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Legislative Update

Week Ending Feb. 9, 2007

• Governor Rendell Unveils 2007-2008 Budget
• Budget Reveals New Tax on “Big Oil"
• Senate Republicans Offer More Immediate Property Tax Relief
• PICPA Encourages Local Tax Collectors to Extend Deadline
• IRS Releases List of “Good Governance” Suggestions

Governor Rendell Unveils 2007-2008 Budget

On Tuesday, Gov. Ed Rendell stood before a joint session of the General Assembly to make his annual budget address, revealing an aggressive agenda for the 2007-08 fiscal year. Called his “Agenda for Pennsylvania Progress,” the budget highlights many of the issues the governor has championed since taking office, including property tax reductions, transportation funding, health care reform and energy conservation.

In his address, Gov. Rendell said: "The voters resoundingly approved of the progressive agenda that we have developed together. We must continue to move forward through the new Agenda for Pennsylvania Progress, a comprehensive strategy to address the long-term challenges that still confront us. And with this budget, I intend to deliver on that agenda."

The total proposed General Fund budget, which is a component of the overall $59 billion operating budget for the Commonwealth, is $27.3 billion, an increase of $948 million or 3.6 percent over the current 2006-07 fiscal year budget. The plan, however, reduces spending by $162 million in all areas other than the departments of Education, Public Welfare, Corrections and Probation & Parole. Other funds in the overall budget include Federal Funds, the Motor License Fund, the Lottery Fund and the Tobacco Settlement Fund.

More than half of the nearly $1 billion in new spending will be put towards education initiatives. In addition, the budget outlines plans to raise the sales and use tax from 6 to 7 percent, half of the revenues of which will be combined with gaming revenues to accelerate property tax relief.

Gov. Rendell also proposes to impose a new electricity consumption tax – approximately 45 cents per month – to off-set $850 million in borrowing for energy conservation and alternative power development. Also included would be an increase on the cigarette tax from $1.35 to $1.45 per pack, and an additional tax levied on other forms of tobacco.

The governor also introduced a 6.17 percent “Oil Company Gross Profits Tax” to help fund highways, bridges and mass transit, which the state will levy in place of the 9.99 percent corporate net income (CNI) tax. The new tax is structured on a "combined reporting" basis, to enable Pennsylvania to determine which profits are drawn specifically from the Commonwealth. This tax is anticipated to bring in $760 million in funds to be put solely towards transportation improvements. (Please see additional story below for details.)

The 2007-08 budget establishes, in addition, the “Energy Independence Fund” as part of Rendell’s more comprehensive Energy Independence Strategy for Pennsylvania. The intent behind the plan is to make the state less reliant on foreign oil and gas by investing in the production of alternative fuels. The fund would pay for conservation initiatives, research, and solar energy, and would support emerging clean-energy products and companies.

Budget Reveals New Tax on “Big Oil”

In a year when companies such as Exxon Mobil Corp. posted records profits, Gov. Rendell boldly announced in his budget address Tuesday his intention to introduce a new tax in Pennsylvania directed solely at the oil industry.

Called the Oil Company Gross Profits Tax, the new levy of 6.17 percent is intended to help fund highways, bridges and mass transit, and is structured on a “combined reporting” basis, under which companies that operate in multiple states must provide data on all their profits. It can then be determined how much of those profits were obtained in Pennsylvania and duly taxed.

The revenues – projected to be in excess of $760 million – will be combined with those collected from the governor’s plan to lease the Pennsylvania Turnpike, in order to produce approximately $1.7 billion for transit and transportation projects.

In exchange for paying the Oil Company Gross Profits Tax, oil companies would no longer pay the state’s 9.99 percent Corporate Net Income (CNI) Tax. According to Gov. Rendell, the revenues generated from levying the CNIT on these companies is a fraction of what it should be because these companies structure their financial reporting to avoid paying the tax. The use of unitary combined reporting in this instance, the governor noted, will no longer allow them to skirt compensating Pennsylvania for the business conducted here.

Gov. Rendell’s announcement was met with mixed reviews from both sides of the aisle, as well as general discontent from the business community. All await with interest and scrutiny, too, the governor’s proposed legislation that he claims will empower the attorney general to ensure that the Oil Company Gross Profits Tax will not in turn be passed on to Pennsylvanians at the gas pump

Senate Republicans Offer More Immediate Property Tax Relief

Shortly following the governor’s budget address, in which he pledged to raise the state sales and use tax to 7 percent to lower property taxes for Pennsylvanians, the state Senate Republican caucus made their own offer: to dedicate $75 million of their “legislative reserve” for immediate use toward the same goal.

Senate Appropriations chairman Sen. Gib Armstrong (R-Lancaster) made the proposal in a written statement, stating that the General Assembly’s “continuing appropriation” had increased from $215 million from $161 million in 2006. This reserve is made up of funds accumulated from monies not spent throughout the year to be used in the event the governor refuses the legislature funding for projects.

The Republican Senators propose to introduce legislation that would remove the $75 million from across all four caucus reserves. According to Senate President Pro Tempore Joseph Scarnati (R-Jefferson), this would leave adequate funds for the General Assembly to operate while providing equitable refunds to property owners.

PICPA Encourages Local Tax Collectors to Extend Deadline

PICPA took proactive measures this week to try to ensure that local tax collectors fall into compliance with state and federal tax filing deadline of April 17, 2007. This extension is a result of Tax Day falling on a Sunday, and Monday being a recognized holiday in Washington, D.C. Local tax collectors, however, are not mandated to follow state or federal guidelines.

Anticipating the confusion that would no doubt ensue were there to be two separate filing deadlines, PICPA contacted the Pennsylvania Earned Income Tax Officers, Administrators and Collectors Association (PEITOAC).

In a Feb. 8 communication to its members, PEITOAC urges “if asked by any of your taxpayers or tax professions, you also agree to accept returns filed and postmarked by April 17. Agreeing to a common due date certainly seems to make the most sense and is the fairest way to treat our taxpayers.

IRS Releases List of “Good Governance” Suggestions

The IRS recently outlined a list of recommended guidelines for tax exempt organizations to comply with IRS regulations. The Pension Protection Act of 2006 left tax exempt organization governance to self-regulation, so the IRS cannot require organizations to follow the nine recommendations.

The guidelines suggest that organizations adopt a mission statement and code of ethics, require board members to eliminate conflicts of interest when holding a board position, enhance financial auditing protocols, control compensation decisions, and streamline document retention and availability to the public.

The guidance is still being assessed and should be finalized by the end of 2007. The final version will be posted as part of an “on-line” assistance program to aid exempt organizations in IRS compliance.