Generally, as an asset ages, it loses value. Anyone who has owned a car can understand that principle. For businesses, that means that vehicles, buildings and other equipment become less valuable to their operation over time; this loss of value is, in a sense, an expense that businesses must account for.
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Governments typically allow business to get a tax credit for depreciation. This helps businesses save money for eventually replacing assets as their value approaches zero, and it encourages economic activity as businesses find it easier to buy new assets thanks to having a lower tax burden.
In the aftermath of the federal tax cuts enacted at the end of 2017, Pennsylvania was left with an uncertain path forward when it comes to its tax breaks for depreciation. Revenue Secretary Dan Hassell, during testimony before the Senate Appropriations Committee, explained that with the federal changes allowing “bonus depreciation” at a rate of 100 percent for several years, Pennsylvania faced the prospect of losing a significant amount of revenue if it allowed the federal provision to apply within the state.
“If we were to take that … approach, … there would be huge revenue loss in our [corporate net income] tax, and frankly I didn’t feel that … it should be something that I as a revenue secretary should make a policy decision that would unbalance the state budget at the stroke of a pen,” Hassell said.
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When Sen Lisa Baker, R-Dallas, asked Hassell if a legislative solution was required, he replied, “Yes, that should be done.”
Now, to address this issue, House Bill 2017 seeks to resurrect the state’s tax breaks. Rep. Eli Evankovich, R-Murrysville, in discussing the bill Wednesday on the floor of the House, tried to break down a confusing topic in simple terms.
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“If this bill doesn’t become law, the expenditures that [businesses] make on equipment and assets will be taxed as income,” he said. “In other words, if a company spends a million dollars in Pennsylvania investing to try to buy assets and make money on those assets and employ people on those assets, if this bill doesn’t become law, they will be charged the corporate net income tax on that asset.”
The minority chairman of the House Appropriations Committee, Democrat Joseph Markosek of Monroeville, didn’t dispute the need for a bill to reinforce the depreciation deduction. His concern was what he cited as the bill’s move to allow businesses to claim the depreciation earlier in the life cycle of the assets in question. He argued that this would throw off the state’s budget in the short-term by, potentially, more than $100 million.
“This is revenue neutral, but over a number of years, what this bill does is pretty much front-end loads the deductions,” he said. “Obviously the business community would want that because you get more deductions up front, but then in future years you get less. So what we were hoping to do, I think, with the budget this year, and certainly the administration is too, is to kind of phase this in so that it would be a smooth deduction over a number of years.”
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Rep. Frank Ryan, R-Palmyra, the primary sponsor of the bill, disputed the idea that it was front-end loaded and said it was needed to try to entice companies like Amazon, Apple and CenturyLink to want to do business in Pennsylvania.
“We need to send a message loud and clear to those organizations that we are hoping will locate in Pennsylvania that we want them to locate here,” he said. “For the people that are currently located in the commonwealth, it’s a ‘gotcha’ moment. We put them between a rock and a hard place, and today is our time to change that. Please make no bones about it, when we put our businesses and our employees under the gun for a provision that could harm them, we’re making the state significantly less likely to survive.”
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A fiscal analysis by the House Appropriations Committee predicted that the state would see immediate revenue reductions of $8.2 million in the current fiscal year and $19.3 million in the next, but that those losses would be made up in future years.
“Initial reductions to General Fund revenues result from the timing of the depreciation deductions; however, this legislation is revenue neutral over the life of the property,” the analysis states.
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The bill passed on a 183-4 vote and was sent to the state Senate for consideration.
