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Loophole delay?Administrative concerns likely put Delaware fix on back burner

By , - Last modified: May 18, 2012 at 1:14 PM

While progress has been made to close the so-called Delaware loophole and, in the process, make Pennsylvania more attractive on business taxes, a final resolution is not expected this year, according to party leadership.

The state House earlier this month passed House Bill 2150. The bill would address the Delaware loophole, which allows businesses headquartered in other states to avoid paying Pennsylvania’s corporate net income tax on their commonwealth operations.

However, Gov. Tom Corbett indicated he wants to wait until next year’s budget to tackle business loopholes and tax cuts, according to published reports.

With that said, the Senate likely will not take up the bill.

“It doesn’t make a lot of sense to send it to the governor’s desk if he is not supportive,” said Erik Arneson, a spokesman for Senate Republicans. “That’s the kind of thing that if you are going to go through the effort and get it to the governor’s desk, make sure it’s something he can sign.”

Rep. Dave Reed, R-Indiana County, the lead sponsor, said he is aware of the governor’s position on the bill but still would prefer the issue gets addressed this year.

Business tax reform is a top issue for the GOP, House Republican spokesman Steve Miskin said, expecting there to be continued discussion on the bill in the General Assembly.

The administration has voiced concerns about fiscal impacts of the bill in a slowly rebounding economy.

The proposal would:

• Add an “expense add-back provision” to prevent corporations from reducing or avoiding taxes, beginning in 2013.

• Allow for the reduction of the CNI to 6.9 percent at increments of 0.5 percent per year, beginning in 2014. The tax is 9.9 percent.

• Phase out the cap on carrying forward net operating losses in a subsequent tax year.

• Shift the tax apportionment system to a single-sales factor.

Currently, multistate corporations can reduce their Pennsylvania taxes by reporting their income and profits through affiliates in other states, primarily Delaware.

The reform would force payment and make up for an estimated annual revenue hole of $500 million.

Reed and Rep. Eugene DePasquale of York County, the leading Democratic sponsor, have said closing the loophole would bring in an additional $30 million to $40 million in revenue the first year and hundreds of millions of dollars a year after that through added business investment.

“Our bill is a more surgical approach,” Reed said, adding the goal is only to go after companies that avoid paying the tax.

Lowering the tax rate will create fairness in the system, and the economy will grow in the long term, Reed added.

It has been estimated that 1 percentage point of corporate net income tax in Pennsylvania equates to about $200 million in state revenue, according to the Pennsylvania Chamber of Business and Industry.

Opposing Democrats prefer a Delaware loophole proposal that would adopt combined reporting, said Bill Patton, a spokesman for House Democrats.

Combined reporting means that corporations and their subsidiaries would be required to jointly file one tax report and pay taxes according to the amount of business activity conducted in Pennsylvania.

Luzerne County Democratic Rep. Phyllis Mundy last year introduced a bill to that effect.

She has argued that HB 2150 would fail to close the Delaware loophole and create new loopholes for corporations to avoid paying their fair share of taxes in Pennsylvania.

HB 2150 still would permit companies to deduct expenses for trademarks, copyrights and patents by simply claiming it is for a legitimate business purpose, she said. The bill would put the burden of proof on the Department of Revenue to prove those deductions are not valid.

Mundy’s legislation — HB 1396, which remains in the House Finance Committee — would require corporations to add back expenses from the use of patents, trademarks and copyrights and interest expenses to their taxable income.

It also would set a higher standard for allowing these deductions and would place the burden of proof on the companies to show the deductions are valid, she said.

Mundy’s bill would have an adverse impact on companies not even using the Delaware loophole, Reed said.

“We believe valid business reasons for the movement of money should not be subject to the law,” he said.

The chamber, which has not taken a formal position on the Reed bill, does prefer an add-back provision over combined reporting, said Sam Denisco, vice president of government affairs.

“Combined reporting is just a massive tax increase on business,” he said. “We prefer business to be incentivized to come to Pennsylvania and stay here. Combined reporting is the antithesis to that.”

Rep. Joe Markosek of Allegheny County, the ranking Democrat on the House Appropriations Committee, said Reed’s bill would create a net loss of state revenue exceeding $3 billion over the next eight years.

He calculated that net loss by combining the revenue changes from the CNI reduction, sales factor change and net operating loss being uncapped.

The Pennsylvania Budget and Policy Center, a nonpartisan left-leaning think, has said HB 2150 will “cripple the commonwealth’s ability to provide education, health care and human services for Pennsylvania families” because of the tax cuts with no guarantee of closing the loophole.

The bill’s biggest flaw is the exception for transactions “related to a valid business purpose,” the center said in its analysis.

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Jason Scott

Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin County. Have a tip or question for him? Email him at jscott@cpbj.com. Follow him on Twitter, @JScottJournal. Circle Jason Scott on .

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