PA House Democrats Propose Job Crushing Tax Hike on Small Businesses

Against the backdrop of escalating economic uncertainties, House Democrats have introduced a bill that would substantially raise the tax rate on passive income for small businesses across the state.

House Bill 1773, titled the “Fair Share Tax Plan” proposes an increase in taxes on passive income sources for small businesses, including S-corporations, partnerships, and sole proprietors, from the current rate of 3.07 percent to a staggering 12 percent.

This increase would affect all of Pennsylvania’s nearly 180,000 small businesses, along with the millions of workers they employ.

The bill, authored by Representative Christopher M. Rabb (D-Philadelphia) and co-sponsored by Rep. Elizabeth Fiedler (D-Philadelphia), Rep. Rick Krajewski (D-Philadelphia), and Rep. Joshua Siegel (D-Lehigh), positions itself as a remedy to what it describes as Pennsylvania’s regressive income tax system, aiming to alleviate the tax burden on lower-income families.

HB1773 is set for a planned hearing by the House Finance Subcommittee on Tax Modernization and Reform tomorrow afternoon.

Opponents of the bill argue that HB1773 could exacerbate Pennsylvania’s already tenuous economic standing, of which data from various sources paints a bleak picture.

The Kauffman Foundation ranks Pennsylvania last in the nation for new entrepreneurs, signaling a challenging environment for startups that would be exacerbated by the “sticker shock” of a twelve percent tax rate on small businesses. Further, the state has seen an exodus of residents and businesses in recent years, with PennLive reporting the state as having the fourth-highest number nationwide of residents leaving in 2023, and the Bureau of Labor Statistics placing Pennsylvania fifth from the bottom in net firm migration (number of businesses moving in versus moving out).

The top reason cited by people moving out of Pennsylvania according to United Van Lines? “Job.”

HB1773’s approach appears misaligned with broader efforts by the governor and state legislature to bolster the state’s competitiveness and economic health. Specifically, Governor Josh Shapiro’s bipartisan initiative to gradually reduce the Corporate Net Income tax, from 9.99 percent in 2022 to ​4.99 percent by 2031, which is designed to attract business and investment.

Members of Pennsylvania’s business sector have sounded off voicing opposition to the bill and its provisions which they believe will lead to a dramatic regression in efforts to enhance the state’s economic competitiveness.

“The proposal that House Democrats are scheduled to consider tomorrow would destroy small businesses across the Commonwealth by quadrupling their taxes overnight,” stated Michael Plummer, Director of Public Affairs for the Pennsylvania Chamber of Business and Industry

“House Bill 1773 would sabotage our economic competitiveness and undermine bipartisan efforts to attract and retain businesses in Pennsylvania.”

The PA Chamber went on to emphasize that employers are still struggling with inflation, workforce shortages, and supply chain disruptions, calling the proposal “tragically shortsighted.”

“Instead of entertaining proposals that would lead us to economic ruin, lawmakers should prioritize policies that support small business growth and foster a more competitive business environment.”

The PA Chamber’s full statement is available here.

Greg Moreland, Pennsylvania State Director of the National Federation of Independent Business (NFIB), did not mince words in his critique of the proposal calling it “asinine.”

“Small business owners are much different than Elon Musk and Jeff Bezos and aren’t asking for a quadrupling of their tax rate,” said Moreland.

“There would be severe consequences to our mom-and-pop shops should this proposal become law. But maybe that’s what the sponsor wants? You can’t tax your constituency into prosperity. Wasn’t it President Reagan who said the nine most dangerous words in the English language were, ‘I’m from the government, and I’m here to help?’”

As the debate unfolds, the future for many of Pennsylvania’s small businesses hangs in the balance, waiting to see if this tax hike will become a reality or if alternative solutions can be found to balance House Democrats’ focus on equitable taxation and bipartisan initiatives towards statewide economic vitality.

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.