FOR IMMEDIATE RELEASE
State Rep. Phyllis Mundy
Closing the Delaware loophole the right way
Pennsylvania deserves real tax fairness, not hollow political acts
By state Rep. Phyllis Mundy
The issue of closing the much-maligned “Delaware loophole” in Pennsylvania has made quite a few headlines in recent weeks.
But don’t be fooled by claims that a new bill, backed by the Republican majority in the state House, would finally close the Delaware loophole.
That bill, introduced in January by state Rep. Dave Reed, R-Indiana, has been hailed as a way to close the Delaware loophole. Unfortunately, his bill falls far short of that goal.
Under current tax law, multistate corporations avoid paying Pennsylvania's Corporate Net Income tax by setting up shell companies in Delaware to hold copyrights, patents and trademarks. Multistate corporations that do business in Pennsylvania pay the shell company to use the copyrights, patents and trademarks, reducing its taxable income here.
Companies often use Delaware because it does not tax royalty income.
The Reed bill would still allow companies to deduct expenses for trademarks, copyrights and patents by simply claiming it is for a legitimate business purpose.
Other states with similar legislation require the companies to demonstrate why these deductions are legitimate, but the Reed bill would put the burden of proof on the Pennsylvania Department of Revenue to prove they are not valid. The bill presumes that any of these transactions done at market prices is legitimate.
The Reed bill also would allow multistate corporations to claim a credit for taxes paid in other states and deduct those expenses in Pennsylvania. And it would allow companies to shift income out of state by deducting interest on loans from related companies – another tax avoidance strategy used by corporations.
In short, the Reed bill is one big tax loophole dressed up to look like a fix to another tax loophole. It’s smoke and mirrors, and it doesn’t come close to delivering real tax fairness to Pennsylvania.
In contrast to the Reed bill, a bill I introduced last year would close the Delaware loophole, as well as a wide array of other loopholes that allow corporations to dodge paying their fair share of taxes in Pennsylvania.
My bill, H.B.1396, is widely considered to be the most comprehensive approach to solving the corporate loophole problem. It would require corporations and their subsidiaries to jointly file one tax report and pay taxes according to the amount of business activity conducted in Pennsylvania. Twenty-three other states have enacted combined reporting legislation.
Unfortunately, it’s clear that Gov. Tom Corbett and the Republican leadership in the state House and Senate have no desire to pursue this comprehensive approach.
Recognizing that political reality, I will introduce another bill that takes a similar approach to the Reed bill.
But my bill will do it right – requiring corporations to add back expenses from the use of patents, trademarks and copyrights and interest expenses to their taxable income; setting a higher standard for allowing these deductions; and placing the burden of proof on the companies to show their deductions are valid.
This is a basic matter of tax fairness.
Pennsylvania businesses and taxpayers are the ones left holding the bag when multistate corporations are allowed to shirk their tax obligations.
More than 70 percent of businesses in Pennsylvania pay zero state income taxes, largely through the use of tax loopholes. While those multistate corporations get a free ride, Pennsylvania’s small businesses are stuck shouldering a greater share of the tax burden.
In the spirit of tax fairness, my bill would reduce the Corporate Net Income tax to 6.99 percent from its current level of 9.99 percent – a 30 percent cut – over six years starting in 2014.
We need to close corporate loopholes, but we need to get the job done right so all corporations pay their fair share.
Because, when everybody pays their fair share, everybody wins.
State Rep. Phyllis Mundy is Democratic chairman of the House Finance Committee. She represents the 120th Legislative District in Luzerne County.