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Rep. Bryan Cutler expecting corporate loan tax repeal in governor's budget

- Last modified: January 30, 2013 at 11:59 AM

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Rep. Bryan Cutler. Submitted photo
Rep. Bryan Cutler. Submitted photo

State Rep. Bryan Cutler said this morning he expects Gov. Tom Corbett to include a repeal of Pennsylvania's corporate loan tax in the budget he will present to the legislature next week.

The tax is paid on nonbank business loans made by Pennsylvania residents and companies with treasurers based in the state. The tax rate is 4 mills; the amount taxed depends on the loan interest rate.

Cutler, a southern Lancaster County Republican, is prime sponsor of a bill to repeal the tax. The legislation, House Bill 78, cleared the House Finance Committee last week.

The tax is an outdated relic, Cutler said, with the state having abolished a number of similar personal property taxes in the 1980s. It affects only about 7,000 taxpayers, which may explain why it has received little attention.

A home remodeler who uses nonbank financing to support his business called Cutler's attention to the tax.

Repealing it "will encourage a reinvestment in Pennsylvania and allow small businesses to acquire the capital they need to remain solvent," Cutler said in a statement.

The tax brings the state about $15 million a year, according to Michael Wood, research director for the left-leaning Pennsylvania Budget and Policy Center think tank.

Eliminating it could allow companies organized as C corporations to evade the corporate net income tax "by shifting profits to the owners in the form of interest payments on 'loans,'" Wood wrote in a blog post last week.

The 4-mill rate is probably not deterring companies from doing that now, if they want to, Cutler said. Moreover, most Pennsylvania companies are pass-through S corporations, and for them the tax is double taxation, he said.

Small-business owners "often take their paycheck … and plunge it back into their business," said Suzanne Stoltenberg, spokeswoman for the Pennsylvania chapter of the National Federation of Independent Businesses.

Federal law requires small-business owners to pay themselves a salary, which is taxed at the individual income tax rate, Stoltenberg said. If they then have to put money back into the business to pay a vendor or a bill, they shouldn't be subject to a second 4-mill tax, she said.

"In our opinion, it's a matter of fairness," she said.

But Sharon Ward, director of the Pennsylvania Budget and Policy Center, said the typical loan subject to the tax isn't a stopgap, but is in the hundreds of thousands of dollars. Repealing the tax would primarily benefit wealthy companies and individuals, she said.

"We're not talking about mom-and-pop businesses here," she said.

The proposal is part of a pattern of "poking holes in the state's revenue bucket," she said.

Cutler said repeal would be part of a Corbett budget plan that is revenue-neutral overall. The tax is discriminatory because it falls only on loans made by Pennsylvania residents and companies with Pennsylvania treasurers, he said.

"If you can find somebody out of state to lend you the money, you don't pay the tax," he said.

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