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Legislative Update

Week Ending March 23, 2007

• Committee Approves Revenue Secretary Nominee
• Governor’s Health Plan Legislation Introduced
• Rendell Touts Mass Transit Funding Plan
• Speaker Asks Reform Commission to Continue Work
• New Bills Introduced
• AICPA Testifies on Reportable Transactions
• West Virginia Approves Combined Reporting Bill

Committee Approves Revenue Secretary Nominee

The state Senate Finance Committee met this week to consider the nomination of Thomas Wolf, Gov. Ed Rendell’s nominee for Secretary of Revenue. Wolf’s nomination was unanimously approved by the committee. If confirmed by the full Senate, he will replace Greg Fajt, who is now a special assistant to the governor.

In his opening comments to the committee, Sec. Wolf identified two major challenges facing the department. “The first is a technological one,” noted Wolf. “We have requested $1 million in the 2007-2008 Budget to hire a consultant to develop a strategic roadmap to update our information technology. Many of the department’s computer systems are written in COBOL, a language not even taught in today’s colleges and universities. The second challenge is the development of a succession plan. The department, like other state agencies, is facing the retirement of many key individuals.”

Finance Committee chair and PICPA member Sen. Pat Browne asked why Sec. Wolf, as a member of the governor’s Business Tax Reform Commission, supported so strongly the idea of a pass-through entity tax. Sec. Wolf explained his belief that his overall goal is for equity of taxation across business types. He added that such a tax could have resulted in a significant reduction in the Corporate Net Income tax rate, presently one of the highest in the nation.

Asked for his position on tax courts, the Sec. Wolf stated that he believes they are a good idea but knows there has been some "push back" from tax professionals. Sen. Browne speculated that this "push back" could be the result of their fear that they would not be able to represent their tax clients in a court of law.

Sen. Browne then stated that while he is pleased to recommend Wolf, he is still concerned about some of his tax policy ideas and worries that the Administration has not completely considered all of the implications of some of their ideas such as combined reporting and the Delaware Holding Company tax provisions. He stated he would like to see more macro economic data that shows positive revenue projections for the future if these ideas are implemented.

Sen. Browne also commented that he fears the tax on the oil companies could violate the uniformity clause of the constitution and that any attempt to impose a tax on all industry groups to avoid this constitutional hurdle could end up damaging some industry sectors.

Governor’s Health Plan Legislation Introduced

The 96-page bill containing Gov. Ed Rendell’s health care reform plan—Prescription for PA—was introduced this week in the state House. Sponsored by House Democratic Policy Chair Rep. Todd Eachus, the measure has 10 Democratic co-sponsors, but no Republicans.

House Bill 700 will be the subject of a series of statewide hearings by the House Insurance Committee. The first of these hearings are set to begin next Monday, March 26, and Tuesday, March 27, in Harrisburg.

Gov. Rendell’s plan would create a state-subsidized health insurance plan to help cover the state’s uninsured. It would be funded, in part, with a three percent “fair share” payroll tax, which could rise in future years.

Businesses already providing health insurance for employees would qualify for a tax credit that would exempt them from the tax. Those that do not provide coverage would be required to pay the tax quarterly.

The legislation does not specify what type of coverage a business would have to provide to avoid the tax. The standard will be tied to out-of-pocket costs paid by employees and the percentage of employees enrolled in the coverage.

The plan also seeks to reduce financial waste in health care, which according to the governor, amounts to about $7.5 billion a year.

Rendell Touts Mass Transit Funding Plan

Undeterred by the rather chilly reception received at the recent House and Senate budget appropriations hearings, Gov. Ed Rendell jumped back into his bus this week and went on a seven-town, two-day barnstorming trip to drum up support for his transportation funding plan.

Rendell’s plan would generate $1.7 billion in long-sought dedicated source of transit funding for highways, bridges and mass transportation. The governor has proposed the leasing of the Pennsylvania Turnpike, which he says would generate $900 million a year, and a new 6.17 percent tax on oil company gross profits. The later would generate about $760 million a year from oil companies.

No legislation has been introduced yet to implement the governor’s proposals. PICPA is actively monitoring developments.

Speaker Asks Reform Commission to Continue Work

House Speaker Dennis O'Brien on Thursday sent a letter to members of the bipartisan Speaker’s Commission on Legislative Reform thanking them for carefully considering changes to House rules and asking them to continue meeting to consider broader institutional reforms.

The Speaker asked commission co-chairmen Josh Shapiro (D-Montgomery) and David Steil (R-Bucks) to focus the panel’s attention on seven topics in the next several months and try to issue recommendations by this summer.

O'Brien said he agrees with Majority Leader Bill DeWeese that the House’s standing committees can push reform efforts forward by holding hearings and considering bills referred to them.

The areas that O'Brien wants the reform panel to consider include the following:

• House Ethics Committee reorganization
• Development of a “Member Code of Conduct”
• Term limits
• Updating the state’s Open Records laws
• Campaign finance reform
• Examination of the size of the legislature
• Developing a policy for bonuses for legislative staff

During its first phase, which was limited to addressing the reform of the House’s internal rules, the commission held all of its meetings in Harrisburg. For the upcoming second phase, O'Brien encouraged the co-chairmen to schedule sessions in other cities to give more people an opportunity to observe the process and, if they wish, be heard.

A schedule of meetings will be announced later. It is expected to extend from April to June.

The commission’s 12 Democratic appointees are Reps. Mark Cohen, Bob Freeman, Tim Mahoney, Kathy Manderino, Phyllis Mundy, Chris Sainato, Josh Shapiro, Tom Tangretti, W. Curtis Thomas, Greg Vitali, Don Walko and. Jewell Williams.

The 12 Republican appointees are Reps. David Argall, Kerry Benninghoff, Jim Cox, Craig Dally, Glen Grell, Jerry Nailor, Brad Roae, Sam Rohrer, Carole Rubley, Curt Schroder, David Steil and Michael Vereb.

New Bills Introduced

Your PICPA government relations team continues to monitor the flood of new bills that are being introduced and referred to committees. Here’s a short list of bills that we are actively monitoring on behalf of members.

Senate Bill 417 (Corman) amends the Tax Reform Code (TRC) to further provide for the rate of inheritance tax. Upon the bill’s adoption, the inheritance tax upon transfer of property passing to, or for the use of, a grandfather, grandmother, father, mother and lineal descendants, or a wife or widow and husband or widower of a child would be decrease from a rate of 4.5 percent to 3.5 percent – in the case of siblings, from 12 percent to 7 percent – for estates of decedents dying after Dec. 31, 2006, and before Jan. 1, 2008. Both rates would then decrease until phased out after Dec. 31, 2012. Upon the transfer of property passing to or for the use of all persons other than those designated in the legislation, the inheritance tax would decrease from a rate of 15 percent to 13 percent, but would not be phased out until Dec. 31, 2014.

Senate Bill 418 (Corman) amends the TRC further providing for the imposition of the personal income tax (PIT) and authorizing the offsetting of gains and losses among the various classes of income by adding that a taxpayer may offset the gains or losses within one class of income with the gains or losses occurring within another class of income. Gains or losses would be limited solely to that class of income. Losses within this particular class of income may not be used to offset any gain in any other class of income.

Senate Bill 419 (Corman) amends the TRC further defining "taxable income" for purposes of corporate net income (CNI) tax by adding that the $2 million limit on the net operating loss (NOL) deduction in a taxable year would not apply to the deduction of start-up period losses. Start-up period losses are the sum of the net loss or losses incurred in the corporation's first taxable year plus its nine succeeding taxable years.

Other bills of note, which also amend the Tax Reform Code include:

Senate Bill 403 (Kasunic) establishes a graduated payment scale for certain taxpayers liable for corporate net income (CNI) tax payments. In order to be eligible for the graduated payment scale the corporation must be initiating a new business within the state, relocating a business from outside of the state to inside the state, or expanding an existing operation within the state. This will not include activity resulting from mergers, acquisitions, buyouts, consolidations, reorganizations, or the takeover, purchase or transfer of ownership of any existing business. The corporation also must create at least 50 new full-time employment position filled within the first taxable year, to be maintained and filled for at least five consecutive tax years.

Senate Bill 476 (Wonderling) decreases the rate of the corporate net income (CNI) tax from 9.99 percent to 8.49 percent beginning the taxable year of Jan. 1, 2008 to Jan. 1, 2010, and each taxable year thereafter.

Senate Bill 539 (Greenleaf) adds that a self-employed taxpayer may deduct from net profits, one-half of the self-employment taxes.

As always, members with questions are encouraged to contact PICPA.

AICPA Testifies on Reportable Transactions

In testimony presented at an IRS hearing this week, the AICPA highlighted ways that the government can leverage lessons learned both inside and outside of government to improve the administrability of the reportable transaction regulations.

Concerns outlined by the AICPA address aspects of the proposed regulations that do not seem to strike an appropriate balance between the need for greater transparency to identify and deal with potentially abusive transactions and the burden on taxpayers and tax advisors.

The IRS needs to capture meaningful information, but the current regulations may be unnecessarily burdensome to taxpayers and tax advisors and, in the end, the AICPA’s goal is to ensure that the regime is properly administrable.

West Virginia Approves Combined Reporting Bill

In the final hours of the regular 60-day legislative session on Saturday, March 10, both the West Virginia House and Senate approved a combination of Senate Bill 749 (combined reporting) and Senate Bill 751 (business franchise tax reduction).

The adopted version of Senate Bill 749 contains mandatory combined reporting language which mirrors model legislation developed by the Multistate Tax Commission. The bill also reduces the business franchise tax to the greater of $50 or 0.48 percent of the value of the tax base for 2009, with eventual reduction to $50 or 0.20 percent of the value of the tax base by 2012. Notably, the legislation contains a “tax haven” provision, provides broad authority to the tax commissioner (to determine what may or may not be included in the combined report) and includes insurance companies within the combined group.

The Governor has until March 28 to sign the legislation.