Business interests failed to win a reduction in the Pennsylvania corporate net income tax but cheered a cut in the state's capital stock and franchise tax that's included in the state budget signed yesterday by Gov. Ed Rendell.

The corporate net income tax, at 9.99 percent the second highest in the nation behind Iowa, remains unchanged in the new $24.3 billion budget despite proposals that it be reduced.

But the approximately 15 percent reduction in the contested capital stock and franchise tax is "an important victory for economic development," said Barbara McNees, president and chief operating officer of the Greater Pittsburgh Chamber of Commerce.

The corporate net income tax and the capital stock and franchise tax are the two major business taxes in Pennsylvania. Most businesses pay both, although the impact can vary significantly depending on the industry. Manufacturing firms, for example, enjoy operating exemptions enacted many years ago.

Harold Miller, president of the Allegheny Conference on Community Development and executive director of the Economy League of Southwestern Pennsylvania, was likewise pleased that the budget continues the previously delayed phase-out of the capital stock and franchise tax.

The capital stock and franchise tax rate, currently 5.99 mills, is scheduled to drop to 4.99 mills in 2006. Its opponents are pressing for it to be reduced by 1 mill per year until it is completely dissolved by 2011.

"Getting that included in the budget was very important," Miller said. "It's very important to potential investors that when Pennsylvania says it's going to cut a tax that it in fact lives up to that. Having a predictable tax system is as important as having a competitive tax situation."

Earlier phase-out schedules have twice been delayed to help meet revenue shortfalls. And McNees said there was some talk in Harrisburg during the budget deliberations of again delaying the phase-out. "We were holding our breath last week," she said.

The business-backed conference, an influential public policy and lobbying organization for the region, had argued that Pennsylvania is competitively disadvantaged by being one of only a few states that have both the capital stock tax and a corporate net income tax. Most states levy one or the other, but not both.

Proponents of business tax reductions argue that an increase in economic activity over time, stimulated by a more competitive tax structure, could generate enough new revenues to partially or fully offset rate reductions.

McNees said there was interest in reducing the corporate net income tax among some state legislators but pressure to reduce a proposed $383 million in proposed Medicaid cuts was too great.

The conference argued that job creation in the state rose every time in the past three decades that the corporate net income tax dropped, including a spurt in the mid-to-late '90s after lawmakers reduced the tax rate from 12.25 percent. They say employment fell when the tax was increased by almost 50 percent in 1991 under former Democratic Gov. Robert P. Casey Sr.

"The CNI tax rate is a bid red flag for people trying to locate or expand here," Miller said. "We had hoped to see a first step in the budget, but it looks like it was sufficiently tight."

Conference CEO F. Michael Langley said he looks forward to working with the governor and legislature to further reduce business taxes in the state and he thanked the legislators who supported business tax changes.