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April 25, 2013 | By | Posted in Legislature

PA lawmakers crafting new tax loophole for private aircraft

By Melissa Daniels | PA Independent

HARRISBURG – Pennsylvania’s state sales tax code – already full of carve-outs for niche industries and special interests – is about to get a little more complicated.

The state General Assembly appears to be on the way to passing a new sales tax exemption for airplane parts and maintenance, meaning private plane sales and repair expenses would go untaxed. The change would mean a loss of $12 million dollars in tax revenue for the state General Fund.

FLYING IN STYLE: A new sales tax exemption for airplane parts would make life a little easier for those who own private planes.

FLYING IN STYLE: A new sales tax exemption for airplane parts would make life a little easier for those who own private planes.

The proposal is good news for plane owners, who might be paying thousands in 6 percent sales tax on a $50,000 repair. But some say the bill is further complicating a tax code that already gives plenty of specialized tax exemptions.

Proponents of the measure, like bill sponsor Rep. Bill Kortz, D-Allegheny, said plane owners in Pennsylvania are flying their jets to other states in order to avoid paying sales tax on costly maintenance.

States like New York, Massachusetts, Ohio and Connecticut all have a partial or full sales and use tax exemption for aircraft. If Pennsylvania follows suit, it will boost a stagnant industry, Kortz said.

“The bottom line is I want people to work, make money, expand the business, and pay taxes,” Kortz said. “This will do just that in the aviation industry.”

There’s about 8,000 planes in Pennsylvania, and about 130 airports. The Federal Aviation Administration mandates planes must be inspected on a routine basis after certain numbers of hours of flying, and Kortz said this creates a built-in market for services.

Kortz faced some opposition on his proposal even within the Democratic caucus, as some felt it was favoring special interests with another tax break. The bill passed the state House with bipartisan support, though it saw 23 negative votes.

Bipartisan support also exists in the state Senate. The Democratic caucus has the exemption listed on their 2013-2014 budget plan, Sen. Dave Argall, R-Schuylkill, has a similar proposal in the works, and Kortz said he’s met with the governor’s staff to discuss the proposal.

To Kortz, the measure isn’t a tax break but a tax shift, as aviation industry jobs will balance out the lost sales tax dollars.

“If we get more tax dollars, I don’t care how we get it,” he said. “We’re stagnating in this industry.”

FEWER TAXES, MORE JOBS: The sales tax exemption would lure jobs to Pennsylvania, supporters say.

State Rep. Jim Marshall, R-Beaver also sponsored the bill. He compared it to an existing exemption for helicopter sales, rentals and maintenance that affects about 550 companies, according to commonwealth estimates. The exemption totals about $400,000.

Marshall said that exemption created about 400 jobs at Sikorsky Global Helicopters in Coatesville.

Marshall noted the Pittsburgh Institute of Aeronautics in Allegheny County has programs that teach airplane maintenance, but 95 percent of graduates move out of state. He said the exemption would boost jobs and benefit businesses with aviation fleets, without over-complicating the state’s tax code.

“There are so many exemptions now, and it’s so complex, I hardly believe this one is going to tip the scales on that,” Marshall said.

A report from the Independent Fiscal Office on the airplane exemption estimates the state would lose about $12.5 million in the first year. About 2,060 direct jobs and 2,680 indirect jobs would need to be created, bringing in a total of about $265 million in income, in order to neutralize those losses with other taxes.

The IFO concluded the exemption would likely increase demand for aircraft parts and services in the state, though it’s unclear by how much.

But it added the strongest effect of the exemption “would be the retention of residents who might otherwise purchase parts and services out of state.”

Sharon Ward, executive director of the progressive Pennsylvania Budget and Policy Center, said these types of tax exemptions are passed in other states via urging of plane owners. She said the exemption is an example of putting special interests above the broad public interest.

“It’s simply going to give a tax break that will reduce the costs for these plane owners, but will really kind of drain the treasury and not return back very much in terms of jobs and tax revenue,” she said.

Typically in Pennsylvania, such tax exemptions rarely deliver on the promised benefits, she said. If jobs generated by the exemption don’t balance out, the state loses money.

Free market advocates point to exemptions like this as picking winners and losers in the economy. Nathan Benefield, director of research at the Commonwealth Foundation, said Pennsylvania’s tax code is littered with niche exemptions, from gold bouillon to American flags.

“In terms of good taxation, you should have one that’s fair, flat, low rate, and easy to understand,” Benefield said. “We’ve made the sales tax so complex, and exempting some products and taxing others is just not good policy.”

Pennsylvania has the 16th  highest sales tax rate in the nation with a six percent rate. But because of the exemptions, the state is not generating as much revenues as that would suggest. Pennsylvania’s percent per capita revenues rank 27th, according to data from The Tax Foundation, a tax policy center in Washington, D.C.

Daniels can be reached at Melissa@PAIndependent.com and follow @PAIndependent on Twitter for more.

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Eric Boehm is a reporter for PA Independent. He can be reached at Eric@PAIndependent.com or at (717) 350-0963.

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