Tax Reform Update: Senate, House Proposals Differ in Key Ways
Tax reform is developing at a breakneck pace. On Nov. 16, the U.S. House passed the Tax Cuts and Jobs Act bill, H.R. 1, by a vote of 227–205.
The bill reduces the number of individual tax brackets from the current seven to four; provides a larger standard deduction; repeals many itemized deductions; reduces the corporate income tax rate to 20 percent; repeals the alternative minimum tax and, after 2023, the estate and generation-skipping taxes; among many other changes.
Focus now shifts to the U.S. Senate as it continues the mark-up process of its own version of the Tax Cuts and Jobs Act. Major differences in the two bills include provisions affecting businesses, such as a corporate rate delay, the treatment of pass-through income, cash accounting and expensing, and depreciation. The full Senate is expected to consider its bill after the Thanksgiving break.
Differences between the two bills will have to be resolved in a conference committee. Congressional Republicans and the White House hope to have a bill on President Donald Trump’s desk before the end of the year, with most provisions likely to be effective Jan. 1, 2018.
The PICPA’s Federal Taxation Committee is closely monitoring tax reform. It is hosting an “End-of-the-Year Update Webinar” on Wednesday, Dec. 13, at 1:30 p.m., where members will provide a helpful overview of 2017 tax changes and provide a look ahead to the coming tax season.
Registration is free for PICPA members, and $50 for nonmembers. You can register here.
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Fiscal Office Releases Long-Term Economic and Budget Outlook
Pennsylvania’s Independent Fiscal Office released its long-term economic and budget projections, titled Economic & Budget Outlook: Fiscal Years 2017-2018 to 2022-2023. The report evaluates the demographic, economic, revenue, and expenditure trends that will affect the state’s fiscal condition through fiscal year (FY) 2022-2023.
The following factors affect projections of the commonwealth’s fiscal condition in the forecast period:
- The projections include mandatory (also referred to as the cost-to-carry) and nonmandatory expenditures. The potential FY 2018-2019 imbalance would be approximately -$600 million if the financial statement incorporated only mandatory expenditures.
- The recent revenue package is expected to generate about $2.3 billion in new revenue for FY 2017-2018, which would be sufficient to maintain a positive ending balance for the current year. However, the budgetary impact largely is temporary, as most proceeds are derived from borrowing and one-time fund transfers.
- Enacted appropriations for FY 2017-2018 were flat compared to prior-year spending. While there will be some “snap back” in FY 2018-2019 expenditures based on temporary measures employed in the current year, the forecast incorporates savings based on recent cost containment efforts.
- Pennsylvania’s fiscal outlook is constrained by its demographics. A projected contraction of the working age population (ages 20-64) moderates economic growth. An increase in the 65+ cohort will restrain tax revenues due to the changing income and spending patterns associated with an aging populace and increase health care and other expenditures associated with the long-term care of the elderly.
Updated revenue and expenditure estimates suggest policymakers could face a potential budget imbalance of up to $0.99 billion in the upcoming fiscal year. The potential imbalance expands to $1.87 billion in FY 2019-2020 and reaches $2.19 billion by FY 2022-23 based on current policies. The imbalance is described as “potential” because policymakers have various tools to control expenditures on a temporary or permanent basis.
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PICPA Submits Comments on Proposed Realty Transfer Tax Regulations
The PICPA Committee on State Taxation's Regulations Subcommittee recently reviewed and provided comments on the Pennsylvania Department of Revenue’s (DOR) draft realty transfer tax regulations. The proposed amendments are intended to provide clarity and effectiveness to DOR’s regulations, as well as make the regulations consistent with policy and the Realty Transfer Tax law.
The PICPA noted in its comment letter that some provision in the draft regulations may go beyond the statutory authority contained within the law. Furthermore, many of the proposed changes are substantive in nature and not simply clarification, noted the PICPA.
The PICPA also endorsed the comments submitted by the tax section of the Philadelphia Bar Association.
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State Tax Review Committee Convenes First Meeting
The state House Finance Select Subcommittee on Tax Modernization and Reform convened its first public hearing Nov. 15. The subcommittee was created by House Resolution 327, sponsored by Rep. Jake Wheatley (D-Allegheny), the Democratic chair of the House Finance Committee, to investigate, review, and make recommendations concerning the process, rates, and methods by which revenue in the state is collected and assessed on taxpayers.
The focus of the hearing was Pennsylvania’s taxes and history. Among those who testified were Dr. Robert Strauss, professor of economics and public policy at Carnegie Mellon University; Secretary Dan Hassell and Deputy Secretary Amy Gill of the Department of Revenue; Deputy Secretary Rick Vilello of the Department of Community and Economic Development; and Sue Copella and Jennifer Shultz from the Penn State Data Center.
The select subcommittee, which is chaired by Rep. Eli Evankovich (R-Allegheny), is charged with submitting a report of its findings together with its recommendations for appropriate legislation no later than Nov. 30, 2018.
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PICPA Member Confirmed to State Tax Board
Peter R. Barsz, CPA, CGMA, and PICPA member, was nominated by Gov. Tom Wolf and unanimously confirmed by the state Senate for a second term as a member of the State Tax Equalization Board (STEB). Barsz’s nomination had recently been approved by the Senate Finance Committee.
Barsz is a partner in the regional CPA firm of Barsz Gowie Amon & Fultz, which services clients throughout the Greater Delaware Valley. He is active in local government, and currently serves on several municipal boards in Delaware County. He is also a member of the PICPA CPA-PAC Board and Legislation Committee.
STEB was established by the General Assembly through Act 447 of 1947 to compensate for the lack of assessment uniformity statewide in distributing school subsidies. Barsz serves as chair of the three-member board. STEB collaborates with the Tax Equalization Division of the Pennsylvania Department of Community and Economic Development to fulfill its responsibilities.
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Audit Commission Releases Report
The Legislative Audit Advisory Commission (LAAC), chaired by Rep. Mark Keller (R-Perry/Cumberland), accepted the audit report of the Pennsylvania General Assembly’s finances for the 2016-2017 fiscal year as conducted by an independent CPA firm.
The annual audit of the various legislative departments and service agencies revealed a reserve of $94,936,297 as of June 30, 2017. The audit was carried out by Boyer & Ritter LLC of Camp Hill.
LAAC’s function is twofold. It examines the standards of audits performed under the provisions of Section 10 of Article VIII of the Constitution of Pennsylvania, and recommends measures for the improvement of preauditing of the financial affairs of the commonwealth. It also annually reports recommendations and suggests legislation for the improvement of auditing, particularly as it pertains to the legislature.
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Senate and House Education Committees Hold Hearing on State System
The Senate and House education committees held a joint hearing focused on the Pennsylvania State System of Higher Education Strategic System Review.
Over the past year, the state system hired the National Center on Higher Education Management Systems to examine the current higher education system and to provide recommendations for changes. At the hearing, members of the committees asked important questions related to their concerns about the report after hearing from university presidents, the chancellor’s office, and the faculty union.
Sen. John Eichelberger and Rep. David Hickernell, respective chairs of the Senate and House committees, both noted that without substantial change, the system, under its current structure, is not sustainable for the long term. In addition, the lawmakers cited mandates stemming from union contracts and other systemwide and local regulations that will continue to be impediments to the state-owned universities as they look to be innovative and successfully compete with other institutions across Pennsylvania’s various higher education options.
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House Speaker Turzai Announces Bid for Governor
House Speaker Mike Turzai (R-Allegheny) announced this week what had been whispered for several months throughout the capital: he is an official candidate for governor. Turzai joins an already crowded GOP field. Laura Ellsworth, Paul Mango, and state Sen. Scott Wagner have all previously announced that they will seek to unseat Gov. Wolf next November.
Turzai made his announcement using social media.
“As speaker of the Pennsylvania House, we’ve been the last line of defense against every imaginable scheme to take away your hard-earned dollars and freedom. We’ve stopped billions in taxes on working families. We blocked massive new taxes on jobs—all across the commonwealth—and at the very moment when we were about to unleash real energy independence,” Turzai said in the video.
In other election-related news, state Rep. Rick Saccone (R-Allegheny) was selected by his party to be the Republican candidate in the special election to replace Tim Murphy, who resigned. The special election will be held March 13, 2018. Democrats have yet to select their candidate.
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