Red tape to green light: Pennsylvania leaders seek tax reform for startups

Harrisburg, PA – Pennsylvania is gearing up to ditch its business “startup penalty” and roll out the welcome mat for new companies.

In a virtual press conference hosted by the Pennsylvania Chamber of Business and Industry, state legislators and prominent business leaders came together to discuss the need to reform the state’s treatment of net operating losses (NOLs) in order to foster economic growth and attract new businesses.

The panel included Luke Bernstein, President and CEO of the Pennsylvania Chamber of Business and Industry, State Senator Greg Rothman, State Senator Nick Miller, State Representative Paul Friel, State Representative Josh Kail, and Nicholas Bertram, CEO of Flash Food.

Bernstein opened the discussion by highlighting Pennsylvania’s “uniquely harsh treatment” of net operating losses (NOLs), noting that Pennsylvania’s current cap on NOLs is significantly lower than most states.

“Pennsylvania is just at 40 percent of taxable income, tied for last with New Hampshire,” said Bernstein.

NOLs occur when a business’s expenses exceed its income in a given year. This is common for startups, which often face high initial costs and may take several years to become profitable. A higher NOL cap allows these businesses to carry forward their losses to offset future taxable income. This means they can reduce their tax burden in profitable years, providing much-needed financial relief.

Senator Nick Miller (D-Lehigh), the Democratic chairman of the Senate Finance Committee, put it simply, “Startups have a lot of upfront capital expenditures that if they go to other states, we’re probably not gonna bring them back. This is the backbone of our economy.”

By increasing the NOL cap, Pennsylvania can help businesses survive their early years, and in Berstein’s words, incentivize businesses to “come here, stay here, grow here.”

Senator Greg Rothman (R-Cumberland), sponsor of Senate Bill 346, which aims to reform the NOL cap, acknowledged that while Pennsylvania has tremendous potential, it significantly lacks a pro-growth NOL tax infrastructure that other states have adopted.

“We’re losing to other states that don’t have this penalty… We’re losing to Ohio. We’ve heard about that.” Sen. Rothman stated.

Adding to this point, Representative Josh Kail (R-Beaver) shared an anecdote about his experience with a potential investor choosing Ohio over Pennsylvania due to the state’s unfavorable NOL provisions specifically.

“The number one thing was net operating loss provisions because they can’t carry those losses forward like they can in [other] states,” Rep. Kail explained.

Coming from the business perspective, Nicholas Bertram employed a unique approach to articulate this point by consulting ChatGPT to determine the best states for starting a new company.

When Bertram asked the AI, it ranked Delaware, Texas, Florida, Nevada, and North Carolina as the top choices, while Pennsylvania fell between 25th and 30th, citing the state’s poor regulatory environment.

Referring to Tesla’s decision to bypass Pennsylvania for Nevada, Bertram emphasized the broader implications of the current tax code on business decisions. “We missed out. 6,500 Pennsylvanians missed out on great jobs because of that.”

Representative Paul Friel (D-Chester), who has a background in running businesses, addressed the hesitations of some assembly members to support NOL reform due to concerns about potential loss of tax revenue.

“I also don’t really subscribe to the notion that it’s a net loss for government revenue,” said Rep. Friel. “I think if we truly believe that investing in businesses here is going to grow that pie, I don’t see us in the long term losing revenue from a government and a tax revenue point of view. I see us creating more jobs, creating more businesses here, creating more tax revenue, just at a lower rate.”

The consensus among speakers was clear: reforming Pennsylvania’s NOL treatment is crucial for the state’s economic future. The press conference concluded with a call to action for legislative support to pass the necessary reforms.

“We need to send a message to the business community that Pennsylvania is open for business,” Sen. Rothman urged.

With strong bipartisan backing and a unified vision for economic growth, Pennsylvania’s leaders are hopeful that these changes will soon become a reality, fostering a more competitive and prosperous environment for businesses and startups statewide.

Olivia DeMarco is an Editorial Associate for Broad + Liberty. She previously served as a legislative aide in the Pennsylvania House of Representatives. She holds a Masters in Public Policy from Temple University.