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State Explores Strategies to Prevent Businesses from Leaving Pennsylvania

HB 1289 would incentivize certain businesses to convert to employee ownership—preventing them from moving and saving jobs

BTA’s own Dan Zugell leading the efforts to expand employee ownership in PA with pro-ESOP tax law changes

HARRISBURG, PA – Pennsylvania’s House Finance Committee held an informational meeting on HB 1289 on June 19 at the Capitol Building in Harrisburg.

The bill addresses a tax incentive for C-Corporations to consider employee ownership, also called employee stock ownership plans, which all states offer except Pennsylvania and Arkansas.

“It would help us as a state to adopt the same type of allowances that are allowed under federal law for these plans. These plans do a lot for the economy, for the employees and they provide revenue into the treasury for the government,” Rep. Daryl Metcalfe, the bill’s sponsor, said.

There are already more than 300 companies in Pennsylvania that are either partially or fully employee-owned. They include Sheetz, Wawa, Dansko Shoes, Bradford White Water Heaters and VooDoo Brewery.

Ed Renenger, a lawyer at Stevens & Lee, a Pennsylvania-based law firm with approximately 150 lawyers and 50 non-lawyer business and consulting professionals, offered testimony encouraging that the bill be passed into law.

“House Bill 1289 removes the disincentive built into the Commonwealth’s tax system for a business owner of a C Corporation to sell to an ESOP and I hope the Committee agrees that this disincentive should be removed so that the Commonwealth can reap the benefits that ESOPs bring and create a sustainable structure to help keep more of our best businesses here in the Commonwealth,” he said.

Kevin McPhillips Executive Director of the Pennsylvania Center for Employee Ownership, said the bill fixes a competitive disadvantage that hurts the state’s economy when owners evaluate succession plan.

“We want employee ownership to be as attractive as possible for business owners when they are thinking about succession planning,” he said. “Selling the business to the employees encourages the company to stay and in Pennsylvania.”

In private industry, 70 percent of business owners over the age of 55 have no succession plan, which is not good considering that 4.5 million companies will transact over the next 10 years in the U.S.

“We are on the cusp of a Silver Tsunami as baby boomer business owners start to retire and sell their businesses,” McPhillips said.

One of those Pa-based business owners is Ken Baker, CEO of NewAge Industries located in Southampton, Pa. Baker offered testimony at the finance committee meeting noting that since the inception of the ESOP at his company in 2006, NewAge’s share price has gone up over 800 percent. The company manufacturers of plastic tubing, hose, and a supplier of RFID solutions.

“Employees who have ‘a piece of the action’ view their work very differently than employees who just ‘punch the clock,’” Baker said. “The House Bill 1289 is a wonderful incentive to encourage companies to become employee owned in the form of an ESOP. It will help keep companies from relocating to other states or, worse, to other countries. This will allow the Commonwealth to keep companies in the state, keep the tax base, grow it, and help provide a wonderful benefit for its citizens.”

Daniel Zugell, Senior Vice President for Business Transition Advisors, a business succession consulting firm specializing in ESOP transactions based in Cranberry Pa., said other states recognize and value the power of employee ownership and the positive economic effects. For example,

  • Iowa and Missouri provide up to $25,000 toward a feasibility study and exempts up to 50 percent of the taxable income of ESOP companies;
  • Colorado provides limited loans toward ESOP funding;
  • Massachusetts has a state funded employee ownership center;
  • New York passed a two-year blue-ribbon panel on how to encourage employee ownership; and
  • Texas will reintroduce a house bill that would elevate ESOP companies to Historically Underutilized Businesses or HUBs status.

“Pennsylvania should not only catch up to the 48 other states with this legislation but also consider subsequent legislation to make Pennsylvania the national model for employee ownership,” Zugell told the finance committee.