(The Center Square) – Just two states in the country prevent businesses from carrying over most of their net operating losses into the new year: New Hampshire and Pennsylvania.
Net operating losses are common among start-up businesses, where costs sunk into hiring and capital can take years to recoup. In the meantime, federal law permits owners to carry those losses into the new year, thereby reducing their tax bill.
Twenty-five states put no percentage cap on the allowable amount, while an additional 19 match the federal limit. In Pennsylvania, the rate is set at 40%.
Critics say the state’s outlier status discourages business growth in favor of the status quo. The freshman batch of lawmakers in the General Assembly, coupled with a strong appetite for economic reform, however, offers hope.
“Status quo is a huge thing in Pennsylvania and status quo makes it hard to move anything,” said Sen. Greg Rothman, R-Shippensburg. “Big change is really hard to get done in Harrisburg.”
Rothman introduced legislation in 2023 to raise Pennsylvania’s cap to 80% over the next four years. It passed unanimously in the Senate Finance Committee on May 9 and awaits action on the chamber floor.
Rothman said some longtime policymakers told him they worry about how much revenue the state will lose from increasing the cap. The Pennsylvania Chamber of Business and Industry estimates the first-year cost at $44 million, escalating to $260 million in the third year – though the numbers don’t account for business expansion and corresponding revenue.
“I think it will increase revenue in Pennsylvania and won’t cost us anything,” Rothman said.
Rep. Josh Kail, R-Beaver, said the framing of such concerns is all wrong.
“When we talk about loss of revenue in Harrisburg, really what we are talking about is an increase in revenue for our constituents,” he said. “When the government isn’t taking as much from our taxpayers, that means our taxpayers are keeping more.”
The refrains echo a common theme in state government: Pennsylvania is hemmoraging population due to dwindling economic opportunity. Democrats want to spend most the state’s $14 billion on education and safety net programs, while Republicans see it as a buffer for temporary lost revenue from tax cuts.
Either way, expanding the net operating loss cap seems to rise above the fray.
“I see us creating more tax revenue just at a lower rate and I truly believe that’s what’s going to happen here if we execute on this,” said Rep. Paul Friel, D-Pottstown. “We are going to grow that tax base. We won’t lose revenue.”
