December 12, 2004 | By Keith Martin in Washington, DC

PENNSYLVANIA is looking at possible changes in the state tax system. 

Developers with new projects in the state should take the risk of such changes into account in their pricing.

A commission appointed by the governor to look into possible business tax reforms recommended on November 30 that the state reduce the corporate tax rate from 9.99% to 6.99%, but it said such a tax cut would cost the state a lot of money — even when combined with a tax increase the commission is recommending — and a rate of 7.22% would be revenue neutral.

The commission proposed to make up some of the lost tax money by subjecting limited liability companies, partnerships and S corporations to a 1% entity-level tax. Such entities are not taxed currently; income taxes are collected today directly from the partners. 

States tax companies doing business in them only on income earned in the state. Most states use a three-factor formula to figure out how much of a company’s income is earned in the state. For example, a company that had $100 in income from all its operations might calculate how much to apportion to state X by taking a weighted average of its sales, property and payroll in the state as a percentage of its
total sales, property and payroll in all states. 

The commission recommended that Pennsylvania move to use solely of the sales factor to apportion income, but that it pool all the income and operations of all affiliated companies into a single, unitary group before applying the sales factor. It also urged the governor to lift a cap of $2 million a year on the amount of net operating losses that a company can deduct.

The governor is expected to use the commission report in drawing up his next budget