200 million to support Pennsylvania's manufacturers and research and technology companies."

Rendell will propose the following business tax cuts as part of the 2006-2007 budget: Retroactively reducing the Capital Stock and Franchise Tax rate from 4.99 to 4.89 mills-a $18.3 million savings; Continuing to phase out the CSFT at the lower rate, thus going to 3.89 mills in calendar 2007-saving $167 million; Increasing the Net Operating Loss tax deduction from $2 million to $3 million in losses per year-saving businesses $7.3 million; and, Increasing the Research and Development Tax Credit cap from $30 million to $40 million-saving businesses $10 million.

The PICPA anticipates that the Governor will once again call on the legislature to enact combined reporting for corporate taxes and the creation of a tax appeals tribunal. The PICPA has testified in opposition to the tax tribunal proposal.

Graduated Income Tax Proposed  

Another day, another property tax relief plan. This time the plan, offered by Senate Democrats, calls for a tax increase on high-income Pennsylvanians, which could raise $750 million for immediate property tax relief. When combined with revenue generated by slot machine gambling, the increase would permit at least $1.75 billion worth of property tax reduction, say its proponents.

The proposal would create three state Personal Income Tax (PIT) brackets, by raising the rate 1-˝ percentage points to 4.57% on annual income above $250,000, and three percentage points to 6.07% on income above $400,000.

Enactment of the plan would require a constitutional amendment to exempt the PIT from the uniformity clause in Article VIII.

The constitutional amendment would cap the highest bracket rate at no more than twice the base rate. For example, with the PIT currently at 3.07% for the lowest income levels, the top bracket could be no higher than 6.14%.

Once the constitutional amendment passed, the legislature could then approve the graduated tax.

Only 71,000 out of roughly five million households in the state would pay higher taxes under this plan, according to proponents.

Tax Bill Veto Upheld 

By a vote of 116 to 76 on Monday, the state House sustained Gov. Ed Rendell's Dec. 23 veto of business tax relief legislation. A veto override needed 135 votes. All but four Republicans were joined by ten Democrats in voting to override the Governor's veto.

After the House vote, Rendell praised his fellow Democrats. "House Democrats who voted to uphold my veto stood strong for fiscal responsibility, as well as our collective commitment to make the right choices for Pennsylvania businesses and taxpayers," said Rendell. "We must work together to enact a fair business tax cut package when it makes economic sense and when revenues allow us to sustain reductions without impacting other critical state programs."

House Bill 515 proposed a phased in Single Sales Factor formula for the Corporate Net Income Tax and elimination of the cap on NOLs, as 48 other states have.

Graham Fix in the Works

Legislation reversing the Commonwealth Court's ruling in Graham Packaging Company, L.P. v. Commonwealth will be introduced in the state Senate. The recent decision overturned a long-standing Department of Revenue policy regarding prewritten computer software.

The proposed legislation will amend the Tax Reform Code of 1971 by codifying definitions related to computer software and its delivery. It will create an exclusion from tax for prewritten software and digital products that are delivered electronically, along with an exclusion from tax for the renewal of licenses to use computer software.

The Department of Revenue has indicated that this unexpected tax burden on Pennsylvania's businesses, and perhaps individuals as well, will cost taxpayers $55 million for fiscal year 2006-07, increasing to $72.1 million by fiscal year 2009-2010.

House Approves Non-Bid Maximums

Legislation that will permit public school districts to increase non-bid contract maximums has been approved by the state House. House Bill 1866 now goes to the state Senate for consideration.

Under current law, all contracts in excess of $10,000, unless specifically excluded, must be competitively bid by school districts and awarded to the lowest responsible bidder following advertising for bids. In addition, written or telephonic price quotations must be obtained from at least three qualified and responsible contractors for contracts that exceed $4,000 but are less than $10,000.

House Bill 1866 increases the dollar amount requiring full advertising and bidding of contracts to $18,000 and the range requiring written or telephonic quotes from $4,000 to $10,000 to $7,000 to $18,000.

Lawmakers OK Sovereign Bill

Without debate, lawmakers passed a bill on Wednesday to help embattled Sovereign Bancorp Inc. in its fight against shareholders. In quick fashion, Senate Bill 595 was amended Tuesday in the House Appropriations Committee with the language favored by Sovereign Bank, and then approved Wednesday by both the House and Senate.

The bill, which would make changes to Title 15 (Corporations and Unincorporated Associations) concerning the removal of directors, "controlling persons" and for the appointment of minors to advisory committees for certain non-profit corporations.

Currently, a "controlling person or group" in a business corporation is defined as a person or group of persons acting in concert that have voting power over voting shares of the registered corporation that entitles the holders to cast 20% of the votes that all shareholders would be entitled to cast in an election of the corporation's directors.

The bill would prohibit shares acquired directly from the corporation in a transaction exempt from the registrations requirements of the Securities Act of 1933 from being used in the calculation of the 20% threshold required to constitute a controlling person or group.

Further, the legislation outlaws the removal of directors without cause unless the articles of incorporation contain a specific and unambiguous statement that directors may be removed from office without cause.

The bill now goes to the Governor.

PICPA Advocacy Efforts Continue

The PICPA's recent testimony before the Senate Special Session Legislation Committee is one example of grassroots advocacy. Member involvement in the legislative process, where your expertise as a CPA is vital to analyzing the effects proposed changes could have on Pennsylvania's business community, is critical! State legislators increasingly are looking to the CPA profession for input on such matters.

You can be a part of the process by making your voice heard at the 2006 Day on the Hill Program scheduled for Tuesday, June 6, in Harrisburg. Join your colleagues at the 5^th annual event. It's the easiest way for you to connect with your state legislators. For more information contact your PICPA Government Relations Team at (717) 232-1821 or email us at GovernmentRelations@picpa.org.