By Peter N. Calcara, PICPA vice president, government relations

I first watched Pennsylvania’s budget process unfold as a young staffer in the state Senate in the spring of 1987. It was an eye-opening experience, and nothing that my political science degree had prepared me for. The process itself has not changed much in the past 35 years. Yes, gone are the 2:00 a.m. votes (a good thing!), but in the end you still need 102 votes in the House, 26 in the Senate, and the governor’s endorsement to get a budget approved. Horse trading—both seen and unseen—remains as prolific as ever.   

While the process was similar to years past, there was an unprecedented wrinkle to contend with: a flood of tax dollars coming into Pennsylvania’s coffers. According to the state Department of Revenue, Pennsylvania ended the 2021-2022 fiscal year on June 30 with $48.1 billion in General Fund collections, $5.6 billion (13.2%) above estimate. Then add in another $2.2 billion of remaining federal American Rescue Plan Act funds, and you have serious money. And a lot of money means there were a lot of wish lists. Challenges were inevitable.  

Perhaps it is surprising that it only took a week of overtime to nail down all the particulars. Seven days after the 2022-2023 fiscal year began on July 1, Gov. Tom Wolf and state lawmakers did finally adopt a $42.8 billion state General Fund appropriations bill (Senate Bill 1100). The budget was approved with overwhelming bipartisan support in the General Assembly – 47 to 3 in the state Senate and 180 to 20 in the state House. Total spending will rise to $45.2 billion when nearly $2.4 billion in federal funds are added. Wolf signed the budget and related bills into law on July 8.  

Budget agreements are not exclusively about spending. Tax laws change too, and this year there was a big change. There will be a staged reduction in the corporate net income (CNI) tax rate: it will drop 1% to 8.99% beginning in January 2023, with 0.5% annual reductions thereafter until the rate reaches 4.99% in 2031. This is the first reduction in the state’s CNI tax rate in more than two decades. It was, simply, a significant political accomplishment. House Bill 1342, now Act 53 of 2022, which amends the Tax Reform Code, also includes changes to market-sourcing and economic nexus rules, provides greater conformity to federal Internal Revenue Code Section 179 expense deductions and Section 1031 like-kind exchanges, and, for the first time, creates a Pennsylvania Child Care Tax Credit equal to 30% of the federal credit to support working families.

One note of disappointment for the PICPA is that the General Assembly failed to enact a state and local tax (SALT) parity provisions proposed in House Bill 1709. The bill would have created an elective pass-through entity (PTE) tax that provided a federal tax benefit to many PTE and small-business owners who are limited in their ability to deduct state and local taxes. The bill also would have clarified the statutory language under which the DOR currently penalizes Pennsylvania resident partners who elect to pay similar PTE taxes in other states. Failure to enact this legislation has made Pennsylvania an outlier among states that have a personal income tax.

For a deep dive into this year’s budget details, the related tax changes, and how it all impacts your clients and taxpayers, the PICPA is hosting a special Legislative Update Webinar on Thursday, July 21, from 9:00 a.m. to 10:40 a.m. Join me, Drew VandenBrul, CPA, managing director at Grant Thornton, and Michael J. Semes, of counsel with BakerHostetler, for a 100-minute session. I hope you will join us to learn about all the exciting details.

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