The state budget agreement announced by Gov. Rendell on June 30, 2008, as agreed to by the governor and the General Assembly, did not include two corporate tax relief proposals that had been anticipated by many taxpayers.

One proposal that was not included in the budget package would have increased the cap on the net operating loss carryover that a corporation may use in a tax year to the greater of $5 million or 20 percent of taxable income, effective for tax years beginning in and after 2009. (The current limit on net operating loss carryforwards that a corporation may use in a tax year is the greater of $3 million or 12.5 percent of taxable income.) Thus, the budget will provide no relief from the severe limitations that Pennsylvania places on the use of net operating loss carryforwards. These limitations tend to penalize research-intensive industries and cyclical businesses.

Another proposal that was not included in the budget package would have increased the weighting of the sales factor of Pennsylvania's apportionment formula from 70 percent to 85 percent, effective for tax years beginning in and after 2009. This proposal was excluded from the budget deal, despite the beneficial effect that increasing sales-factor weighting would have had for most Pennsylvania-based businesses.

However, two significant tax bills were included in the budget agreement.

Senate Bill 1412 has been signed by both chambers of the General Assembly, and Gov. Rendell's signature is expected shortly. This Bill eliminates the sales factor from the Pennsylvania Keystone Opportunity Zone ("KOZ") credit computation. As a result, a corporation located in a KOZ will determine the portion of its corporate net income tax and franchise tax that is eligible for the KOZ credit by multiplying the tax paid by an apportionment formula composed of equally weighted property and payroll factors. These factors will be a ratio of the corporation's property and payroll within a KOZ to the corporation's total Pennsylvania property and payroll. When signed by the governor, the KOZ apportionment change will apply to taxable years beginning in and after 2009.

Senate Bill 1063 was signed by Gov. Rendell on July 2, 2008. This new piece of legislation will streamline the state's local earned income tax collection. After the streamlining, there will be 69 local income tax collectors throughout the state, compared with the current 560. The Bill requires employers to withhold all income taxes on employees' wages; provides a uniform definition of "taxable income" to apply in all localities; and establishes an appeals process. A 2004 non-partisan report by the Pennsylvania Economy League estimated that the state's disjointed collection of local earned income taxes left about $237 million uncollected each year.

This article is presented for informational purposes only and is not intended to constitute legal advice.