These are the tax reductions that are part of the budget package:

1. Sales tax exemption for all computer services.

2. Adds a retail baking exemption to the manufacturing exemption. The Revenue Department is concerned that the previous language would have had unintended effects on the taxation of pizza as well, but it is believed that this language will not.

3. Exempts from the sales tax items purchased for use in the production of full length films with a national distribution. Items such as the film, props, costumes would be included.

4. Exempts from the income tax health care benefits that workers receive as cash to purchase their own health care plans. These are so called cafeteria style benefits and they are currently taxable.

5. Expands the scope of the Subchapter S tax break to include the federal changes allowing for up to 75 shareholders instead of the 35 currently allowed. Pennsylvania's limits on passive income are maintained.

6. Expands the poverty forgiveness provision of the PIT. Also, the amount of exempt income per dependent would be expanded by $1,000, to $4,000. The base for 100% forgiveness would be maintained at $6,300. The bill also simplifies qualifying for poverty forgiveness by allowing dependent status to be determined by federal dependent status. Current law requires a work sheet to be filled out and some simple calculations to determine dependent status.

7. Lists the voluntary checkoffs that are to be available on the PIT tax return. Breast cancer and a Korean/Vietnam memorial fund are added to the existing checkoffs.

8. Adds language to clarify the non-taxation of transfers of property by trusts and living trusts. There has been some concern that the language placed in the tax reform code in 1995 is flawed.

9. Raises the capital stock value exemption from $100,000 to $125,000. The capital stock value exemption reduces the tax liability of businesses by subtracting the exemption amount from the calculations of the business tax liability, prior to the application of the rate. Since the exemption helps many smaller businesses to pay only the minimum tax, increasing the exemption is designed to aid primarily smaller businesses.

10. Transfers an additional one-thirty first of the cigarette tax proceeds to the Children's Health Fund, known as CHIP. This provision is effective retroactively to January 1, 1997.

11. Increases the money available for the Neighborhood Assistance Tax Credit from $16.75 million to $18 million.

12. Exempts the sale of candy and gum from the sales tax when the items are sold within an eating establishment.

13. Expands the sales tax exemption for basic cable service to include channels that are uninterrupted by commercials but are still offered by the cable company as part of the basic package. This has no real cost because the department is currently not taxing these programs.

14. Adds a new tax of 2% on truck rentals. The tax will be similar to the tax on car rentals that the rental company uses to pay the registration of the vehicle.

15. Creates a research and development tax credit for additional R& D done in this state. The credit will be capped at $15 million. If additional applications are filed all the qualifying credits will be prorated. Two million dollars will be granted to businesses with assets under $5 million.

16. Provides two additions to the processing exemption for both the capital stock tax and the sales tax. One is for the shearing and leveling of massive steel products for finer machining and the other is for the cutting and dicing of tobacco leafs.

17. Exempts large publicly traded partnerships from the withholding requirements of the income tax. Any income distribution will still be taxed but it will be the responsibility of the person receiving the distribution instead of the partnership making the distribution. Smaller partnerships will continue to withhold the income tax.

18. Eliminates the capital stock minimum tax for out-of-state sellers at flea markets. These vendors will pay the tax as the formula dictates but they won't pay the minimum amount.

19. Makeds various changes to corporation's filing status. Limited liability companies and business trusts will have their federal tax election determination between partnership and corporation determine their state election as well. There are 1,600 for-profit nonstock corporations in Pennsylvania that were not taxable under the CNI. There is language include to tax them in this bill.

20. Eliminates the realty transfer taxation of transfers between individuals and living trusts. Current department policy doesn't tax these transfers.

21. Eliminates the realty transfer tax on the sale of agricultural land from a conservancy trust to a farm entity. An agricultural easement must be part of the sale and the conservancy must have held the land for two years.

22. Exempts from taxation trust funds which are converted between a bank managed fund and a mutual fund.

23. Adds provisions making uniform penalties for the fine of paying taxes with a bad check and uniform refund periods for all taxes.

24. Eliminates the tentative payments made by taxpayers of the bank shares, mutual thrift, insurance and utility gross receipts taxes. These taxpayers would instead pay four quarterly estimated payments. The Department feels that there is no lost revenue from this proposal but there could be some loss in the first fiscal year because taxpayers will change from paying the state 90% of their tax base from the preceding year to four 25% installments of the current estimated liability. In the first fiscal year of the change the payments will equal 50% (two quarterly payments) of current liability instead of 90% of the previous year's liability.

    FISCAL IMPACT:

    The total cost to the General Fund for these tax reductions is $187.85 million in 1997-98 fiscal year. The table below itemizes the cost of each component of the bill.

    Tax Item	1997-98 Cost In millions	1998-99 Cost In millions
    Repeal of Computer Services from Sales Tax	$89	$92.6
    Retail Baking Exempt	$6	$6
    Film Exemption for Sales Tax	Minimal	Minimal
    Cafeteria Style Health Care Benefits	$10	$10.3
    Expanding Sub S Status	$16.9	$12.1
    Poverty Forgiveness Expansion	$24.8	$25.5
    Additional Tax Checkoffs	$0	$0
    Clarification of Trust Taxation	$0	$0
    Increase in Capital Stock Exempt.	$10.2	$10.7
    Additional Transfer to CHIP	$10.8	$10.8
    Neighborhood Assistance Tax Credit	$1.25	$1.25
    Exemption for Candy and Gum in Restaurants	$1	$1
    Expansion of Basic Cable Definition	$0	$0
    2% Tax on Truck Rentals	$0	$0
    Research & Development Tax Credit	$10	$10
    Additional Processing Exemption for Tobacco Leaves & Steel Production	$2.7	$2.7
    PIT Withholding Exemption for Large Traded Partnerships	$0	$0
    Elimination of Capital Stock Minimum for Out of State Vendors at Flea Markets	Less Than $200,00	Less Than $200,00
    Federal Filing Status and Taxation of For Profit Nonstock Corp.	Unknown	Unknown
    Transfers Between Individuals and Living Trusts	$0	$0
    Elimination of Realty Transfer Tax for Agricultural Transfers from a Conservancy	Minimal	Minimal
    Exempting Trust Fund Conversion	Minimal	Minimal
    Uniform Penalties & Refund Periods	Minimal Increase	Minimal Increase
    Replacing Tentative Payments with Estimated Payments	$0	$0
    Total Cost	$187.85	$188.15

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    For more information, contact the Office of State Senator Vincent J. Fumo.
    

    1208 Tasker Street Philadelphia, PA 19148 (215) 468-3866

    2637 East Clearfield Street Philadelphia, PA 19134 (215) 423-7670

    Senate Box 203001 Harrisburg, PA 17120-3001 (717) 787-5662

    E-Mail: Senator_Fumo@fumo.com.

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