Tax Changes

    The Governor proposed five tax changes as part of his budget. Only a proposed increase to the poverty exemption of the personal income tax is geared to low income persons. The remaining reductions are for businesses.

    The Governor=s proposed changes are:

1. Retroactive (1-1-98) reduction of the Capital Stock tax rate from 12.75 mills to 12.25 mills. The cost to the state is estimated at $46.2 million.
   
2. The net operating loss provision to the Corporate Net Income tax is to be extended from a 3 year recovery period to a 10 year period. Businesses with larger losses or smaller profits will be able to recover more of their losses. The expanded time frame will be phased in and the cost to the Commonwealth is estimated at $17.8 million.
   
3. The $15 million cap on the job creation tax credit is to be expanded to $20 million. The cost to the Commonwealth is $5 million.
   
4. Creation of an enterprise zone plan in up to 12 geographical areas that would make those areas tax-free for a limited period of time. The Governor would call this program Keystone Opportunity Zones. The plan would exempt the business from all state taxes and perhaps extend to the employees and residents of the zone for personal income tax forgiveness. Sales tax would also be forgone for goods used within the zone. This tax break might last for up to 12 years. The Governor=s enterprise zone plan would include local tax abatement such as the wage tax for the employees and property tax for the business that would move to the location. The cost is estimated to be $5 million in the first year. But the cost could raise rapidly in future years.
   
5. The poverty forgiveness exemption for the dependents of the poorest PIT taxpayers is to be expanded from $4,000 to $6,000 annually. The base exemption amount for the wage earner would increase from $6,300 to $6,500. These two changes would allow a family of four making up to $25,000 to pay no state income tax. The amount of the exemption for each dependent was raised last year to the $4,000 level. The cost to the state is estimated to be $54.1 million.

    The total cost of the Governor=s tax reductions is estimated to be $128 million.

    Additional tax reductions were added to the bill in the House Rules Committee. These changes include:

1. An additional $500 in poverty forgiveness from the personal income tax for the first dependent if the wage earner is a single parent.
   
2. A capital gains exemption for sale of a primary residence. Currently there is a similar exemption allowed for senior citizens but it can only be used once in their lives. This exemption would have no such limits
   
3. An additional reduction to the capital stock tax rate. The Governor=s proposal was for a half of a mill reduction. The amended version of the bill raises the reduction by .26 of a mill.
   
4. A sales tax exemption for food products sold in vending machines.
   
5. A manufacturing exemption for the roasting of green coffee beans for both the capital stock tax and the sales tax has been added.

    The total cost of the tax bill is estimated to be $206 million or about $78 million more than the Governor=s original budget plan.