Legislation Would Lower Business Taxes, Close “Delaware Loophole"
The state House Finance Committee has passed a corporate tax reform package that will attempt to close a loophole, but opponents warn the method will hurt the state if it becomes law.
"Multi-state companies can send money to other states with lower tax rates, or no taxes, and in that way avoid paying taxes in Pennsylvania," said Sharon Ward, director of the Pennsylvania Budget and Policy Center.
House Bill 2150 would attempt to close what is known as the "Delaware loophole" by requiring companies to claim tax deductions only for intangible expenses directly related to a valid business purpose. Additionally, the legislation would lower the corporate income tax rate.
Representative Dave Reed (R-Indiana County) said his measure is aimed at job creation and enhancing the state's economic recovery.
"Finding and keeping good family-sustaining jobs is what's on everyone's mind these days," said Reed. "Unfortunately, because of Pennsylvania's complicated tax structure and high tax rate, job creators are unwilling to relocate and even remain in the Commonwealth."
House Bill 2150 would gradually lower the corporate tax rate from 9.99% to 6.99%.
"The mere existence of the loophole creates an unfair and unbalanced business environment," Reed said. "A successful business is not based on who can avoid paying the most taxes; it's based on hard work and a good business model. Closing the Delaware Loophole allows us to lower the tax burden on all Pennsylvania businesses, which will in turn create jobs."
Reed said his proposal would only affect businesses that are taking advantage of the loophole for the sole purpose of tax avoidance in Pennsylvania.
Democrats in opposition to the bill think the language is too broad, and that many transactions could be claimed as legitimate business purposes. They suggest "combined reporting" instead, which requires corporations to file returns based on their and their affiliates' total business activity. Ward said it won't be a difficult adjustment for corporations, if an adjustment at all.
"Most of the largest companies in Pennsylvania already operate in states that have combined reporting, so they are quite familiar with the process and, in fact, are already filing those returns," Ward said.
Ward fears that an originally good intentioned idea has been flipped around in a way that will hurt Pennsylvanians.
"Legislation that was supposed to close the Delaware loophole has really turned into a bill that will make massive cuts in taxes, and that means that local taxpayers will pay more for things like education and human services," Ward said.
She said she's not surprised tax cuts are part of the package, considering it's an election year, but that tax cuts are implausible at a time like this.
Representative Reed expects a full House vote on the bill by the end of May.