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Legislative Update

Week Ending Nov. 17, 2006

• Election Results Still Up in the Air
• House Conducts Internal Leadership Elections
• Plan to Phase Out Inheritance Tax Approved
• Tax Bill Clears House
• Transportation Funding Commission Issues Report
• New Tax Brochures to Help Build Client Relations

Election Results Still Up in the Air

Despite the fact that the polls have been closed for more than a week, there is still a question as to which party will have control over the Pennsylvania House of Representatives in the forthcoming legislative session. The holdup is a result of a pair of as yet undeclared seats in Chester County, both to replace retiring Republicans – Elinor Taylor and Robert Flick. Unofficial ballot counts have the Republicans maintaining both seats by 19 and 136 votes, respectively, giving the GOP a tenuous 102-101 hold on the chamber.

However, Democrats claim that once the absentee, provisional, emergency and military or overseas votes have been tallied, there is a good chance they will become the House majority party for the first time since 1994. In the race between Shannon Royer (R) and Barbara McIlvaine Smith (D) for the Taylor seat, there are 354 such votes still to be factored; for the Flick seat, between Duane Milne (R) and Anne Crowley (D), there are 495. Formal results will likely not be released until after Thanksgiving, and the likelihood is high that there will be appeals to these and other close races around the state.

Also to be taken into consideration is the concerted effort from both parties’ leadership to woo members on the other side of the aisle. Reports are already spreading that Rep. Dennis O’Brien (R-Philadelphia) once again has been asked to switch affiliations, and that there are other as yet unidentified targets. Rep. O’Brien has issued a statement asserting that he has no plans to convert to the Democratic Party.

House Conducts Internal Leadership Elections

Speaker John Perzel (R-Philadelphia) has an additional motivating factor to persuade the more conservative Democrats to join the Republican Party: he must still secure enough votes in the chamber as a whole in order to maintain his position as Speaker of the House.

Earlier in the week, the state House held its own internal elections to determine who would hold leadership positions for both parties. While Speaker Perzel won re-nomination to the post, he also faces a contingent of dissenters within his own party, who look to reform the caucus – and he therefore has no guarantee that he can rely on purely “party line” votes to garner re-election.

It is noteworthy to mention, as well, that PICPA member Rep. John Maher, CPA (R-Allegheny) narrowly lost his bid to become House Appropriations Committee Chair to Rep. Mario Civera (R-Delaware) in the closest election for either caucus.

Please see below for additional House leadership election results. The Senate will hold its own elections when they return to session on Monday, Nov. 20, the results of which will be noted in the upcoming Legislative Update.

Republican Caucus:

• Speaker of the House, John Perzel (Philadelphia) - no change
• Majority Leader, Sam Smith (Punxsutawney) - no change
• Majority Whip, Dave Argall (Schuylkill) - no change
• Majority Caucus Chair, Sandra Major (Susquehanna) - replaces retiring Elinor Taylor
• Majority Caucus Administrator, Merle Phillips (Northumberland) - no change
• Majority Caucus Secretary, Jerry Stern (Blair) - replaces retiring Raymond Bunt Jr.
• Majority Appropriations Chair, Mario Civera (Delaware) – replaces retiring Brett Feese
• Majority Policy Committee Chair, Mike Turzai (Allegheny) - replaces Mario Civera

Democratic Caucus:

• Democratic Leader, Bill DeWeese (Green) – no change
• Democratic Whip, Keith McCall (Carbon) – replaces defeated Mike Veon
• Democratic Caucus Chair, Mark Cohen (Philadelphia) – no change
• Democratic Caucus Secretary - Frank Dermody (Allegheny) – replaces retiring Kevin Blaum
• Democratic Caucus Administrator - Dan Surra (Elk) – replaces defeated Fred Belardi
• Democratic Appropriations Chair, Dwight Evans (Philadelphia) – no change
• Democratic Policy Chair, Todd Eachus (Luzerne) – replaces retired Stephen Stetler

Plan to Phase Out Inheritance Tax Approved

Pennsylvania's "death tax" would be eliminated by 2010 under legislation passed by the state House this week, 163-29.

Pennsylvania assesses the inheritance tax at different levels, depending on the relationship between the individuals involved. Under House Bill 906, the tax would be phased out as follows:

• Transfers from grandparents, parents or other lineal descendants - currently taxed at 4.5 percent. Tax would drop to 2 percent in 2009 and be eliminated in 2010.
• Transfers between siblings - currently taxed at 12 percent. Tax would drop to 9 percent in 2006, 6 percent in 2007, 4.5 percent in 2008, 2 percent in 2009 and be eliminated in 2010.
• All other transfers - currently taxed at 15 percent. Tax would drop to 10 percent in 2006, 7 percent in 2007, 4.5 percent in 2008, 2 percent in 2009 and be eliminated in 2010.
• The bill also includes language to ensure that property held jointly between a child and a parent that is transferred to the parent after the child's death would not be subject to inheritance taxes.

An amendment to HB 906 would make the Neighborhood Assistance Tax Credit program available to S corporations, limited liability companies and partnerships. The program allows a tax credit of 20 percent of the amount invested locally, up to a maximum of $250,000 each fiscal year.

The measure now goes to the Senate for consideration, but with limited days remaining in the current session it is very unlikely the bill will see further legislative action.

Tax Bill Clears House

As reported in July, provisions within legislation sponsored by Sen. Pat Browne, CPA, Senate Bill 1139, were contained within the most recently passed budget bill. With its original provisions now law, the bill is being used in these waning days of the 2005-2006 session as a vehicle for other proposed changes to the tax code.

In October, the House Finance Committee amended SB 1139 with language creating a new diesel technology tax credit. This credit of $3,000 would be for a taxpayer who incurs a qualified new diesel technology expense and has taken retail delivery of the highway vehicle in a taxable year.

This week, the House further amended the bill to include an exemption for certain National Guard members’ active-duty pay from the state income tax. The bill was passed unanimously, but it must now return to the Senate for a vote on concurrence before heading to the governor’s desk.

Transportation Funding Commission Issues Report 

The bipartisan Transportation Funding and Reform Commission issued a final report this week, offering a funding solution to pay for improvements to Pennsylvania's highways and bridges and for public transit which provides 413 million rides a year across the state.

The commission recommended $900 million in additional funding for highway and bridges and $760 million in targeted public transit funding. If the recommendations are adopted, the average driver would pay $7 more per month so the state could fix deficient bridges, improve the quality of the most heavily used roads, modernize traffic signals and implement new safety features to reduce highway deaths. The new funds for public transit would mean a change in realty transfer taxes that would add about $5 a month to a 30-year, $150,000 mortgage.

The commission recommended a new dedicated public transit fund and a revenue-neutral swap of $589 million to set it up. A broad-based, dedicated tax, a small portion of either the sales or personal income tax, would replace existing revenue sources from the General Fund, the Public Transportation Assistance Fund and Act 3 of 1997.

At the state level, the commission said, the Realty Transfer tax represents the best and most appropriate option for raising $576 million in additional state revenue for public transit. The commission recommended an increase of 0.89 percentage points in the tax to generate the needed $576 million.

The commission recommended the General Assembly enact legislation to enable counties and municipalities to raise revenues to underwrite $184 million needed for public transit. This money could be raised by up to a 0.25 percent local sales tax, a 0.20 percent earned income tax or a 0.50 percent local realty transfer tax.

New Tax Brochures to Help Build Client Relations

Three new brochures are available just in time for tax season. PICPA's State Taxation Committee developed a brochure highlighting some key differences between federal and state personal income tax returns, PICPA's CPA Image Committee produced a brochure to help individuals and firms select a CPA, and the AICPA's Federal Tax brochure highlights considerations for 2006 filings. Order these and other brochures online . The first 50 brochures are free. Additional copies are available for a nominal fee. Contact the PICPA's communications team for details at communications@picpa.org.