The Pennsylvania Capitol Building. The state legislature passed and Gov. Tom Wolf signed a bill that will lower Pennsylvania’s corporate net income tax rate. (photo via Creative Commons Attribution-Share Alike 3.0 license)

Newly passed legislation will significantly reduce the state’s corporate net income tax rate, a move that could help fuel economic development across the Commonwealth and make Pennsylvania more competitive against other states.

The bill, approved by the state House and Senate on July 7 and signed by Gov. Tom Wolf on July 8, will cut the corporate net income tax from 9.99% to 8.99% as of Jan. 1, 2023, then gradually reduce it each year in phases until 2031, when it reaches 4.99%.

A reduction of the corporate net income tax has long been on a list of economic policy proposals supported by the Lehigh Valley Economic Development Corporation, according to LVEDC President & CEO Don Cunningham.

“We appreciate the efforts of our Lehigh Valley legislators in helping pass this bipartisan bill, which will ultimately benefit all businesses and residents of the state,” Cunningham said. “Reducing the corporate net income tax will have a positive effect on our efforts to attract more businesses to locate and expand in the Lehigh Valley and throughout Pennsylvania.”

Pennsylvania’s 9.99% corporate net income tax rate is currently the second largest in the nation, behind only New Jersey at 11.5%, according to the Tax Foundation. The rate in Pennsylvania had remained unchanged since 1995.

By contrast, this bill (entitled PA House Bill 1342) will make Pennsylvania’s corporate net income tax the sixth lowest in the country by 2031, according to the Pennsylvania Chamber of Business and Industry (PCBI).

After the initial reduction to 8.99% on Jan. 1, 2023, Pennsylvania’s corporate net income tax rate will decrease by one-half percentage point each year. For example, it will drop from 8.99% in 2023 to 8.49% in 2024, then 7.99% in 2025, and so on until reaching 4.99% in 2031.

“This budget makes major tax policy modifications that are the most significant changes to improve the economic climate here in Pennsylvania in more than a generation,” said state Sen. Pat Browne. “… Pennsylvania’s overall business tax climate will soon be the most competitive among our northeastern states and among the most competitive in the nation.”

In addition to generally creating a more competitive business climate, studies have shown a decrease in the corporate tax rate leads to increased gross domestic product, higher wages, increased home values, and other economic benefits, according to PCBI.

The reduced corporate net income tax was part of a larger tax code reform package included in the $45.2 billion state budget, which included other measures like caps on tax credits, personal income and sales tax provisions, inheritance tax exemptions for Gold Star families, and others.

It also allows small businesses impacted by the COVID-19 pandemic to defer personal tax liabilities through “like-kind exchanges” of certain property, freeing them up to invest in job-creating assets needed to help stay competitive. Pennsylvania had been the only state in the country that did not previously offer this type of deferral, according to PCBI.