State lawmakers pushing for combined reporting in exchange for lowering the corporate net income tax rate continue to rely on misinformation in a purposeful attempt to cloud the debate on this complicated business tax reporting mechanism, which would have serious implications for business growth and job creation in the commonwealth.
There are few who would argue against reducing the uncompetitive CNI tax. Pennsylvania has the highest effective CNI rate in the nation — even the world, when federal taxes are considered. Reducing the CNI to 6.99 percent won't give the commonwealth the lowest rate, but it will bring Pennsylvania more in line with other states. Doing so would eliminate a huge red flag that knocks the state out of contention before deliberations start on other factors that drive business investment decisions.
However, eliminating one red flag would only raise another if combined reporting were adopted. Contrary to what proponents contend, it would do more than target the use of the so-called "Delaware Loophole" and capture legitimate transactions from businesses that do not even have passive investment companies.
The business community's concern with combined reporting has always been that it casts too wide a net and is, therefore, not an effective remedy to address illegal tax avoidance schemes. It should be stressed that the Revenue Department already has the authority under current law to identify, address and disallow expenses arising from sham transactions.
Further, the Revenue Department has improved its access to data, auditor training, audit technology and audit prioritization with regard to sham transaction investigation and is more aggressively addressing this issue. That said, the department has indicated that more careful examination of corporate tax returns for "suspect" transactions is generally proving that the vast majority of business are not engaged in purposeful attempts to skirt taxes.
The rallying cry for combined reporting proponents is that 70 percent of corporations pay nothing in corporate income taxes to the state. This warrants important clarification that is conveniently absent from their missives.
According to the Revenue Department, while roughly 70 percent of companies had no corporate net income tax liability, 65 percent of those companies weren't active for a particular tax year or reported zero taxable income to the Internal Revenue Service. Companies do not pay tax on money they don't make.
In addition, there is no guarantee that combined reporting would bring additional revenue to the state, because it merely creates winners and losers within the tax system. Some industries might see their tax burden lowered under combined reporting, while other businesses and industries would pay significantly higher taxes.
There is no statistical evidence that states enforcing combined reporting collect more tax revenues than states that employ separate accounting, given the other characteristics of the tax structure and the state's economy. In other states with some type of combined reporting requirements on the books, high percentages of $0 returns still exist. California is at 54 percent; Texas is at 72 percent; Utah is at 75 percent; and Minnesota is at 72 percent.
The "70 percent" is simply not due to rampant tax avoidance.
Attempts to bleed every last dollar from job creators in the name of "tax fairness" ignores the economic benefits to the commonwealth and its residents of a competitive tax structure in which businesses have money to reinvest here in Pennsylvania — in jobs and in their business.
Pennsylvania's climate for private-sector job creation is headed in the right direction, helped by a number of recent business tax reforms that have enjoyed bipartisan support. Adopting combined reporting would be a giant step backward.
Lawmakers should continue to reject combined reporting and instead embrace meaningful efforts to foster private-sector job growth. This is the only scenario in which everyone wins.
Sam Denisco is vice president of government affairs for the Pennsylvania Chamber of Business and Industry, the state's largest broad-based business association, with its membership representing nearly 50 percent of the private workforce. More information is available on the chamber's website at www.pachamber.org.