|
|
FOR IMMEDIATE RELEASE |
|
CONTACT: Ann
Collis |
State Rep. David
Levdansky |
|
|
|
|
|
|
‘Combined reporting’ would make Pa. business taxes fair
Pennsylvania’s famously antiquated corporate tax system needs overhaul
HARRISBURG, June 15 – Legislation that would close loopholes that allow some businesses to avoid paying taxes in Pennsylvania has moved one step closer to becoming law, according to state Rep. David K. Levdansky, D-Allegheny/Washington. Levdansky’s legislation was reported out of the House Finance Committee Wednesday.
Levdansky, who serves as majority chairman of the committee, said the bill (H.B. 1186) would implement the recommendations of the Governor’s Business Tax Reform Commission.
Levdansky explained that current loopholes in Pennsylvania tax law allow major corporations to avoid taxation by shifting profits to out-of-state subsidiaries.
“Many corporations earn profits nationwide, but have developed an accounting scheme to avoid paying their full share of Pennsylvania’s Corporate Net Income tax,” Levdansky said. “The practice is costing Pennsylvania hundreds of millions of dollars in lost revenue. It is simply unfair that many businesses pay their fair share, while others pay little or nothing.”
For example, a company can create a subsidiary (called a passive investment corporation), which consists of little more than an address, in a tax-free state like Delaware. The out-of-state subsidiary owns the company’s intangible assets such as patents, copyrights, trade names and trademarks.
This subsidiary will then charge its Pennsylvania locations an exorbitant fee to use the intangible property -- effectively diverting profits out of Pennsylvania and into the out-of state-subsidiary. Because the tax-free state does not levy corporate income taxes on earnings from intangible assets, those profits are free from state corporate income taxes.
Levdansky said the most effective way to address these and related issues is to adopt a measure known as combined reporting.
Combined reporting requires a company’s profit, both in-state and out-of-state, to be distributed based on the percentage of business conducted in each state. Once that is determined, each state is able to levy a tax on the portion of profit acquired within its borders.
“Combined reporting guarantees tax fairness by making sure everyone is paying their share,” Levdansky said. “Companies should not be able to do business in Pennsylvania and avoid paying their fair share simply because they can employ a multitude of tax attorneys and accountants in an effort to deploy tax avoidance strategies.”
Approximately 73 percent of all registered corporations in Pennsylvania pay nothing in state income taxes; 12 percent pay less than $1,000.
Levdansky said the increase in tax revenue from combined reporting would be used to reduce business tax rates across the board.
“While Pennsylvania has the second-highest Corporate Net Income tax in the nation, a detriment to economic development, the rate is extraordinarily high because so few Pennsylvania corporations actually pay it,” Levdansky explained. “By enacting combined reporting, Pennsylvania could lower its Corporate Net Income tax from 9.9 percent to 7.9 percent, uncap the net operating loss deduction and adopt the 100 percent sales ratio apportionment formula so Pennsylvania-based businesses are not penalized for expanding employment and property within the state. This would make it clear to all businesses – in state and out of state -- that our tax structure is competitive.”
Twenty states have enacted combined reporting. They are Alaska, Arizona, California, Colorado, Hawaii, Idaho, Illinois, Kansas, Maine, Minnesota, Montana, Nebraska, New Hampshire, New York, North Dakota, Oregon, Texas, Utah, Vermont, and West Virginia. Vermont, New York, Texas and Virginia have all adopted combined reporting since 2004.
Additionally, the governor’s of North Carolina, Iowa, Michigan and Massachusetts have recommended that their states adopt mandatory combined reporting.
###ac/2007/mjh
l:\print\releases\combinedreporting2.039