Gov. Ed Rendell's new budget proposal is meeting swift opposition from trade groups who say that it contains a stealth tax increase for businesses.

The offending provision pertains to the state's capital stock and franchise tax, which now stands at 2.89 mills. According to current law, said David N. Taylor, executive director of the Pennsylvania Manufacturers Association, it would drop to 1.89 mills next year.

Mr. Rendell's budget calls for a tax of 2.49 mills. In the view of the PMA, which represents some 1,500 businesses statewide, that is a tax increase, one that will cost businesses about $40 million.

"It shows that this administration is fundamentally unserious about improving Pennsylvania's business competitiveness," Mr. Taylor said.

The Pittsburgh Technology Council, the Hazelwood-based consortium of technology companies, also expressed its displeasure with the governor's proposed change.

"Increasing business taxes in a year when you're about to go into a recession is really a bad idea," said Brian Kennedy, vice president for government relations.

Rendell spokesman Barry Ciccocioppo defended the provision, arguing that it is not an increase.

"The bottom line is, it's still a reduction, and it will be equivalent to a $100 million business tax cut this year, and it will not affect the phaseout of the capital stock and franchise tax in 2011," he said.

The capital stock and franchise tax is a tax paid on a business' assets each year, regardless of how much money the business has made or lost that year. Income is taxed separately with the corporate net income tax.

The tax was targeted for elimination by Gov. Tom Ridge in 2000. But the law passed by Harrisburg did not kill the tax immediately; instead, it ordered a gradual reduction of the tax until it would disappear completely in 2009. The phaseout has since been extended to 2011.