Extras on Excise: Reign of 171-Year-Old Business Tax Ends in Pennsylvania

Pennsylvania has bid farewell to the capital stock and franchise tax, which has been a part of the state tax code since 1844. Effective this month, businesses are no longer liable for the tax as it expired at the beginning of 2016.

The capital stock and franchise tax was imposed on domestic and foreign entities operating in Pennsylvania and was based on the capital stock value – computed using a statutory formula – and the relevant tax rate. While the tax rate declined fairly consistently over the last 15 plus years – in 2015 it was 0.045 percent – businesses viewed the tax as burdensome because it was imposed without regard to profitability.

Further, the tax “negatively impacted job creation and created barriers to growth,” said Pennsylvania Chamber of Business and Industry President and CEO Gene Barr in a statement released by the organization hailing the expiration of the tax.

“While we still have a long way to go in improving the Commonwealth’s competitive edge and strengthening the state’s business climate, the final elimination of the CSFT is a step in the right direction,” said Barr. The phase-out of the tax began in 2001 and was supposed to occur over a 10-year period during which the tax rate was to decrease annually. However, fiscal realities necessitated that the tax rate be frozen between 2008 and 2011, and the phase-out extended.

With the elimination of the capital stock and franchise tax, the corporate income tax is the only generally applicable entity level tax on businesses in Pennsylvania. Because pass-through entities – such as partnerships as well as limited liability companies and S-corporations that elect to be treated as partnerships – are not subject to the corporate income tax, many businesses in the state will avoid entity level taxation completely.

Many in the business community undoubtedly think this will boost economic growth in the state, however in 2014 and the first half of 2015, the capital stock and franchise tax generated about $400 million in revenue for Pennsylvania. Given the state’s persistent budget woes – the fiscal year 2016 budget was not enacted until midway through the fiscal year due to disputes between Gov. Wolf (D) and the legislature on severance tax and other issues – it will be interesting to see whether efforts to replace that revenue were effective and also whether any notable boost to business and industry materializes.   


Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Did Pennsylvania make the right move in phasing out the capital stock and franchise tax?

With a free trial to Premier State Tax Library, practitioners have a single trusted resource that provides all of the tools and information they need to develop and implement the right tax strategies.