Proposed state budget would create Like-Kind exchanges

Gov. Tom Corbett announced his proposed 2013-2014 $28.4 billion General Fund budget yesterday in Harrisburg. The budget includes an increase of nearly $679 million from the current budget. The budget presented is balanced with no tax increases. Corbett looks to reform the Commonwealth’s public pension system. In addition, he continues his focus on making Pennsylvania a business friendly environment. He is looking to JOBSFirst, launched in 2012, to create a robust employment environment and help revitalize the economy.

The two issues addressed in Corbett’s overall budget outline directly relate to real estate. They include the creation of the Like-Kind Exchanges, similar to the federal 1031, and closing the 89/11 loophole.

PAR President Bette McTamney said, “The proposed tax reforms move the Commonwealth in a positive direction toward creating more jobs and stimulating economic development. These proposed changes help to improve Pennsylvania’s job climate and push our economy in a positive direction.”

According to the Department of Revenue, the plan will increase the state’s Gross Domestic Product by $2.8 billion and create more than 18,000 jobs. Leading business indexes rank Pennsylvania in the bottom half of states in business taxes and economic outlook.

Don Roth, PAR Legislative chair said PAR supports the governor’s proposal to provide for Like-Kind Exchanges. “In Pennsylvania, the personal income tax does not contain a provision for the like-kind exchanges. Exchanges of property that result in gain or income are generally subject to tax,” Roth said.

The governor’s proposal would align Pennsylvania with federal rules allowing for like-kind exchange of property without facing a negative tax consequence. The Department of Revenue believes the fiscal impact is zero in the first three years and a loss of $66 million in taxes the following two years.

The proposed plan also eliminates the 89/11 Realty Transfer Tax loophole. Kurt Schenck, chair of PAR’s Commercial, Industrial and Investment Committee, said the committee recently vetted this issue and approved the plan.  “When looking at the 89/11 loophole as part of the whole tax code, eliminating it in favor of other more substantive code changes is a very responsible course of action,” Schenck said.

The Department of Revenue projects generated revenue from this change is projected to be $55 million over the next five years.

To read the complete 2013-14 Budget in Brief, visit budget.state.pa.us.