'cause this is just what we need to create jobs in a fragile recovery, at the end of the worst recession since the Great Depression.


Idjits.


By the way, would this even be legal? given that professional services have effectively no value-added over labor content and given that labor is already subject to payroll taxation? wouldn't this be double taxation? putting what is effectively a sales tax onto professional services is arsinine. Sorry.

we work in a number of different jurisdictions and the tax laws we experience vary quite a bit from state to state. it takes a lot of time and patience to track the various laws and we find it a challenge - at best - to remain in compliance across all of our markets.

that being said, in this economy, state governments are desparate for operating funds and this sort of legislative behavior is to be expected. I'm sure your state AIA component is watching this development carefully -- be sure to lend your support when they ask you to write a letter (or, even better, to make a visit) to you state legislator to explain the adverse impact this tax will have on your practice and your ability to provide employment in the state.

if the outcry is strong enough, loud enough and long enough, they will back down -- I've seen it happen. but, it won't happen if architects in the state just sit back and "hope" somebody else carries the water for them.

good luck.

Thanks, Distant. Hopefully we architects can join in with the attorneys, accountants, etc. and present a strong front. Unfortunately for us, the gov is suggesting an overall reduction of the state tax from 7% to 5% but then adding in all kinds of categories like professional services. Our tough battle will be all those people who will be getting a tax savings on everything that is taxed now, like cars. For the average voter, it may seem like a tax cut with the burden shifting to businesses. Of course, most people do not realize that a business unfriendly environment is not good for their economy. We already have one of the highest tax rates on businesses in the country. Good thing housing is cheap.

Great post, distant. That's one of the best things about my AIA membership, that it keeps me up to date on what local legislative activity impacts my business.

So what other professional services would be taxed? The dentist? Doctors? Hair and nail salons? (In my state the same office that licenses architects licenses hair stylists.) Chiropractors? Yoga teachers? Babysitters? This seems like a potential pain in the ass to EVERYONE.

"General Fund expenditures are reported in the
following functional assignments, along with the related percentage of non-federal expenditures: direction and supportive
services (3.56), protection of persons and property (12.44), health and human services (37.34), public education (39.82),
recreation and cultural enrichment (1.08), economic development (2.63), transportation (.04) and transfers to debt service
funds (3.09) for all obligations except those incurred for highway or other special revenue fund purposes."

General Fund Fund Balance Increase
At June 30
2009 (2,030.4)* (2,615.7)*

During the fiscal year ended June 30, 2009, total General Fund expenditures and other uses exceeded revenues
and other sources by $2,615.7* and, at June 30, 2009, the Commonwealth reported an unreserved/undesignated fund
deficit (budgetary basis) of $(2,030.4)* in the General Fund.

*In millions of dollars.

Fund Statements at-a-glance
Governmental Funds – Total Fund Balances – Were $6.089 billion at June 30, 2009 compared to $8.860 billion (restated from
$8.830 billion) at June 30, 2008, for a year-over-year decrease of $2.771 billion.

General Fund – Fund Balance – Was $.515 billion at June 30, 2009, compared to $2.974 billion at June 30, 2008, for a yearover-
year decrease of $2.459 billion.

"During the fiscal year ended June 30, 2009, the overall financial position (net assets) of the Commonwealth, including both
governmental and business-type activities, decreased by $4.7 billion, or nearly 16.5 percent of total beginning (restated) net
assets of $28.5 billion. For governmental activities, the net decrease in net assets was $2.1 billion or 8.3 percent of beginning
(restated) net assets of $25.3 billion. Total investments, excluding the State Employees’ Retirement Fund and all other
fiduciary funds, amounted to over $14.3 billion and total cash balances were over $633 million at June 30, 2009. These
amounts represent significant decreases from prior fiscal year investment ($19.3 billion) and cash ($1.8 billion) balances.
Such decreases were primarily caused by much lower General Fund and other tax revenues, a sharp decrease in
Unemployment Compensation net assets, and lower investment income during the current fiscal year."

For governmental activities, general revenues decreased by over $2.6 billion, net, during the fiscal year, largely as a result of
decreases in reported General Fund tax revenues (over $2.3 billion), a decrease in General Fund investment income (over
$266 million), and a decrease in Motor License Fund tax revenues ($48 million), offset by an increase in gaming tax revenues
($230 million). Tax revenues decreases resulted from declines in overall economic activity in the Commonwealth; the largest
of such decreases was personal income taxes reported on a full accrual basis – nearly $900 million. Net decreases in tax
revenues were reported along with year-over-year decreases in investment income (over $473 million) for aggregate
governmental funds.

Taxes and intergovernmental revenues represent the largest sources
of revenue, while health and human services and
education represent the largest outflows or expenditures.

The largest significant source of tax revenues -- net of refunds -- ($24,118) is Personal Income Tax (PIT). Reported PIT
($9,468) accounts for 39 percent of all taxes reported. Sales tax, which represents a tax on various items purchased by
consumers, is the second largest category. Reported sales tax ($7,968) accounts for 33 percent of all taxes reported.
Corporation tax, which represents different taxes (including the Corporate Net Income Tax and the Capital Stock/Foreign
Franchise Tax) on various corporations, is the third largest category. Reported corporation tax ($4,354) accounts for 18
percent of all taxes reported.

The General Fund reported a total of $46,266 in total expenditures ($45,248) and other financing uses ($1,018) during the
fiscal year ended June 30, 2009. Expenditures for health and human services ($25,689) accounted for over 55 percent of all
General Fund expenditures and other financing uses. Of these health and human services expenditures, over 95 percent
($24,505) were reported by the Department of Public Welfare. The second largest category, public education, accounts for
nearly 29 percent ($13,340) of the reported expenditures and other financing uses. Of the public education expenditures,
over 92 percent ($12,359) are reported by the Department of Education. The chart shown on the right, above, reports the
percentages expended in each category (amounts in millions).




Do I have to post more from the budget?

Or should we just post lame ignorant comments about genericized political ideas without understanding them or reading the documents from the source?

This is not an attack on business. This is because your state spends too much on education, welfare and "public safety" which are predominately proportional to population density and sprawl-- which accounts for about 40% of Pennsylvania's population if not more.

To support economic development, you need to actually spend money on businesses. The current model of taking all of business tax revenue to spend on suburban schools and ambulance rides for fat people does not work.

Hell, your state spends $16,000 dollars a year per person on indirect welfare programs.

JUST START GIVING PEOPLE HOUSES.

Or you can just do the republican thing and scrape your budget completely devoid of any humanity and hope to God arsonists take care of decrepit building buildings, parks and state forest management areas.

Which is less than 3% of general fund expenditures anyways.

I vote for posting lame ignorant comments about genericized political ideas. They don't make me comatose.

Sure, our state wastes tons of money and has a bloated legislature, budget, etc. Another reason why just generating more income by taxing professional services makes no sense, especially since those services are a generator of jobs, and bring out of state dollars into the state. It may not be an attack on business, but it does clip our wings and make it harder to compete.

I guess you are saying that we voters in Pennsylvania deserve what we have? Is that what you are getting at? Pretty hard to change things when your typical choice on election day is bad Republican soon to be indicted versus bad Democrat soon to hire his entire family (and his mistress) in no work jobs.

i know there has been talk of taxing professional services in michigan too...but i don't think it has even come close to actually happening.

the funny thing is that the politicians don't seem to realize that architects pretty much work for free.

I'd say you have it slightly better off than a lot of states.

But really, most of the bloat in that budget is consequence of choices made. And if you want to preserve quality of life with those current choices, there's not a whole lot of anything you can do either than pay up or live with the possibility of having declining or non-existent services.

Missing a repaving here or there isn't that big of deal.

But what happens when streets stopped getting plowed? When ambulances come three hours late? When the police stop showing up?

The problem with distorting the physical environment away from typical norms means that those expenses become semi-permanent and static.

This problem is even compounded further when certain kinds of living patterns are given certain kinds of tax breaks to make one method of living more affordable than the other.

If one is going to criticize tax increases, one should also criticize tax exemptions-- a tax exemption really means "you cost us a lot of money but we won't charge you anything because we think you'll make more money this way."

Particularly doing away with Pennsylvania Homestead and Farmstead Exclusion (Act 50) which would only help wealthy suburban communities use state coffers to fund school districts as they have the money (power) to muscle the state to pay for county expenditures.

As noted above, education is 40% of the general fund expenditures.

A 5% invoice tax is a drop in the bucket compared to making 5 million or so residents pay their full county and municipal real estate taxes for homes they choose to purchase, at sizes they choose to purchase, in patterns they choose to purchase in schools districts they wanted to be a part of.

Better yet, if you want to encourage responsibly growth... make the millage rate something like 0.05 on the first floor only.

That would encourage people to build two and three story homes... which would make more people have to hire architects!

Yikes Montagneux, where you you find all the time to follow all this stuff? I am impressed with the depth of your thinking. I agree with the basics of what you are saying, but if you lived in Pennsylvania, you would realize how slow things are to change here. The likelihood of a major change like you suggest would take another couple of life times. We still have a state controlled liquor sales system for god's sake. You have to go to a 'state' store for you wine and hard stuff, and a 'distributor' for your beer. They tax us then make it harder to drown our sorrows in a stiff drink.

I guess that gambling thing we started at the end of the year didn't make up the gap quite like they thought it would.

Sorry...

That came off as really snappy. I apologize for that reading this in retrospect.

But it does suck that this is an viable alternative!

But consider this... a $2 million dollar property would be what $60,000 in fees? Is an extra $3,000 going to really matter all that much?

There is talk of the same in California...somewhere in the neighborhood of a 4% tax on the service industry. That will make it much more expensive to live and do business in California. It amazes me that the solution to the mismanagement of California's finances is to tax business owners more. The high taxes in California have already driven business out of our state. The idiots who elected an actor to serve as governor are partly to blame.

The legislators are talking about overhauling the California Tax Code in general. Since this is an election year, I don't foresee that happening until 2011 or later.

I'm usually a tax and spend type of guy, but this really is arsinine public policy, and I suspect there may actually be a few constitutional issues here as well.

Hey? why not have a stamp tax and tax every stamped drawing? ;-P That'll at least have historical significance...

Could we clarify what we're talking about here, please?

Don't most states already have some sort of corporate income tax? Is what we're talking about here something in addition to a state corporate income tax?

If so, what is it based on -- gross fees, or something else?

Does this tax apply to every firm providing services in connection with projects in that state, including firms domiciled there. Or, does it apply only to "foreign" corporations (i.e. firms headquartered in another state) providing services in that state?

I'm a little confused about what we're discussing.

Stone,

As I undersetand it, they're talking about a customer tax on services provided by architects and other professionals. So in other words, if you invoice a client for X dollars in services, he has to pay you that much, plus remit taxes on it for X+%, which they consultant will then have to pay, in turn, and file a return on. That's what been discussed in CA for PA in the legislature. Effectively, it's a sales tax or something like a VAT on professional services.

If you're in an LLP or S-corp, there are no corp taxes.. Pre-tax profits pass through the principals who, in turn, pay personal income tax. If you work for an actual corporation, then, yes, the corp would stay pay corp income tax, then as now.

urbanist -- ok -- thanks -- now that you make the "sales tax" analogy it's starting to make more sense.

Urbanist you nailed it, that is the kind of tax they are talking about. It is not a huge deal if you are comparing the fees of Pennsylvania architects to other Pennsylvania architects, but we do work in many states, and this will hurt us. It will be cheaper for an Ohio architect to do work in Pittsburgh by 5%. I agree it does not sound like a lot, but with clients slamming us right and left for fee reductions, it is going to hurt. Clients have a certain budget for fees, and they are going to push us to reduce our fees by 5% instead of pay the tax as an add.

The average well run architectural firm makes something like 9% profit on their net fees. Now if we reduce it by 5% to make up for the tax, that could be over half the profit. And by the way, profit pays for stuff like expansion, investments in equipment that is depreciated, as well as money in our pockets- stuff that makes the economy go.

Montagneux, no problem. I don't think you were snappy. I was pleasantly surprised by your passion and knowledge. It is OK to be an idealist, even if your vision never happens. You gotta start somewhere.

One weird thing, the article I read in the paper this morning said "gratuities" would be taxed too. Talk about feeling pain. Do you really think people are going to leave that poor waitress an extra 5% to cover the tax she will pay on her tip? I see many restaurants no longer accepting tips by credit or debit card.

archie - to address your example, I would assume this law also will require the Ohio architect to pay the tax on services they provide in connection with Pensylvania projects. That's how it works in many of the jurisdictions where we operate.

While you may not like this tax, I don't think it makes the competitive playing field less level for you. The real question will be whether you can pass this tax along to your clients.

From what I understand is not so much that this is a new tax creation but rather expanding the sales tax definition to include services as a tax.

That combined with dropping the sales tax rate from 6% to 4%.

So, as a sales tax and not a gross receipts tax, the cost should be pushed down onto the consumer and not the company as this is not taxation on revenue.

From further study, apparently about 70 to 80% of the companies in Pennsylvania don't pay corporate taxes anyways as most companies used Delaware as a tax shelter.

So, architectural firms... you should be blaming the businesses around you for fouling up the state of affairs in Pennsylvania. That is, unless you're funneling income (illegally) to tax shelters.

(I think Pennsylvania already has a gross receipts tax anyways... I wonder how that will change?)

Distant; I don't think the Ohio firm will have to pay the tax- they will be performing the work in Ohio, even if it is for a project in PA. We will have to see how it is written. It will skew the playing field for us. About 40%of our work is for clients and projects out of the state. But since we are performing the work in PA, we probably will have to charge the client the sales tax even if the project is in Maryland and the client is in New York. For the state, this is the best kind of money to bring into the state, but they will now discourage it.

Many of our clients work with other architects too, so our fees, even if the same as theirs, will be now 5% higher (Allegheny county tacks on another 1% over the state). At least our cost of living is pretty low here, so we have been able to have fees slightly below the national average. I guess this will get rid of that competitive advantage.

and Montagneux: we pay PA corporate taxes. Although it is a sales tax, it will in essence be a gross receipt tax- it will be on all of our services. We will probably pay a tax to engineers, then pass that tax onto the consumer, and have to keep track of all that mess. Supposedly the consumer will pay that, but how does imposing a 5% tax on architects services help the economy long term?

distant, what jurisdictions are you working in now that have a tax on architects services?

Supposedly the consumer will pay that, but how does imposing a 5% tax on architects services help the economy long term?

it does nothing to help the economy. it just feeds the government spending beast.

and the government will threaten to fire teachers, police, and fire fighters in order to extort the money from people who really grow the economy (instead of trimming government waste and prosecuting corrupt government employees).

teachers are the only one who grow the economy.

Fire and police preserve the economy but that's debatable as the cost benefit analysis on that would be dangerous to run. A few have but it is hard to compute the intangible costs.

And then you run into a wall of urban theory.

But, really, you don't get that much benefit from public safety because public safety does not actively prevent crime and only works in combination with other public programs. Very few crimes are actually caught in the act.

City of New York actively policed crimes (with no real contribution with adequate social programs) from the 1960s to the 1980s with nothing but increases.

It wasn't til the combination of additional government spending and additional government programs that crime decreased.

Small Business Administration, Metropolitan Planning Organizations and the Federal Housing Authority are the ones who really grow the economy because they're the only organizations crazy enough to back loans for entrepreneurs and business types.

Which is where business taxes should be going and not to corrupt crooked county cops and firefighters who do nothing 98% of the time.

oh come now.. surely you're not saying that we don't need fire and poilce?

we have a gross receipts tax instead of sales tax here in new mexico - basically all goods & services are taxed.

it can get a bit complicated and there are loopholes for bordering-states work, or if your service is wrapped up in another's that will be billed so the client isn't double or triple taxed.
total pita - i hate it.