Wolf, State Lawmakers Approve $42.8 Billion Budget
Gov. Tom Wolf’s eighth and final budget is in many ways a historic last hurrah. A week after the 2022-2023 fiscal year (FY) began on July 1, Wolf and state lawmakers adopted a $42.8 billion state General Fund appropriations bill. The plan increases investment in public education, cuts the corporate income tax, offers a first-time childcare tax credit, prioritizes environmental programs, supports safer community initiatives, and secures financial security by depositing a record $2.1 billion into the Rainy Day Fund.
The General Fund budget was approved by overwhelming bipartisan support in the General Assembly – 47 to 3 in the state Senate and 180 to 20 in the state House. Total spending rises to $45.2 billion when nearly $2.5 billion in federal funds are added.
Wolf and lawmakers agreed to a reduction in the corporate net income (CNI) tax rate by 1% to 8.99% beginning in January 2023, with 0.5% annual reductions thereafter until the rate reaches 4.99% in 2031. The reduction represents the first reduction in the state’s CNI tax rate in more than two decades – a significant legislative and political accomplishment.
House Bill 1342, now Act 53 of 2022, which amends the Tax Reform Code, also includes changes to market-sourcing rules and economic nexus to ensure out-of-state companies that do business in Pennsylvania pay the proper amount of taxes. The bill also provides conformity to federal Internal Revenue Code Section 179 expense deductions and Section 1031 like-kind exchanges.
Additional funding has been added to several tax credit programs, including research and development ($5 million increase), film production ($30 million increase), entertainment economic enhancement ($16 million increase), and waterfront development ($3.5 million increase). Both the Educational Improvement Tax Credits (EITC) and the Opportunity Scholarship Tax Credits (OSTC) have significant increases in this budget.
This year’s budget also creates a first: a Pennsylvania Child Care Tax Credit equal to 30% of the federal credit to support working families.
Funding for public education – a priority in each of Wolf’s past seven budgets – hit historic highs under the FY 2022-2023 budget. The plan includes increases of $525 million for basic education funding, $225 million of additional support to the state’s 100 poorest school districts, a $100 million increase to special education funding, an additional $60 million for Pre-K Counts, and $19 million more for Head Start Supplemental Assistance. Education spending now comprises nearly $7.1 billion of the state’s $42.8 billion General Fund budget.
This budget also takes important steps to repay the outstanding loan to the Workers’ Compensation Security Fund – a savings to Pennsylvania businesses of approximately $350 million. The FY 2022-2023 budget provides $42 million of federal American Rescue Plan funding to pay off outstanding debt in the Unemployment Compensation Trust Fund.
The PICPA will offer learning opportunities on the new tax legislation in the coming weeks. Look for more information coming your way.
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Pa. Lawmakers Fail to Enact SALT Proposal
In response to strong opposition from the Department of Revenue (DOR), Pennsylvania state lawmakers failed to enact a tax proposal as part of this year’s budget that would have brought parity for many taxpayers. Gov. Wolf signed the budget (House Bill 1342) on July 8. The legislation includes several tax adjustments (see above), but it does not include the state and local tax (SALT) parity provisions championed by the PICPA and found in House Bill 1709. Failure to enact this legislation has made Pennsylvania an outlier among states that have a personal income tax.
The proposal would have created an elective pass-through entity (PTE) tax providing 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. Pennsylvania is the last remaining large state to not enact SALT parity legislation. In fact, 29 of the 41 states that impose a personal income tax have adopted this new taxing regime, as permitted by the IRS. Currently, 89% of the U.S. population reside in states with either no personal income tax or with SALT parity legislation adopted. This oversight by the legislature places Pennsylvania among the minority of states in its taxing policies.
The federal Tax Cuts and Jobs Act of 2017 created a $10,000 state and local tax deduction limitation through 2025. The SALT cap prevents many individuals from being able to fully deduct state and local income and property taxes on their federal income tax returns. To mitigate the impact of the federal SALT cap, many states – including Connecticut, Maryland, New Jersey, New York, Ohio, and Virginia – have adopted statutes that facilitate the federal deduction of additional state taxes.
The PICPA will continue to pursue this legislative change in the fall when the General Assembly returns to session.
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Pennsylvania Ends Fiscal Year with $5.6 Billion Surplus
Pennsylvania ended the 2021-2022 fiscal year with $48.1 billion in General Fund collections, according to the Department of Revenue. That total is $5.6 billion, or 13.2%, above estimate.
The Independent Fiscal Office (IFO) June Monthly Revenue Update shows that collections, according to IFO’s initial estimate, were $6.2 billion above projections. The report also compares collections to the prior fiscal year, where fiscal year 2021-2022 General Fund revenues of $48.13 billion were $7.74 billion (19.2%) more than the prior year.
Sales tax receipts totaled $1.2 billion for June, $95.6 million above estimate. Fiscal year-to-date sales tax collections total $13.9 billion, which is $1.1 billion, or 8.7%, more than anticipated.
Personal income tax (PIT) revenue in June was $1.6 billion, $179.8 million above estimate. This brings fiscal-year total PIT collections to $18.1 billion, which is $2.4 billion, or 14.9%, above estimate.
June corporate tax revenue of $972.0 million was $406.0 million above estimate. The fiscal year-to-date corporate tax collection total was $7.3 billion, which is $1.7 billion, or 29.2%, above estimate.
Inheritance tax revenue for the month was $121.6 million, $13.2 million above estimate. This brings the fiscal-year total to $1.6 billion, which is $173.0 million, or 12.6%, above estimate.
Realty transfer tax revenue was $76.0 million for June, $10.3 million above estimate. The fiscal-year total of $847.1 million is $164.2 million, or 24.0%, more than anticipated.
Other General Fund tax revenue – including cigarette, malt beverage, liquor and gaming taxes – totaled $178.4 million for the month, which was $4.6 million above estimate. This brings the fiscal-year total to $1.7 billion, which is $21.1 million, or 1.2%, above estimate.
Nontax revenue totaled $38.0 million for the month, $4.3 million above estimate. The year-to-date total is $4.6 billion, which is $117.2 million, or 2.6%, above estimate.
In addition to the General Fund collections, the Motor License Fund received $253.2 million for the month, $7.1 million above estimate. Fiscal year-to-date collections for the fund – which include the commonly known gas and diesel taxes, as well as other license, fine, and fee revenues – total $2.9 billion, which is $37.4 million, or 1.3%, above estimate.
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Court Blocks Implementation of Wolf's RGGI Plan
Commonwealth Court struck a major blow to Gov. Wolf’s environmental agenda. On July 8, the court issued a preliminary injunction temporarily blocking the Pennsylvania Department of Environmental Protection’s entry into the Regional Greenhouse Gas Initiative (RGGI).
The regulation was published on April 23, 2022, with a July 1, 2022, enforcement date. Legal challenges filed by lawmakers and other stakeholders, including power producers and trade unions, were a last-ditch effort to halt the implementation and enforcement of the regulation.
RGGI is an initiative among several New England and Mid-Atlantic states to reduce greenhouse gas emissions from the power sector. This would be achieved by setting a regional cap or limit on carbon dioxide (CO2) emissions from electric power plants in the participating states.
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Department of Revenue Tutorial Videos
The Pennsylvania Department of Revenue (DOR) recently released a series of tutorial videos that provide taxpayers and tax professionals with step-by-step instructions on how to use myPATH, the DOR’s online tax filing system. The new Revenue 411 videos cover five major topics: Making Estimated Payments, Making Extension Payments, Making a Return Payment, Paying a Bill, and Responding to a Letter.
The DOR is working on the fifth and final phase of a major modernization project. This phase involves the transition of all business taxes – including employer withholding, sales, and corporation taxes – into the Pennsylvania Tax Hub (PATH) system. The transition, which is expected to start in late November 2022, will coincide with the retirement of e-TIDES, the current online filing system for business taxpayers.
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Controversial Constitutional Amendments Clear Legislative Hurdle
State lawmakers approved a controversial measure proposing a series of changes to the Pennsylvania Constitution. Senate Bill 106, sponsored by Sen. Dave Argall (R-Schuylkill), was approved 28-22 in the Senate and 107-92 in the House.
The most controversial amendment would explicitly bar tax dollars for abortions and specify that the state constitution doesn’t guarantee that a woman has a right to an abortion. Senate Bill 106 also would institute a constitutional change that would require voters to show identification at the polls.
Another proposed amendment would remove the lieutenant governor from voter nomination and would allow candidates running for governor to choose their own running mates. Also included are proposals on whether the auditor general should audit the state’s elections and whether resolutions passed by the legislature disapproving regulations should be exempted from potential veto by the governor.
Amendments to the Pennsylvania Constitution must pass two successive sessions of the General Assembly then they go before voters to ratify or reject.
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Dowling to Remove Name from Ballot, Retire at End of Term
State Rep. Matt Dowling (R-Fayette/Somerset) announced that he will remove his name from the ballot as the Republican nominee for the General Election this fall and instead retire at the end of his term.
“My recent auto accident and subsequent treatment that I voluntarily sought drove me to deeply reflect on my life and make some hard decisions. One of those was to leave my seat in the state House of Representatives so that I can better spend time focusing on family and my personal journey to wellness,” Dowling stated.
Dowling, a resident of the Laurel Highlands of Pennsylvania, was first elected in 2016 after defeating longtime incumbent Timothy Mahoney.
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