Press Conference on HB 1396, Legislation to Close the “Delaware Loophole”

Representative Phyllis Mundy

April 27^th

Good morning, and thank you for coming.  I am state Representative Phyllis Mundy and I am the Democratic Chairman of the House Finance Committee.  I am joined by my House colleagues, the Pennsylvania Budget and Policy Center, the Pennsylvania Council of Churches, and the Clear Coalition to talk about tax fairness.

Times are tough, and they seem to be getting tougher.  We have been trying to do more with less, and the dollar is harder to stretch than ever before.  We have a multi-billion dollar budget deficit, and in response, the Governor has proposed a budget that makes painful cuts in many areas – public and higher education, social services and healthcare among them. 

But I would suggest that there are alternatives to those cuts that generate additional revenue while creating tax fairness and a lower corporate net income tax for our good corporate citizens. One of those alternatives is to close a tax loophole that has caused Pennsylvania to lose billions in revenue over time. I refer to the infamous “Delaware Loophole” which allows large, wealthy corporations to set up shell companies and subsidiaries in other states. In some cases, this is nothing more than legal money laundering.  At best, it’s a creative accounting scheme to avoid paying Pennsylvania corporate income taxes.

In his prepared remarks before the House Appropriations Committee this year, Acting Secretary of Revenue Dan Meuser wrote, “We need to foster a culture in which all Pennsylvanians understand that by paying their fair share, they help keep the tax burden reasonable for everyone.”  I couldn’t agree more.  We need to close corporate tax avoidance loopholes so that we can lower the CNIT for all Pennsylvania corporations and avoid some of the painful property tax increases that will result from the Governor’s budget proposal.

There is something very wrong when a Pennsylvania family earning $36,000 a year pays more in income taxes than 85% of Pennsylvania corporations.

Accounting schemes allowed by loopholes in our tax laws are being used by many large, multistate, multinational corporations to avoid paying taxes on their profits generated in Pennsylvania.  In fact, more than 70% of Pennsylvania corporations pay no income tax at all. 

Corporations like Walmart, ExxonMobil, Home Depot, Toys R Us and Comcast use tax accountants to employ perfectly legal accounting schemes to avoid paying taxes on the income they earn in Pennsylvania.  These tax loopholes cost Pennsylvania hundreds of millions of dollars in lost revenue.  This isn’t illegal, but it just isn’t fair.

The bill I introduced yesterday, HB 1396, would close the “Delaware Loophole” by using unitary combined reporting, and it would lower the corporate net income tax to a rate of 7.4% over the next three years.

With unitary combined reporting, multistate and foreign corporations would have to file their taxes as a single company for state CNIT purposes.  This bill would make it easier for the Pennsylvania Department of Revenue to collect taxes due on corporate income earned in Pennsylvania.  And, in order to lose our unfortunate distinction of having the second highest CNIT in the country, my bill would also reduce the CNIT from the current rate of 9.99% to 7.4%. This would put Pennsylvania in the middle of the pack of 45 other states with corporate net income taxes.  The reduction would be phased-in during the next three years beginning with 1% decrease in 2012. 

Unitary combined reporting is not a new concept.  Many Pennsylvania companies like Hershey Foods, Boscov’s, Weis Markets, Sears Roebuck and Wachovia (Wells Fargo) use unitary combined reporting in other states which have the wisdom to require it. States like New York, West Virginia and yes, Texas - and 20 other states have been cracking down on businesses that cheat the system and already require combined reporting. 

In 2004, the Pennsylvania Business Tax Reform Commission comprised of prominent business leaders made several recommendations for reforming our tax structure.  Mandatory combined reporting in conjunction with reducing the CNIT was one of their suggestions.  The Reform Commission agreed that tax loopholes create an unfair competitive advantage for large multi-state and foreign companies and put our good corporate citizens – our local businesses and taxpayers – at a disadvantage.

My colleagues and I want tax fairness for all businesses and all Pennsylvanians - we are open to discussion, negotiation and compromise. However, it is past time to put an end to the shell games. We must level the playing field to be fair to our local businesses and individual taxpayers who do pay their fair share.