The state House Finance Committee passed legislation Monday that would close the Delaware loophole and tackle Gov. Tom Corbett's tax reform proposals.
House Bill 440, sponsored by Rep. Dave Reed, R-Indiana County, calls for the implementation of an “expense add-back provision” to close the loophole, which allows businesses headquartered in other states to avoid paying Pennsylvania’s corporate net income tax on their commonwealth operations.
Similar measures have been adopted in 23 other states. By targeting very specific transactions among close business affiliates, the add-back provision only affects businesses that are taking advantage of the loophole for the sole purpose of tax avoidance, Reed said.
The amended bill would reduce the CNI to 6.99 percent from 9.99 percent over 10 years, beginning in 2015. It also would provide an increase in the state’s net operating loss cap in 2014 and offer deductions to incentivize start-up businesses.
In his February budget address, Corbett proposed increasing the loss cap to $5 million from $3 million over a two-year period, which this bill does. This tax break allows job creators to smooth large early losses they incur from current to future tax years.
The governor also proposed the 10-year phase down of the CNI.
HB 440 is on second consideration Wednesday in the House.
Reed got a similar bill through the House last session. Democrats largely opposed the plan last session. They were calling for a Delaware loophole fix that would adopt combined reporting.
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.