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Pennsylvania House of Representatives
https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20170&cosponId=24094
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House of Representatives
Session of 2017 - 2018 Regular Session

MEMORANDUM

Posted: June 7, 2017 11:06 AM
From: Representative Eli Evankovich
To: All House members
Subject: Eliminating the Cap on the Net-Operating-Loss Carry Forward (Former HB1416)
 
The Pennsylvania Supreme Court is poised to announce a landmark ruling that will likely declare Pennsylvania’s Net Operating Loss (NOL) cap unconstitutional. This outcome became even more likely in light of the Supreme Court’s recent ruling in the Mount Airy local share casino tax. Both tax provisions were challenged on the basis of the Pennsylvania Constitution’s “uniformity clause” because taxpayers are taxed differently based upon their income.

Pennsylvania currently restricts corporate employers from reducing taxable income from NOLs by up to $5 million or 30 percent of income. Federal tax law and virtually every state in the U. S. allow for 100 percent deductions. The Commonwealth Court recently and unanimously held, in two separate cases, that the "fixed rate" relief provision, which is currently $5 million, violates the "uniformity clause" of the Pennsylvania Constitution because it treats corporate taxpayers differently based on the amount of taxable income.

Most of those following the case believe the Supreme Court will agree with the Commonwealth Court’s decision that the current NOL cap structure is unconstitutional. Few agree on what remedy the Court will apply. As a result, depending on the remedy the Supreme Court chooses, there are significant risks to both corporate taxpayers and the Commonwealth that merit a legislative solution now.

RISK 1. $400 Million General Fund Hit. The Supreme Court could conclude that the entire NOL cap is unconstitutional. While this would benefit CNIT taxpayers with NOLs, it would create in excess of a $400 million hole in the General Fund budget during a very challenging budget year.

RISK 2. $200 Million Tax Increase CNIT Taxpayers. In the event the Court merely strikes down the $5 million fixed rate cap, it would trigger a $200 million tax increase on CNIT taxpayers that have been able to utilize the fixed rate cap.

The General Assembly should not defer to the Supreme Court to decide whether a tax windfall should benefit taxpayers or the General Fund. Instead, we should enact a revenue neutral legislative fix that strikes the “fixed” $5 million relief provision and applies those revenues directly toward the percentage based relief provision, which could increase from the current 30 percent to 44 percent. The Department of Revenue has informed the House Appropriations Committee that this would not impact General Fund revenues (i.e., it would be fiscally neutral).

In the unlikely (but admittedly preferred) event the Supreme Court upholds current law, I also intend to add language in the legislation that triggers its effective date only in the event all or a portion of the NOL cap are deemed invalid.

Please join me in co-sponsoring this important legislation that is supported by CompetePA, the PA Chamber and numerous other business organizations that represent corporate employers, and was reported unanimously from the House and Senate Finance Committees last year.



Introduced as HB1537