Only two states have Net Operating Loss tax caps below the federal limit of 80% and Pennsylvania is one of them. Several business leaders are trying to change that.
A bipartisan coalition of 73 chambers of commerce across the commonwealth led by the Pennsylvania Chamber of Business and Industry have signed a letter in support of changing that cap, which the letter calls "a penalty on startup businesses." NOL allows employers to offset tax liability with losses from a previous year, something that is viewed as inherently beneficial to startup companies, due to the fact that many startups take years to generate revenue. PA's NOL cap is currently 40%.
"It really is an uncompetitive cap on the net operating loss carry forward and I think it's just one of those things that's always been in place," Matt Smith, chief growth officer of the Allegheny County Conference on Community Development, said. "We think that the time is right, right now, with so much focus on Pennsylvania's open for business mindset, particularly from Governor Shapiro, to make changes like this on the systemic policy side that we need to make in order to be competitive for business investment."
Shapiro has previously spoken favorably of expanding the cap and legislation from the state senate has passed with bipartisan support. Smith said that should the cap be implemented in full it will likely be "part of a larger state budget deal" sometime in late June or early July.
But that budgeting remains a balancing act. The National Federation of Independent Businesses has voiced support for raising the NOL cap, but has also criticized Shapiro's budget outspending revenue. Smith said that while raising the cap will result in less money for the state in the immediate future, it will lead to broader economic development down the line.
"We look at this as a really smart and strategic policy decision that's going to actually enable us to capture even more tax revenue in the future, if we're competitive," Smith said. "We have to be competitive and in order to be competitive we need to make policy changes like this."
Smith said that while the cap affects businesses across the state, it is especially impactful on Pittsburgh. The city's tech sector has garnered a reputation as a hub for startups, particularly in the spheres of artificial intelligence and robotics, a sector Smith feels this policy is hurting.
"Our startups within the robotics or life sciences or energy space are particularly impacted by this because of the way that they're structured," Smith said. "Being a startup means maybe not making a profit in their early years, so it really impacts startups within the Pittsburgh region."
Smith also said that cyclical manufacturing is hurt by the policy, saying that "we have large companies that are in cyclical industries that this particular NOL structure impacts in a really negative way."
