A GOP proposal to close the controversial "Delaware loophole" that allows hundreds of the largest businesses operating in Pennsylvania to avoid paying corporate taxes, was approved by a House committee today.
The bill, which passed the House Finance Committee (16-5) with bipartisan support, would, in the words of its sponsor Rep. Dave Reed (R., Indiana), "require multi-state corporations operating in Pennsylvania to “add back” specific transactions to their state taxable income to ensure they are not being made solely for the purpose of reducing in-state tax liabilities."
He said similar add-back measures have been implemented in 23 other states.
But a top Democrat called it "illusory."
"It doesn't close the Delaware loophole, it in fact makes it worse because it enshrines the loophole in law," said Rep. Phyllis Mundy of Luzerne County, the ranking Democrat on the committee. "There is no intention of truly closing the corporate tax evasion scheme it only gives the illusion that it has."
Mundy has her own bill that she said would effectively close the Delaware loophole by requiring corporations to file Corporate Net Income Taxes (CNIT) as a single company otherwise known as "combined reporting."
According to state Department of Revenue statistics, over 70% of corporations that filed paid zero CNIT In 2008, while an additIonal 12% paid $1,000 or less — about as much income tax as a family earning $33,000. In 2009, the department estimated that the Commonwealth loses approximately $500 million annually using the current CNIT filing methodology, Mundy said in her co-sponsorship memo.
Mundy explains how the loophole works this way:
A corporation operating in Pennsylvania sets up a shell company in Delaware, a state that does not tax royalty income. The parent corporation transfers ownership of its trademarks, patents, or other intangible property to the shell company. The shell company then charges the parent corporation a royalty for using the trademarked name or patent. This allows the corporation in Pennsylvania to treat the payment as a business expense, which it then deducts from its income in the Keystone state, reducing its tax burden here.
She said it would not be onerous for corporations to adopt combined reporting because a majority of the 45 states with corporate income taxes have adopted combined reporting. Already 30 of the Commonwealth’s largest private sector employers already operate in states with combined reporting and prepare single company tax returns.
Reed on Monday defended his bill (HB 440) as a way to level the business playing field.
"We believe the language works to close the Delaware loophole," he said.
The lophole language is part of a larger tax reform bill supported by Gov. Corbett that would reduce the Corporate Net Income tax to 6.99 percent over six years and phase out the cap on Net Operating Losses over nine years.
Before voting against the bill, Mundy called it "little more than enormous tax cut for the largest richest corporations in Pennsylvania at the expense of small business and average citizens."
A similar bill passed the House with wide bipartisan support last year.
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