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Legislative Update

Week Ending May 25, 2007

• House Sends No Tax Increase Budget to Senate
• Pennsylvanians Use E-Filing in Record Number
• Senate Sends Amended Blues Merger Bill Back to House
• Report Urges Adoption of Oil Company Gross Profits Tax
• House Committee OKs Bill Extending County Auditing Deadline
• Transportation Funding Analysis Good News for Rendell
• Tax Strategy Patent Bill Applauded by AICPA

House Sends No Tax Increase Budget to Senate

The House Democratic Caucus did what many experts said they could not do: govern. By a vote of 102 to 97, the House Democratic Majority passed a state budget plan this week that includes no tax increases.

On Wednesday, May 23, House lawmakers approved House Bill 1286 , the $27.3 billion budget proposal, the day after House Republicans unsuccessfully sought votes for an alternative budget plan that kept spending growth at about two percent and restored most legislator-favored program funding. Democrats struck a deal with their GOP colleagues earlier in the week to withdraw the 241 other amendments to the budget bill. As passed this week by the House, HB 1286 reflects Gov. Rendell’s original budget proposal outlined in February, excluding the new programs and tax increases he intended to implement, including transportation funding and his health care proposal.

Republican leaders in the state Senate will likely trim the $27.3 billion budget proposal, however. After the House approved the bill, Senate President Pro Tem Joe Scarnati announced that his caucus would rework the budget bill to restrain spending and guard against a future tax hike.

In addition to the General Fund Appropriation Bill, there is still much to do for the General Assembly, including solving the imminent funding crisis facing public transit and fixing crumbling roads and bridges. Those much needed items have yet to be addressed in the budget process.

The Associated Press reports that Gov. Ed Rendell has admitted that he does not believe his health care reform plan, "Cover All Pennsylvanians," will come up for a vote in the General Assembly before the fall. The proposal has run into resistance from many lawmakers and the business community, particularly as it relates to the “fair share” payroll tax.

The state’s fiscal year ends June 30 and House Democratic leaders said they foresee no reason the budget cannot be passed in a timely fashion this year.

Pennsylvanians Use E-Filing in Record Number   

More than 2.9 million taxpayers, or about half of all individual taxpayers, filed their 2006 state personal income tax return electronically this year, setting an all-time record for electronic filing, the state Department of Revenue reported on May 22.

Taxpayers who file using an electronic method can have their refund deposited directly into their bank account or pay a balance due electronically. This tax season, more than 540,000 taxpayers chose to directly deposit their refund; about 201,000 chose to pay their taxes using the Automated Clearing House (ACH) debit/credit option; and more than 21,000 chose to pay their taxes by credit card.

The department’s Web site received more than 199 million hits this tax season, a 13 percent increase from last year.

Senate Sends Amended Blues Merger Bill Back to House

On May 22, the state Senate approved House Bill 112, legislation to provide state oversight of the proposed merger between Highmark and Independence Blue Cross, and sent the amended bill back to the House for concurrence.

While the Insurance Department would hold final approval -- or denial -- authority for a merger of non-profit health insurance companies, House Bill 112 also establishes an Insurance Restructuring Public Interest Review Board comprised of representatives from the Auditor General’s Office, the Administration, and the four caucuses of the General Assembly, as well as a policyholder, to provide recommendations to the Department.

In addition, House Bill 112 requires the Department of Insurance to develop a written determination that the merger or consolidation will result in a sustained reduction in health care premiums. The Department’s written determination must also set forth the reasons why it believes the transaction will be in the public interest.

House Bill 112 also prohibits any contract or agreement between the Commonwealth and non-profit health insurance companies relating to the disbursement or spending of the proceeds from the merger or consolidation. It also prohibits any spending from the restricted receipt account except upon appropriation by the General Assembly.

Finally, House Bill 112 adds a new article to the Insurance Company Act that will require hospital plan corporations and professional health services plan corporations to report amounts spent on social mission and advertising annually to the Department of Insurance and the House and Senate Insurance Committees.

Report Urges Adoption of Oil Company Gross Profits Tax

An Oil Company Gross Profits Tax (OCGPT) would be a good funding source for Pennsylvania's public transit systems, according to a report released May 23 by the Pennsylvania Budget and Policy Center (PBPC).

The tax, proposed by Gov. Rendell in his budget address in February, would be levied against an estimated $12.5 billion in gross profits from oil company activities in Pennsylvania, providing a large and stable source of revenue for the state's 70 transit systems.

The new PBPC study, entitled Gross Profits: Why Pennsylvania Should Enact the Oil Company Tax, analyzes oil industry economics and suggests that, contrary to the claims of critics, the oil profits tax is unlikely to be reflected in Pennsylvania gas prices or to be borne primarily by Pennsylvanians.

The report concludes that the OCGPT is the best available option for a dedicated funding source for mass transit.

House Committee OKs Bill Extending County Auditing Deadline

The House Local Government Committee has approved legislation that would give county auditors more time to complete and report to the state the results of their annual county audits.

The legislation House Bill 635, would extend the deadline for completing county audits from April 1 to July 1 of the year following the year being audited, and also give counties until July 1 to provide a fiscal report to the Court of Common Pleas and the state Department of Community and Economic Development.

The bill now goes to the full House for consideration.

Transportation Funding Analysis Good News for Rendell

An analysis of options to address Pennsylvania’s massive transportation funding needs has determined that a lease of the Pennsylvania Turnpike is likely to generate the highest level of funding to repair roads and bridges and avert drastic public transit cuts, Gov. Ed Rendell announced this week.

According to the report, although other options studied are feasible, they are unlikely to bring in enough revenue to tackle all road, bridge and transit needs. The other options would likely need to be supplemented by other revenue sources to fully fund all transportation needs, the analysis concluded.

The financial analysis, completed over the last month by Morgan Stanley & Co., which is serving as the Commonwealth’s independent financial advisor on transportation funding alternatives, looked at three options:

• A long-term lease of the turnpike;
• Creation of a new, tax-exempt, public benefit corporation under IRS code 63-20, which would allow for private management of the turnpike; and
• A proposal by the Pennsylvania Turnpike Commission that includes new tolls on Interstate 80 and a new “congestion tax” that would be collected at the most heavily used turnpike exits.

The report concludes that each proposal could likely deliver the $965 million per year required to meet the state’s highway and bridge investment needs. Two of the options — a long-term lease and a new public corporation — could also provide significant funding for the state’s transit needs. Estimates are that the long-term lease option could meet funding needs for all highways and transit systems.

Tax Strategy Patent Bill Applauded by AICPA

The American Institute of Certified Public Accountants (AICPA) applauded the introduction by Rep. Rick Boucher (D-VA), with co-sponsors Reps. Bob Goodlatte (R-VA) and Steve Chabot (R-OH), of H.R. 2365, legislation that would limit damages and other legal remedies available to holders of patents for tax planning methods.

The AICPA opposes tax strategy patents for the following reasons:

• They violate the core principle of equity that under girds the entire tax system—namely, that people in similar situations ought to pay a similar amount of taxes.
• They may cause some taxpayers to pay more tax than Congress intended.
• They complicate the provision of tax advice by professionals.
• They make compliance by taxpayers more difficult.
• They mislead taxpayers into believing that a patented strategy is valid under the tax law.

The three senior members of the House Judiciary Committee introduced the bill on May 17. H.R. 2365 was referred to the House Judiciary Committee, which has jurisdiction over patent issues.