Senator Mensch’s Legislation to Uncap Net Operating Loss Carryforward Passes Senate Finance Committee

Harrisburg –  Senator Bob Mensch’s (R-24) legislation, Senate Bill 598, which seeks to uncap the Net Operating Loss (NOL) Carryforward was reported out of the Senate Finance Committee unanimously.

SB 598 is one of four bills sponsored by Senator Mensch that are aimed at moving the Commonwealth forward through this tough economy by enabling the creation of new jobs for Pennsylvanians, and to help protect our existing jobs.  SB 598 will encourage new capital investment in our state, and will create new jobs.
Current law allows Corporate Net Income Tax (CNIT) taxpayers to reduce taxable income by up to $5 million or 30%, whichever is higher, of net operating losses from the prior 20 years.  A growing number of tax attorneys are increasingly concerned that the Supreme Court, which agreed will soon consider the Nextel v Commonwealth of Pennsylvania net operating loss (NOL) case, will (at best) strike down the $5 million “fixed” relief provision in current law.  The Court held that the “fixed rate” relief provision, which is currently $5 million, but at the time the case was commenced was $3 million, violates the “uniformity clause” in the Pennsylvania Constitution because it treats corporate taxpayers different based on the amount of taxable income.
By capping that deduction at the greater of $3 million or 12.5% of taxable income, however, the General Assembly has favored taxpayers whose property (i.e., taxable income) is valued at $3 million or less. To the extent these taxpayers are in a positive net loss carryover position, they pay no corporate net income tax—i.e., they have no tax burden. A similarly-situated taxpayer with more than $3 million in taxable income, however, cannot avoid paying tax under the NLC deduction provision.
While the Commonwealth Court limited the remedy just to Nextel, the Pennsylvania Supreme Court, assuming it agrees with the Commonwealth’s persuasive conclusion that the fixed NOL relief provision is unconstitutional, has three potential remedies:

  1. Eliminate the $5 million “fixed” relief provision and maintain the current 30 percent relief provision.  This would result in a $200+ increase in revenues to the General Fund (i.e., a $200+ million tax increase to CNIT/NOL taxpayers).  This also happens to be precisely what the President Judge of the Commonwealth Court recommended.
  2. Eliminate all NOL relief provisions (i.e., both the $5 million and 30 percent provisions) under the theory that the General Assembly intended them to be nonseverable (e.g., “the two have been increased together for many years).  This would be disastrous to CNIT/NOL taxpayers, triggering a $2.3 billion tax increase.3.  Eliminate the current NOL cap altogether.  While this would be the most   beneficial to CNIT/NOL taxpayers, it would also create a $2.3 billion revenue shortfall to the General Fund.

Senator Mensch’s legislation provides a solution that remedies the constitutional shortcomings of the current NOL relief provisions and use this opportunity to make progress toward the ultimate elimination of the NOL cap.
There are numerous merits to this approach.  For starters, it is revenue neutral.  It would not have any impact on General Fund revenues.  In addition, it would make nearly 50 percent progress toward the elimination of the NOL cap.  This is significant and, as revenues permit moving forward, can pave the way for continued progress toward that end.
For more information on Senator Mensch’s legislation, visit www.senatormensch.com.  State updates can also be found on Senator Mensch’s Facebook at www.facebook.com/senatormensch, or Twitter @SenatorMensch.

CONTACT: Sarah Rasmussen srasmussen@pasen.gov  (215) 541-2388