HARRISBURG — Creating a fairer tax system is on the state budget agenda again with a proposal from Democratic Gov. Tom Wolf to eliminate a business tax loophole, reports Republican Herald.
Wolf wants to close the Delaware loophole — a mechanism that allows businesses headquartered in other states to avoid paying taxes on their operations here — in exchange for dramatically reducing the state corporate income tax rate. It’s one of several proposals to erase a stubborn $3 billion state budget deficit.
The governor wants to implement a “combined reporting” method where businesses and their subsidiaries would file tax returns as a single company, state Revenue Secretary Eileen McNulty recently told the House Appropriations Committee.
“The budget will dramatically improve the competitiveness of our economy by lowering the tax rate for corporations while making taxation more fair for Pennsylvania’s small businesses through combined reporting,” McNulty said. “The governor is proposing to phase down the corporate net income tax rate of 9.99 percent — the second highest in the country — to 6.49 percent by 2022. The proposal will also ensure all corporations pay their fair share by requiring combined reporting beginning in the tax year 2019.”
If adopted by lawmakers, it would end a long-standing practice where businesses shift assets to an affiliated company in another state where they are not subject to Pennsylvania taxes. Delaware has a reputation as a corporate tax haven.
Starting combined reporting would have the greatest impact on large manufacturers doing business in a number of states, Matthew Knittel, director of the state Independent Fiscal Office, said.
The Delaware loophole was narrowed under a compromise state law passed in 2013. This law requires that businesses, even if headquartered elsewhere, pay taxes in Pennsylvania on their profits. The measure was steered by Rep. Dave Reed, R-62, Indiana, who is now House majority leader.
Some Democratic lawmakers said the 2013 law doesn’t go far enough.
The law doesn’t require reporting for tax purposes of lucrative corporate assets such as patents and trademarks, Sen. John Blake, D-22, Archbald, said.
Blake plans to sponsor a bill linking combined reporting with a steep corporate income tax rate cut. He introduced similar bills in previous legislative sessions.
“For me, it’s an issue of tax fairness,” he said.
Blake proposes to make a gradual transition to mandatory combined reporting and a corporate tax rate of 6.99 percent over six years. Initially under the proposal, corporations would file two tax returns using the combined reporting method and the current method so the revenue department could gauge the difference.
Blake is concerned that a swift switch to combined reporting would be punitive for corporations.
“A gradual transition would avoid the adverse shock to our economy and allow tax fairness to be achieved without that short-term risk,” he said.
The Pennsylvania Manufacturers’ Association strongly opposes combined reporting.
Because states have different tax systems, rates and tax definition, there can never be a true apples-to-apples comparison for combined reporting, the association said. That only will lead to more disputed tax cases for businesses with the revenue department.
Closing the loophole would prevent corporations from shifting profits to lower-tax states like Delaware, according to Clear Coalition, an advocacy group.
Blake said he is surprised that more Republicans lawmakers haven’t supported a plan that dramatically lowers the corporate income tax rate.
“The 9.99 percent corporate income tax is sticker shock to companies looking at Pennsylvania,” he said.