Feb. 13, 2018

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Weekly Roundup
#Listrak\DateStampLong# The latest news from the State Capitol

House and Senate Leaders offer Revised Map Proposal to Governor

On Friday, Senate Pro Tempore Joe Scarnati and House Speaker Mike Turzai submitted a new Pennsylvania congressional map to Gov. Tom Wolf. The Pennsylvania Supreme Court ruled 3-2 on a party-line decision (three justices were elected as Democrats, two justices were elected as Republicans) that the current congressional map, which is based on the 2010 Census, was gerrymandered and must be redrawn.

While many legal and political questions remain – the United States Constitution specifically grants the power to draw congressional maps to the legislatures of the each of the states – here is a look into the districts they drew:

Overall, nine of the proposed districts would have performed more Democratic on average and nine which would have performed more Republican. Districts 1 and 2, which were already overwhelmingly Democratic, would be even more packed under the proposal. The open seats in the 7th and 15th would become more competitive under these new lines. The 6th and 16th districts would be protected for the GOP. The proposal also shuffles Republicans from the 12th district, which sees its GOP majority cut in half.

As the district-specific map below shows, President Donald Trump won 12 congressional districts under the current map and also would have won 12 districts under the Scarnati-Turzai proposal. Gov. Wolf won eight districts under the current map; he would have won nine under the Scarnati-Turzai proposal.

Reinventing State Government For the 21stCentury
As part of last year’s budget, Gov. Tom Wolf proposed merging numerous state agencies including combining the Department of Corrections with the Board for Probation and Parole and merging the Departments of Health, Drug and Alcohol Programs, and Aging with the Department of Human Services. While these proposals did not make it into the final budget, I have joined with Reps. Bryan Cutler (R-Lancaster), Seth Grove (R-York) and Matthew Dowling (R-Fayette/Somerset) to assess where Pennsylvania can streamline state government to improve services and reduce costs to taxpayers.

In this bipartisan spirit, we have introduced a package of bills to streamline six Commonwealth agencies and merge them into three improved departments. These new agencies would be the Commonwealth Office of Management and Budget (OMB), the Department of Business, Tourism and Workforce Development (DBTWD) and the Department of Local Government and Community Affairs (DLGCA).
Each merger in the legislation would require the adoption of a strategic plan detailing how the agencies described in the legislation would be combined. In order to provide adequate time to prepare for the mergers, the legislation allows for a strategic plan to be developed within seven months each bill’s adoption.

While each merger is explained in greater detail below, the strategic plan for each merger contains similar requirements. These requirements include:

• 20 percent reduction in administrative costs.
• Improving the delivery of government services to all residents.
• Identification, consolidation and elimination of redundant programs.
• Improving the use of state funds to reduce the cost to the taxpayer.

Office of Management and Budget
This legislation would merge the Budget Office, the Department of General Services, the Office of Administration and the Governor’s Office of Policy and Planning into one agency. This agency, the Office of Management and Budget (OMB), would oversee and supervise all aspects of the Commonwealth’s governance including budget preparation, oversee state expenditures along with handling all procurement, human relations and information technology. This model is used by the federal government and by 29 states and has improved the coordination and management of governance.

To fulfill its important role and the duties of the merged agencies, the new agency would be comprised of several important bureaus. OMB would be organized to include:

• Bureau of Budget & Financial Management.
• Bureau of Planning and Policy.
• Bureau of State Facilities and Maintenance.
• Bureau of Procurement.
• Bureau of Human Resources.
• Bureau of Information Technology.
• Governor’s Office of Transformation, Innovation, Management and Efficiency (GO TIME).

These bureaus would be overseen by the director of the Office of Management and Budget who is required to perform the duties previously given to the secretary of the Budget, secretary of General Services and Secretary of Administration

Department of Business, Tourism and Workforce Development
Under current law, Pennsylvania has decentralized its job creation, economic development and business programs throughout several different state agencies. To improve economic development and strengthen job creation, legislation I have sponsored would merge economic development, business and workforce development policy under a single agency.

The proposal would merge the Department of Labor and Industry with functions from the Department of Community and Economic Development and Department of State. Under the legislation the new Department of Business, Tourism and Workforce Development (DBTWD) would be organized as follows:

• Bureau of Trust Fund Management.
• Bureau of Safety and Labor and Management Relations.
• Office of Vocational Rehabilitation.
• Bureau of Workforce Development and Business Finance.
• Bureau of Marketing & Tourism.
• Bureau of Licensing (Occupational Licensing and Business/Non-Profit Licensing).
• Office of Business Consultants.

This legislation ensures economic development programs are under one department to improve coordination and foster greater private sector job growth. It would provide a uniform department to allow Pennsylvania to better compete in a global economy. This proposed merger would also refocus current agencies into the singular mission of private sector job growth and sends this message: Pennsylvania is Open for Business.

This proposal would establish the new department as a one-stop shop for job creators by forming the Office of Business Consultants. The Office of Business Consultants would be designed to reduce the burden of state requirements by assisting job creators with compliance and economic development.

Maximizing Pennsylvania Employment Under the New Federal Tax Law
The U.S. tax landscape has undergone significant changes with the recent enactment by Congress and the President of sweeping legislation overhauling our federal tax system. The new law has already begun to stimulate economic growth and development in many other states. If we act now we can maximize its positive effects for employment and wage increases for Pennsylvania.

For example, under the new law, bonus depreciation doubles from 50 to 100 percent for property purchased between Sept. 27, 2017, and Jan. 1, 2023. After that date, a 20 percent phase-down takes effect. Also, bonus depreciation amount is now permitted for the purchase of used property, in addition to new property. This is a common tax plan strategy used by virtually all businesses at some point in time, both large and small, which allows them to make capital investments, expand and hire new workers

But not in Pennsylvania.

Businesses looking to expand in Pennsylvania will not be able to take advantage of this provision because of rules just issued on Dec. 22 by the Pennsylvania Department of Revenue.

Now, even under the best case scenario, a taxpayer gets no deduction until the asset is sold or disposed of. If the taxpayer has equipment that may be used indefinitely, it could effectively get no depreciation write-off in Pennsylvania. This draconian pronouncement essentially tells businesses owners “thanks, but no thanks, Pennsylvania is closed for business.

My legislation, House Bill 2017, would reverse the provisions of Bulletin 2017-02 and allow Pennsylvania businesses the opportunity to take advantage of this important provision. Please take a moment to read this article on my bill by Jared Walzak of the Pennsylvania Tax Foundation:

Pennsylvania’s New Penalties on Investment Could Scare off Amazon, Others
Feb. 2, 2018
By Jared Walczak, The Pennsylvania Tax Foundation
Amazon shortlisted both Pittsburgh and Philadelphia as potential locations for its new headquarters, but a week before Christmas, the state Department of Revenue made both bids much less attractive, not just for Amazon HQ2, but for all businesses. While other states are positioning themselves to attract new investment, Pennsylvania quietly adopted a policy—by way of a Department of Revenue bulletin—which heavily penalizes investment in the state.

House Bill 2017 should not have been necessary. It addresses an issue that need not have existed. Given the Department of Revenue’s December tax bulletin, however, it is now a matter of urgency.

Corporate income taxes, at both the federal and state level, are intended to be levied on net income. To that end, deductions are allowed for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” (IRC § 162(a)). This is why there are deductions for compensation and for costs of goods sold, and for paying down debt. The major outlier is capital expenditures, where depreciation deductions are taken instead.

By allowing an immediate deduction for other business expenses, but not for capital expenditures, the tax code disincentivizes investment. Inflation erodes the value of these tax deductions, so they wind up understating the cost of the equipment and overstating corporate returns. We have estimated that, over time, corporations are only able to deduct about 87 percent of costs of investment.

Depreciation schedules also do a poor job of aligning with the real world: equipment may become outdated, and thus subject to replacement, long before it physically wears out.

Faster cost recovery favors the future over the past, whereas long depreciation schedules benefit companies that aren’t actively investing or creating jobs. Improvements on cost recovery also equalize the treatment of different types of investment, avoiding distorting economic decision-making.

For all these reasons and many others, accelerated cost recovery has been an important goal of tax reformers for years. It is a highly pro-growth policy. At the federal level, there have been many changes to depreciation over the years, but the two most pertinent ones are the introduction of so-called “bonus depreciation,” which allowed 50 percent of the cost of short-lived assets, like machinery and equipment, to be deducted in the first year, and the full expensing for those same short-lived assets, provided for in the new tax law.

Pennsylvania, like many other states, chose to decouple from federal bonus depreciation rules for revenue purposes. Now, while other states are deciding whether to conform to the new full expensing provisions, Pennsylvania is having a very different debate: whether to treat machinery and equipment purchases worse than other investments, and indeed worse than such investment is treated in any other state.

The bonus depreciation addback statute is not a model of clarity. I don’t think there’s any doubt that the legislative intent was to require companies to add back the accelerated depreciation and instead operate under traditional depreciation schedules. That’s the interpretation the Department of Revenue has operated under until now. In December, however, the Department of Revenue issued a tax bulletin adopting a new interpretation yielding a policy result that few, if any, would champion.

Under the new interpretation, the full deduction must be added back for investments subject to bonus depreciation—or, now, full expensing—at the federal level. Businesses would no longer even receive the depreciation deductions, substantially raising the cost of investment in Pennsylvania.
Both Pittsburgh and Philadelphia are finalists for Amazon HQ2. It’s hard to imagine that the tech giant would be enthusiastic about a policy that dramatically overtaxes investment. Such a policy, though, affects companies of all sizes, particularly those involved in manufacturing or other machinery-intensive operations. No other state penalizes investment the way that Pennsylvania does following the issuance of that tax bulletin.

House Bill 2017 is designed to resolve the existing statutory ambiguity and restore depreciation deductions for machinery and equipment. It does not provide for the old bonus depreciation regime, let alone full expensing. It merely restores the system under which Pennsylvania operated until very recently. Such legislation should not have been necessary. But in the wake of a bulletin which upends the tax treatment of investment, it is suddenly very necessary that something be done. While other states are working to promote investment and growth, Pennsylvania is headed in the other direction.

Fixing Unintended Consequences – Repealing the 1099-Misc Non-Resident Witholding
The Tax Code signed into law as Act 43 contains a provision to require entities to withhold Pennsylvania Personal Income Taxes and other taxes where applicable, on out-of-state payments made to taxpayers of other states where a 1099-MISC tax reporting form is used. Additionally, Act 43 makes the tax a liability of the payor which is an extremely dangerous precedent. Such a provision encourages the payee to fail to file, thereby putting the payor on notice as being liable for the tax thereby shifting the tax burden effectively to an in-state business.

This provision is burdensome and produces no tangible benefit to the Commonwealth because of the reciprocity agreements the Commonwealth has with adjoining states. This statute, if not repealed, encourages other states to cancel their reciprocity agreements with the Commonwealth. In the past year, we have already seen what happens when that occurs when the State of New Jersey threatened to terminate the reciprocity agreement with the Commonwealth.

Therefore, in the near future, I will be introduced House Bill 2027, which would fix this problem by repealing the reporting requirements for 1099-MISC income paid to non-residents.

Property Tax Pension Obligation Disclosure Act
I have introduced legislation, House Bill 2064, which will provide transparency to current and prospective property owners.

This legislation will require the governing body of each school district to calculate the amount of unfunded pension and other postemployment benefit obligations per $100,000 of assessed residential property within the school district. The results of the calculation must be published as follows:

1. On the publicly accessible Internet website of the school district as a separate item from other information on the website;
2. As a footnote in the financial disclosures of the annual audited report of the school district; and
3. In the notice of taxes required by the Local Tax Collection Law.

Additionally, this legislation will require a seller who intends to transfer an interest in real property to disclose the results of the calculation as an item on the property disclosure form. This will help provide prospective homeowners information on the financial solvency of their school district and allow them to make more informed decisions.
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